Global HR Playbook

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IntroductionEven as an experienced HR professional in your home country, entering a new territory and grappling with the nuances of local benefits provisions, payroll, labor laws, salary expectations and cultural practices can be daunting. All of your hard-earned knowledge about employing workers in the US — or whatever your domestic country of operations — must be reevaluated when your company is expanding to another country. What you do at home often does not translate as a template to other overseas locations.

Trust us: The stakes are high. We have too often heard from companies that are facing fines and reputational damage for noncompliance with local labor laws, or that are facing losing promising talent, all because they did not fully educate themselves on what they needed to do when hiring and sending workers overseas. Not only does each country have its own set of constantly evolving employment and immigration laws, they also have their own ways of doing business and their own practices that determine the correct salaries and benefits. Assuming that your global HR strategies and practices should be based on your domestic ones is, in short, a recipe for instability and surprise. Being prepared is critical. As the saying goes, “forewarned is forearmed.”

The good news is that international expansion is an opportunity for HR experts to prove their mettle and value to their business. Those in HR have a unique perspective and skillset to offer when their company is going global. While rightly concerned with labor-law compliance, HR experts also focus on the “people element” of business, which can determine whether a foray abroad is successful or unsuccessful. HR is positioned to keep the discussion grounded on issues few, if any, in the rest of the company are considering, but are fundamental to a company’s success, such as the crafting of job offers that are both enticing to new employees in another country and compliant with the host country’s regulations.

With guidance from global expansion experts, HR should work closely with its organization’s finance, tax and legal teams to meet obligations and expectations, both large and small, for employing expats and host-country workers and keeping them on the payroll — whether that payroll is based in the home country or abroad.

While overseas expansion can be a disorienting experience as you navigate a new set of labor laws and cultural expectations, it’s also an exciting opportunity to get acquainted with a new environment and help your organization take full advantage of the fruits of international expansion. It might appear daunting, but it can be a hugely rewarding, interesting and diverse experience. This playbook will help you prepare for a journey of twists and turns by helping you ask the right questions about global HR policy and practices.

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The Need to Hire Quickly vs. the Need to Expand Smartly

Understandably, many companies new to international expansion start small. Such a company may want to test the global waters, for example, by hiring two sales reps in Germany. It may already have a pool of strong local candidates for the positions. All this sounds easy enough. But can you go ahead and hire someone tomorrow, or even in the next 30 days?

The hard truth is that in most countries, you need a legal presence before you can hire. It can actually be illegal to hire someone before the company has registered a legal entity in the host country. Tax authorities the world over are looking to increase revenues and are on the lookout for corporations that have triggered a taxable presence, or “permanent establishment” (PE), in their respective countries. Any activity that results in revenue being generated (like the activities of those hypothetical sales reps in Germany) will likely trigger a PE. Another trigger is an organization’s sustained physical presence, or a “fixed place of business,” in a host country. Some companies may be tempted to “fly under the radar” and forgo registering a legal entity while trying to evade detection from local authorities. But that strategy, if you can call it one, almost always entails taking on unacceptable levels of financial and reputational risks.

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So, companies looking to legally pay workers in another country must first consider establishing an entity. Legal entity options vary by country, but generally speaking they fall into the three categories outlined below in this section. Probably needless to say, a company’s internal and external legal experts and tax experts will have a large hand in determining the optimal legal entity to establish when expanding into another country. Still, it’s important for HR experts to have a high-level understanding of typical legal entity types.

A representative office: This option presumes the organization will not be generating revenue in the host country. Acceptable activities may include brand promotion, market research or customer service. While a representative office severely limits the parent company’s operations in the host country, it is fairly easy to set up a rep office, with four to six weeks typically needed for payroll registration.

A branch office: A branch office is treated like an extension of the foreign parent company and not considered a separate legal entity. As a result, a branch does not offer liability protection for the parent company. Furthermore, there may be negative tax consequences associated with registering a branch, relative to registering a subsidiary (described below). Still, there are situations where registering a branch is appropriate. For example, companies looking to beat the competition into a new market may consider a branch, as a branch typically take less time to establish than a subsidiary.

A subsidiary: A subsidiary is typically the most expensive and time-consuming entity option, though the benefits often far outweigh the costs. A subsidiary not only provides flexibility with regard to acceptable activities, it is regarded as a separate legal entity from the parent company and therefore provides a layer of legal protection. Similarly, subsidiaries offer the parent company tax protection from host-country authorities.

“It’s important for HR experts to have a high-level understanding of typical legal entity types.”

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Who Are You Hiring?

HR executives can help steer the conversation on who is going to work in the new territory. Whether the company wants to send expatriates, hire local employees or use third-country nationals may depend not only on the mix of talents the company wants but on the country’s labor laws and the related pros and cons that accompany each group.

Why you will want to hire local employees: When you hire a host-country citizen, you eliminate certain significant headaches associated with sending expats, such as the need to provide training about host-country business and social norms. Hiring locals is also a “feel-good” move if your company plans to cater to the local market; it implies you are serious about meeting the needs of the population and that you’re investing in the host country for the long term. Local employees can also provide HQ with valuable, nuanced information about the host country that may be lost on expat employees. Another major plus is that hiring local employees tends to be your least expensive option and often allows you to set up shop more quickly.

On second thought: Local employees will not know your business as well as expats, so they may need more company-related training and ongoing guidance. The company may also need to invest in translators and designate a person or more to manage them from afar.

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Why you will want to send expats: When you have home-country employees with top skills and a firm grasp of the marketplace that are willing to uproot their families for a multi-year gig, the company can greatly benefit from having known and trusted individuals ready to hit the ground running. You’ll eliminate many of the communications-related and cultural challenges that can arise when managing local employees from the home country.

On second thought: Sending expats can be risky and is almost always expensive. Immigration and visa requirements for expats can slow down your expansion timeline, relocation of an entire family can be costly and complex, and you run the risk of the expat’s family members disliking the host country (we’ve seen it happen). In addition, many companies that send expats have tax equalization programs in place to offset any tax burdens associated with accepting overseas assignments. These programs are complicated and costly. All told, sending an expat abroad typically costs a company between two and three times the employee’s home-based salary.

Why you will want to hire third-country nationals: You may need to look beyond the host country’s labor market if it’s a tight one or if the skills you need are hard to find there. Third-country nationals (TCNs) can help solve these problems, and they are frequently a less expensive option than sending expats.

On second thought: The company will need to look into each candidate’s “right to work” in the host country and whether work permits are required to hire them.

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Independent Contractors

You must also consider whether to pay your new workers as employees or independent contractors. An independent contractor can be less expensive, and may allow you to get people working in the new country more quickly than if you hired an employee. The line between an independent contractor and a de facto employee, however, can be quite thin in the eyes of authorities around the world. Someone you had classified as an independent contractor but legally was an employee could have a right to back pay and claim your company failed to withhold income and/or social security taxes.

Authorities will consider many factors when determining whether a worker is an employee or an independent contractor. The issue has to do with whether they are truly acting “independently.” Are they free to work at other companies? Can they do their own hiring? Do they use their own equipment? Or does their business card have your company name on it?

Most US-based HR experts will be familiar with these kinds of worker-classification questions, as they tend to apply in most US states. However, US-based experts should also know that employment laws around the world tend to favor the worker over the employer to a greater degree than in the US, and the area of independent contractor classification is no exception.

We have seen many instances of clients and prospects approaching us after a long-time — and trusted — contractor has come forward to local authorities claiming that he or she should have been deemed an employee all along. If local authorities rule in the worker’s favor (which is not at all uncommon in such cases), the employer may be on the hook for the equivalent of hundreds of thousands of US dollars for fines, back pension pay and other compensation and penalties, depending on the length of the employment relationship and other factors. The message is clear: Know the worker classification laws of your host country and abide by them. Misclassification may save you money in the short term but can lead to crippling financial and reputation damage.

Contractors are responsible for their own taxes and filings. Be sure your hiring managers are clear about expectations with independent contractors and that those expectations are in writing. As always when operating overseas, your agreements must be in compliance with host-country laws, not home-country laws. And while a locally compliant contractor agreement is essential, it’s important to note that local authorities may deem that the worker should have been classified as an employee based on actual work performed, in which case the contract will offer little or no employer protection.

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Customizing the Job Offer

Whether your company’s expansion efforts are successful can have a lot to do with who it’s able to hire. Depending on your industry and locale, top talent can be difficult to find — and keep — particularly if you’re after bilingual workers or if you want English-speaking employees, who may be in high demand in popular expansion countries like China. This means the pressure is on for thoughtfully crafted job offers.

An HR executive who can guide the hiring process from before job-candidate negotiations can save the company from many headaches and problems down the line. Each contract should not only comply with local labor statutes but should also conform as much as possible to local customs. A misguided employment agreement could lead to rejected job offers, unsatisfied employees and ultimately an inability to attract and retain top talent. Moreover, if your company does not follow constantly evolving local employment laws, it could incur significant fines and reputational damage.

In short, you cannot expect to take your standard US or other home-country offer letter and use it for your newly hired host-country employees. Your employment agreements must conform to local employment laws and jurisdictions, which may dictate that your agreements be written in the local language. (You may also pay for English translations, though the contract written in the local language will prevail.) The agreement will also need to comply with any applicable collective bargaining agreements (CBAs), if required.

Furthermore, you will need to comply even if you have acquired a company and its employees in a cross-border transaction. The employees of the now-dissolved entity will still be entitled to whatever was promised to them by their original employer, since their original terms and conditions of employment are often legally protected through the transfer.

Finally, while there’s inevitably excitement surrounding a new hire, you need to consider what will happen if the relationship goes sour. At-will employment is unheard of outside of the US, and employee termination is highly regulated in most countries. Consider this: In France, terminating an employee could cost you a year’s worth of salary or more in severance.

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Employee Benefits: Expectations and Requirements

Expanding globally requires flexibility. You will need to adjust to compliance regimes that may conflict with your company’s existing policies, and you will need to be open to the cultural norms of the host country.

Look at the stark differences you’ll encounter: While high-growth tech firms may make inroads at luring talent in the US through generous share-based compensation packages, such offers might not meet the expectations of job hires in other countries, particularly in Europe, where prospects will be more interested in cash-based salaries.

Unlike in the US, a salaried worker may get overtime for going over the 35-hour mark in a week, and they could be working in a unionized industry. Furthermore, perks that are in the US considered “nice to haves” — such as paid sick leave — are in many countries required by law.

While your company may be blasé when your employees are out sick on a work day and pay them anyway, many countries outside the US require employers to track and cover their employees in case of illness. Companies that do business in the Netherlands, for example, have to pay 70% of sick employees’ wages for up to 104 weeks.

Also consider this: There are only 13 countries that do not guarantee workers paid vacations, and the US is one of them. While you may view your company’s vacation policy as overly generous compared to other US companies in your market, you may discover that new hires in the country you’re expanding to will expect double that amount, and if they don’t get it they won’t take the job.

In many countries, employers must track vacation time and provide much more than the standard 10 days US companies tend to give new employees. Be aware that in some parts of Europe, it’s customary for employees to either take off the entire month of August, or at most work a limited schedule. In some countries, employees are entitled to special bonuses or an entire month’s salary to take with them on their breaks. In Mexico, it is standard practice to provide a “13th month” bonus, the equivalent of one month’s salary around the holidays.

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Related local requirements must be understood before workers are hired. These requirements should be outlined in all employment agreements or your company could be on the hook later for unexpected vacation pay.

Moreover, in many countries employers are expected to contribute significantly into the local social security scheme. In France, for example, the employer can be responsible in some cases for contributing an amount up to 45 percent of a worker’s salary to social security.

As for bonuses, tread carefully. In France and Germany, discretionary bonuses to employees who go above and beyond expectations could turn into contractual obligations. Employees in Spain may expect meal vouchers. In Singapore, both employees and employers make contributions to three separate accounts of the country’s social security system, and only part of that funding is designated for retirement.

In the early days of your company’s expansion planning, special attention should also be paid to how the employees will be on-boarded. Training manuals and handbooks may not translate culturally to the employees in the host country, and adjustments may need to be made. In addition, the host country may have its own health and safety regulations that employees are expected to follow.

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Maintaining Payroll

While your payroll in the US may run seamlessly, adding another payroll that is accurate and timely for an international location can be quite a challenge when the company is new to a country and its regulations. Additional costs and complexities will arise when sending an expat employee, including the possibility of establishing a “shadow payroll” to withhold and remit taxes to local authorities while the expat remains on a home-country payroll.

A key focus is providing the right details when reporting income and taxes to local authorities. The company also needs to take care to withhold the correct payroll taxes. Think not only of the federal taxes, but of regional, state and provincial taxes as well. And consider what the company will be taxed on regarding their payments to employees, including wages and bonuses and reimbursed expenses. Rates and deadlines will vary by location. Reporting compensation needs to be done in the local currency, and for expats, dual reporting may be required.

Underreporting or incorrect reporting can lead to fines and penalties, and over-reporting can lead to lengthy waits for reimbursement. The HR team will want to bring in other experts from within, including the finance, tax, and legal teams, as well as checking with international expansion experts to ensure compliance.

When asking new employees to send you their personal data, be mindful of ever-changing data protection laws, both at home and abroad. In the UK, for example, you will need to get consent from employees before requesting that they send you their information. Be sure to have a process in place for asking employees about their personal data, make sure it’s compliant with applicable laws in the home and host countries, and follow it consistently.

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Forge Ahead with Care

A company’s budget for international expansion can easily balloon, and there are bound to be surprises along the way. But with careful advance planning, due diligence and research, unexpected costs can be minimized, especially with HR’s help.

HR can contribute to a realistic budget with real data about estimated benefits, social security costs, health insurance requirements, pensions (mandatory in some countries), profit sharing (Brazil requires this), and bonuses. You’ll also need to consider incidentals like meal allowances, transportation costs, the need to pay a translator for the company handbook, offer letters and similar documentation.

At the beginning of this playbook we urged you to be cautious before rushing into international expansion, since much of your domestic expertise will not apply to international operations. As an HR expert, however, two major elements of your job will remain the same regardless of where your employees are located. That is, you are responsible for ensuring your company’s compliance with local labor and immigration laws, and for the positioning of your company as an employer that is capable of attracting and retaining key people. The keys to HR success when expanding globally are understanding the ways in which labor laws and customs may differ by country and seeking expert guidance about how to best comply with those laws and customs to minimize risks and maximize your competitive advantages.

“A company’s budget for international expansion can easily balloon, and there are bound to be surprises along the way.”

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ResourcesBlog Articles

“Future of the Global Workplace: The Workplace Flexibility Conundrum,” http://www.radiusworldwide.com/blog/2015/9/future-global-workplace-workplace-flexibility-conundrum

“The Hidden Costs of Overseas Employee Benefits: Vacation and Overtime Pay,” http://www.radiusworldwide.com/blog/2015/5/hidden-costs-overseas-employee-benefits-vacation-and-overtime-pay

“Expat Tax Focus: Sending a US Employee to Germany,” http://www.radiusworldwide.com/blog/2015/8/expat-tax-focus-sending-us-employee-germany-part-1-2

“Banning Work Emails from Home: The Emergence of Out-of-Office Work Restrictions,” http://www.radiusworldwide.com/blog/2015/7/banning-work-emails-home-emergence-out-office-work-restrictions

“Work Stoppages and Worker Representation: What European Employers Need to Know,” http://www.radiusworldwide.com/blog/2015/6/work-stoppages-and-worker-representation-what-european-

employers-need-know

eBook

Winning Globally: A Playbook for International Expansion Teams. What you need to know about successful international expansion, from vetting proposed activities to maintaining compliant operations. http://www.radiusworldwide.com/knowledge/resources/ebook-winning-globally-all-chapters

Webinars

“HR Obligations Abroad: What You Should Expect,” http://www.radiusworldwide.com/knowledge/events/webinar-hr-obligations-abroad

“Scaling Your Talent Strategy: Creating Efficient Systems for Hiring, Paying and Retaining a Global Workforce,” http://www.radiusworldwide.com/knowledge/events/webinar-scaling-hr-operations-nov-2015

“Expats: What to Consider Before Sending Your Employees Overseas,” http://www.radiusworldwide.com/knowledge/events/webinar-expats-what-to-consider

“Strategic Workforce Planning for Global Growth Initiatives,” http://www.radiusworldwide.com/knowledge/events/webinar-strategic-workforce-planning

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About Radius’ Global HR Team Radius’ global HR team of expert advisors, combined with our cloud-based software platform OverseasConnect, can handle all of your international HR requirements. Global Payroll on OverseasConnect lets you manage payroll in all your countries operations right from your desk. And Radius’ HR Advisory team can provide services for all stages of employment abroad, including:

• Compensation and benefits benchmarking, analysis and implementation• Development of documents such as employment contracts, employee handbooks,

onboarding plans and bespoke policies• Employee relations and litigation advice• Data privacy policies and alignment• Equity compensation planning and analysis• Redundancy, layoffs and termination policy creation and consultation

For more information about how Radius’ experts can help you with your global HR needs, contact us.

About RadiusRadius helps companies expand and win globally. Clients from startups to larger multinationals take advantage of Radius’ international accounting, finance, banking, tax, HR, legal and compliance support to simplify their core operations, reduce their risk exposure and improve the management and control of their overseas businesses.

Radius delivers support and expertise through managed services, advisory services and OverseasConnect, our integrated cloud-based software platform, to create solutions that meet the needs of over 600 clients operating in 110 countries around the world. Headquartered in Bristol, UK with offices in the US, Brazil, China, Germany, India, Japan, and Singapore, we are the global growth experts. For more information, please visit www.radiusworldwide.com.

US Tel: +1 888 881 6576UK Tel: +44 (0) 203 005 5518Email: sales@radiusww.com

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Last revised October 15, 2015