By Donald C. Dowling Jr.
Almost invariably, when a multinational branches out, it will need to employ people in a new country. Doing this is complex; getting it right can be confounding. Whether we are talking about a U.S. business exploring how to set up its first foreign outpost in Canada or a multinational conglomerate operating across 56 countries planning to launch a new office in its 57th, identifying and following the human resources and employment law “rules of the road” in a new country is always daunting.
This is a checklist of the HR questions that can arise when a business expands into a new jurisdiction. Answers to the questions, of course, vary according to the country at issue. The checklist is broken into five stages of starting up a new operation abroad. (This article does not address expatriate issues.) The stages are:
• Stage 1: Business structure and contracting.
• Stage 2: Benefits/compensation.
• Stage 3: Local-hire issues.
• Stage 4: Written employment contracts.
• Stage 5: HR administration.
Business Structure and Contracting
When entering a new country, the first legal question is: Which corporate structure should the company use—a representative office, a branch or a subsidiary? Carrying on business overseas may subject the parent entity to local tax liability as a “permanent establishment” and expose parent-company assets to host-country claims.
If incorporating a local subsidiary makes the most sense, remember that different types of host-country corporations can carry different collective labor/employment obligations (in Germany, for example, a public limited company, AG vs. limited liability company, GmbH).
Setting up a host-country corporate entity presence usually requires designating in-country shareholders, selecting in-country directors, issuing local powers of attorney and appointing local agents for the process. In-country employees are usually the most logical choices to fill these positions.
A “freelancer” or “independent contractor” working abroad as a de facto employee can be deemed an employee by operation of law, regardless of the text of the contractor agreement—thereby exposing the principal to significant tax and other liabilities. And even if the contractor is held to be a self-employed agent, local laws still may impose restrictions on termination.
A business entering a new country often needs to contract with local partners if only to outsource functions like payroll, accounting or janitorial services. Factor in the employment law exposure here if outsourced employees might later also claim to work for the principal as a “dual employer” (a particular issue in Latin America).
Cede no more autonomy to an overseas office head than to a domestic counterpart. From the beginning, put in place tough accounting, oversight, audit, Sarbanes-Oxley Act and Foreign Corrupt Practices Act controls.
Benefits/Compensation
Hiring in a new country requires attracting in-country employees into a business which, as yet, lacks a market presence. Attracting host-country talent without overpaying requires careful benchmarking of local benefits and compensation. Get a breakdown by “minimum expected package,” “standard expected package” and “rich expected package.” And before setting initial compensation, factor in vested rights. There may be restrictions on how much an employer can roll back pay or benefits granted upfront.
Engage an experienced in-country payroll provider, and then ask about total payroll costs beyond wages. Budget for applicable “statutory benefits” and “social costs” like social security, housing funds, disability funds, profit sharing, provident funds, premium-paid vacations and 13th-month bonuses.
Most countries offer government payor (“socialized”) medicine, so employer-provided health benefits may not be an issue—except that, increasingly, employees in certain countries expect supplementary health insurance.
Separately, the social security retirement benefit in some countries replaces a high enough percentage of final average pay that in some positions, private pensions may be unnecessary. But in many countries, employers are expected to give other customary benefits, ranging from bus transportation to meals to cars to housing. Find out which benefits are customary and how much they cost.
Local-Hire Issues
Find out which strategies and tools will work in the target country to attract and retain bilingual multinational-quality local talent. How effective are host-country recruiters?
Adapt an organic in-country job application form for the new operation, or else modify the headquarters application form appropriately. Ensure that any globally accessible web-based job application complies in-country.
In many countries, data privacy and criminal laws tightly regulate background checks and pre-hire screening—and limit the availability of good information about applicants. Formulate a host-country background check strategy, factoring in what can be done legally and practically. And, as diversity has gone global, some jurisdictions actually impose affirmative action hiring requirements that outstrip U.S. rules. Be sure to comply.
Written Employment Contracts
Laws in many countries require signing an employment contract or agreed-offer letter or, at least, giving employees a written “statement of terms and conditions of employment.” Even where not mandated, written employment contracts outside the United States protect employers by disproving employees’ version of the oral employment arrangement. In many countries, a detailed employment contract plays the role that employee handbooks play in the U.S.
Do not transplant a U.S. job offer form letter with a U.S. employment-at-will clause.
A new in-country startup should add in a right to assign the relationship to an entity incorporated later (in case of any corporate shuffle), plus a right to change the place of work (in case of an office move).
Employee probation periods, where available, can offer employers flexibility at the outset of employment from
rigid restrictions against firing. But understand the limits. In Japan, for example, even a probationary employee is not employed at-will.
Fixed-term employment contracts, rolled over for successive terms as necessary, can also offer flexibility. But most countries restrict serial rollover of consecutive fixed-term contracts. Check local limits. China and France have issued fairly complex rules in this regard.
In place of the distinction between “exempt” and “nonexempt” employees under U.S. law, employment rights outside
the U.S. can tie into job position. Bestowing a title like “managing director” can affect whether certain host-country employment laws, agency powers and “sectoral” collective agreements apply.
If non-compete/confidentiality/non-solicit restrictions are important, get a locally enforceable clause. Many countries require paying extra consideration in exchange for non-compete obligations. France and Germany impose especially tight restrictions.
In most countries—even many with age discrimination laws—mandatory retirement remains legal and widespread, but it can be tricky to implement. If mandatory retirement makes business sense and is consistent with the company’s code of conduct, be sure to incorporate any retirement mandate into individual employment contracts.
Bringing employees on board in a new country requires having HR policies in place. Instead of using a U.S.-style employee handbook, issue locally required HR mandates, such as the “work rules” of Japan and Korea. Use any locally advisable HR forms, such as the United Kingdom’s overtime opt-out. Actively check to be sure the new local policies are consistent with any globally applicable code of conduct or policies that headquarters may have issued.
Check what laws affect “onboarding” employees, such as mandates regarding hours, breaks, holidays/vacations, weekend closings, paid days off and parental leave. In Europe, it is illegal to withhold benefits from part-timers. If the new startup operation has no in-country office as yet, research applicable laws regarding working at home.
HR Administration
Laws in some jurisdictions (for example, France, Belgium and Quebec) mandate that HR communications be in the local language. Penalties for violating these language laws can be severe, especially under France’s Loi Toubon. Even where there are no such laws, local-language HR communications promote comprehension and enforceability in court and before government agencies and employee representatives.
U.S. union avoidance strategies are rarely exportable. Overseas, worker representatives (trade unions, works councils) can be ubiquitous, and sectoral collective agreements often reach even non-signatory employers.
Data protection/data privacy laws in many places restrict transmitting employee data out of country, even to an employer’s own headquarters. Implement compliant practices such as those under European Union model contractual clauses (or “safe harbor” or “binding corporate” rules).
The best ounce of prevention is learning from the mistakes of those who went in before you. When gathering answers to the questions on this checklist, ask your local in-country contacts a catchall question: Which human resources and compliance mistakes do you most often see being made by companies coming in from abroad?
Donald C. Dowling Jr. is international employment counsel at White & Case LLP in New York City. PLC Which Lawyer ranks him as one of the two top (“Leading”) international employment lawyers in the U.S., and he is ranked in Chambers. He heads a team of lawyers whose law practice is dedicated to advising multinational employers on regional and global employment law compliance outside the U.S.
