Employers are reassessing the way that they manage their global mobility programs, especially in the areas of immigration, taxes and international employment law.
Increasingly, employers are shifting to globally integrated operating models, requiring them to design new organizational structures, governance models and business processes. In this transformation, HR will be a change agent.
An organized and comprehensive approach to global mobility is essential. By nature, global mobility programs are expensive, often resulting in labor costs two or even three times the costs of domestic employment. The result of an unfocused and piecemeal approach is an upward spiral in employerwide international business travel costs and expenses.
The costs can be exacerbated, for example, when the expenditures for “stealth expatriates” are hidden in the budgets of several independently managed corporate departments and/or locations around the world, which generally result in senior management having little idea of the magnitude of the company’s total global mobility expenditures. Further, “stealth expatriate” programs risk inconsistent compliance—or even a complete lack of compliance—with international immigration, tax and labor laws. An efficient and cost-effective solution to these issues requires a coordinated approach supported throughout the organization, providing a proactive framework for deploying and maintaining global resources.
All too often individual corporate departments deal with global mobility issues on an ad hoc basis and without coordination, even where inter-department issues are common. Employment laws, immigration, and personal tax issues often track independently from each other.
From both efficiency and effectiveness perspectives, employers should consider a global mobility policy which integrates HR, tax, travel, payroll, finance, immigration and accounting considerations.
Critical to developing a managed global mobility policy is to first do an accounting—not only to identify the departments involved from a control and budgeting perspective, but also the workforce currently or historically deployed—by creating a database that identifies the employees who have been deployed and track their location, duration of assignment, business functions, compensation and benefits, as well as the effectiveness of the assignment. Capturing all of these factors would permit the employer to examine whether incentives being provided around the world are in line with the company’s business plan and are actually producing results.
Immigration requirements necessitate globally mobile employees to have proper visas and work permits. Immigration should not be a stand-alone issue, but must be closely integrated with tax and international employment law. Immigration issues are seldom subject to instant resolution. Visa violations can result in government audits, penalties and limits on the employer’s ability to deploy employees when and where needed. For this reason, some multinational corporations have introduced a zero tolerance approach—driven by brand protectionism—to ensure a reduction in such liabilities.
In designing an integrated immigration approach, corporations need to examine tax treaties between the host country and countries in which corporate employees are working, in order to determine the tax exemption requirements. For example, the treaties may address whether a number of days of physical presence over a period of time will affect how an employee is taxed and other costs. Several European countries have judicially introduced the concept of an “economic employer,” meaning that the country may consider whether there is a local alternate or agent of the employer with enough control to make an employee subject to local taxes. Further, the corporation must develop a method of accounting for such costs and charges, necessitating a system for tracking the travel of its global workforce.
As with immigration issues, tax considerations will require employers to develop administrative processes for tracking the travel of its employees. In the absence of tax treaties or totalization agreements, the employee and employer may be liable for income tax and social taxes in more than one country. For example, a U.S. citizen is subject to U.S. tax regardless of where the employee performs services or is paid, and, in the absence of a treaty, totalization agreement, or solution under the U.S. tax code, may be taxed by both the home and host countries.
Documentation is necessary to determine if benefits are subject to favorable tax treatment. For example, under the U.S. tax code, moving expenses may be excludable from income or deductible by the employee based on the duration of time worked in the host location.
The applicable rule provides, in part, that no exclusion or deduction is allowed unless the taxpayer’s new principal workplace is at least 50 miles farther from his former residence than was his former principal workplace, and the taxpayer is a full-time employee during the next 39 weeks. There are also repatriation considerations with regard to the 39-week test. These rules require a means of substantiating the qualified expenses incurred.
Other Legal Considerations
A number of legal issues may arise in the context of a global workforce. Issues include:
Legal enforceability of employment agreements in foreign countries. To cite just one example, many non-U.S. jurisdictions will refuse to enforce or apply U.S. law with respect to the enforcement of noncompetition provisions, even where the agreement contains a U.S. choice of law or venue provision.For this reason, “garden leave” has become a common practice in the United Kingdom in lieu of noncompete provisions. An employee on garden leave remains employed during the period that a noncompete provision would otherwise apply, but, the employee is being paid to stay away from the office and not perform any services for the company, having a duty of loyalty not to compete with the employer.
The application of the U.S. Foreign Corrupt Practices Act with respect to U.S. citizens working abroad. This may require corporations to review their corporate policies on corruption issues and increase oversight and training, as well as indemnification provisions.
The selection or creation of an entity to employ the workers in a foreign jurisdiction. Often, the employer will establish a legal entity, such as a corporation, in the host country for the purpose of employing its assignees. It is also common to engage a professional employer organization (PEO) in a favorable tax jurisdiction to handle the benefits and tax aspects. In this situation, however, care must be taken to make clear who actually employs the assignees, the employer or the PEO. Otherwise, worker classification issues may arise.
The manner in which the employee abroad will be paid. An employer may be required by the host country’s law to pay the employee in the local currency or by use of a local payroll. It is important to check whether the host jurisdiction will allow a “shadow” payroll or split payroll.
U.S. employers must keep in mind that its U.S.-benefit programs may not provide the same tax advantages or benefits for an employee working outside of the U.S. Normally the time to consider changing an employee’s benefits package is prior to effectuating a transfer. For example, a U.S. deferred compensation plan may be detrimental for employees working in any jurisdiction providing the employer a tax break for doing business in the host country. Equity programs may have drastically different taxation timing rules. Further, the employer may elect to adopt a global pension plan to ensure that an employee accruing pension benefits in various host countries ends up with a pension at least as beneficial as if he or she had continued to work in the United States. Employers should also be prepared for the employee to have a tax event when he or she returns to the United States with a vested pension benefit accrued in the host country.
Shareholder activism and corporate governance. It is important to be aware of the various disclosure and corporate governance standards that apply around the world.
Littler Mendelson is the largest U.S.-based law firm exclusively devoted to representing management in employment, employee benefits and labor law. To read the original article on SHRM.org, please click here.