Top tips for US businesses engaging staff globally
Succeeding in the US and looking to expand your workforce globally? There are a number of things you should consider to avoid the all-too-often bumpy road businesses find themselves in when trying to succeed in a global market. Attracting (and keeping!) good candidates starts with preparation, and we're not just talking about getting the right person for the role but also ensuring that they are hired in line with local laws and practices. Here are some key considerations:
Businesses need to think about how to structure their overseas business because how you will engage your staff will often depend on this – for example, some countries will allow you to employ employees through your US parent company (provided you have the necessary payroll and benefits systems in place and abide by local laws), but others will not and will insist that you have a local corporate presence. With this comes the challenge of navigating the local laws of doing business via a local business entity.
If you don't set up a local entity, you will need to consider if there is any obligation to file information publicly about your US parent company, something which is a requirement in the UK. Not having a local entity may also still result in the creation of a taxable permanent establishment in that jurisdiction which will cause you to have tax liabilities (something much more common if you are hiring individuals in sales roles). This is something which will need to be assessed on a case by case basis.
These are all things you will need to consider and will often fall to be decided based on the tax position and your future plans in that country.
Hiring status considerations
Once the international corporate structure has been decided, the next consideration has to be the hiring options, it is important to get this right from the outset as the potential employment and tax implications can be significant.
The most common options are:
Often the simplest and most common approach for US companies expanding overseas.
2. Independent Contractors.
Using contractors as an alternative to employees is often a question we get asked. This may be an option provided the tax and employment status risks are carefully reviewed, which will be different in each country.
The use of contractors is coming under increasing scrutiny in many countries from both the tax authorities (with the interests and penalties that can entail) and also the Employment Tribunals (determining whether employee rights such as paid holiday and termination protections apply). Other jurisdictions are also very alive to this issue and the increase in gig economy workers.
In the UK, April 2020 will see the introduction of the IR35 reforms which will shake up how companies in the private sector continue to engage contractors operating via a personal services company. The effect of the legislation will pass liability on to the end user and as such will lead to increased scrutiny in the overall supply chain. We are working with a number of companies who are considering alternative ways of engaging their contractors as this new legislation is resulting in a cautionary approach for using contractors going forwards.
You should take legal advice about any potential misclassification risks before engaging contractors.
3. Third party agencies/PEOs (Professional employer organisation).
An option not as common in markets outside the US. Engaging through a PEO type arrangement should be exercised with caution, with consideration of the possible tax risks of creating a permanent establishment; local laws regulating the use of these types of organisations and the company's future growth plans. However this continues to be a possible short term option for initially testing out a new market, but this position should be reviewed regularly.
The final piece of the jigsaw will be putting in place the practical considerations to ensure a smooth working environment:
Will this be managed in house or outsourced? Has the business considered the costs including tax and social charges which will apply? What mandatory withholdings are necessary in the local market? Will there be any mandatory collective bargaining agreements?
Are there any mandatory minimum benefit requirements? For example, in the UK, there is an obligation for employers to provide pension contributions (although the employee can opt out of this subject to certain conditions). This is the same in other jurisdictions as well, for example Hong Kong and Sweden.
You will also need to consider the market norm for benefits, common benefits often include bonuses, private health cover, permanent health insurance, meal vouchers, childcare vouchers and life assurance. If you have an understanding of the value of benefits in different jurisdictions, then you can decide how to tailor your standard US employment packages for local hires to help you attract and retain the right talent for your business.
The tendency to offer stock options and high commission is not as common in Europe as it is in the US. However, if you are intending to issue non-US based staff with stock, there may be scope to set this up in a more tax efficient plan and this is something that you should consider.
3. Local laws.
Local laws will need to govern your staffing relationships. Gain an understanding of the local employment laws which will apply which will differ from the US in a number of respects. Local laws will often dictate particular termination requirements, notice periods (there is no 'at will' concept outside the US), working time requirements, family leave provisions, holiday entitlements, minimum wage etc. It is also important to ensure that key terms such as non-competes (and other post termination restrictions), confidentiality provisions and intellectual property terms are also localised to ensure that the company is sufficiently protected.
4. Agreements and policies.
US template contracts and policies are unlikely to be sufficient and will need to be localised on a country by country basis to ensure that they comply with local laws. There may also be additional policies which need to be put in place under law or by custom.
Employment contracts in other countries will typically be much longer than the offer letter used in the US – it's not uncommon to see employment contracts in Europe being in excess of 10 pages long. The content is needed to protect the company and manage the relationship for both parties, every clause serves a specific purpose.
There's a lot of factors to consider, but maintaining staff engagement and satisfaction will be crucial in your international expansion effort, we strongly recommend seeking legal clarification from the specific jurisdiction you are expanding into, to ensure that you are engaging staff correctly.