top workplace law challenges facing multinational employers: establishing new global operations...

Top Workplace Law Challenges Facing Multinational Employers:

Establishing New Global Operations

Kevin Chapman, Assistant General Counsel, Dow Jones & Company

Shelly Cooper, Senior Vice President & General Counsel, IAP Worldwide Services, Inc.

John Sander, Shareholder, Jackson Lewis P.C.

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Overview

• Do you need employees at all: the independent contractor/employee conundrum

• Establishing the new local operation• Establishing the employment relationship

(both local and ex-pat)• Implementation of policies and handbooks,

both global and local

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Scenario

ABC Company has decided to expand into international markets for the first time. The Company’s plans vary quite a bit among individual markets; in some cases the objective is simply to have one or more contacts in place to call on customers and assess the potential for growth, while in others the Company wishes to have an established presence. The head of the business unit, Polly Pushhard, and her chief deputy, Eddie Earnest are charged with launching the business and growing revenue immediately, and accordingly are pressing the Law Department to develop a plan for moving forward in all markets as soon as possible.

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Scene 1

The first question in your mind is whether the Company needs to have a corporate presence and employees in all markets, or whether some can be staffed with independent contractors (with no corporate presence) or through a representative/liaison office with lesser formalities than a corporate subsidiary. What factors will you look at, and what are the pros and cons you will consider, in making recommendations?

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Do You Need Employees At All?• Most countries explicitly differentiate between independent contractors

and employees.• Independent contractors may have some protections in civil codes

(e.g. calculation of sales commissions on termination) but are not entitled to benefits and are responsible for their own tax filing and payment. The employee enjoys the vastly greater benefits of the local labor code and social benefit schemes, and the employer has the obligation of social tax contributions and income tax withholding.

• As in the US, rarely a bright line determination, but the touchstone is the extent of the individual’s subordination to the direction of the company.

• The stakes of mischaracterization are generally much higher outside the US in light of more extensive social benefits, unfair dismissal protection, and more aggressive penalties and enforcement.

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Key Aspects Of An Independent Contractor Relationship

• Clear documentation of the parties’ intent to create an IC relationship, including contractor’s responsibility for own benefits and taxes—but this is just the starting point, as courts nearly everywhere will look to the realities of the relationship if they conflict with the document

• Avoidance of employment-like compensation such as bonuses and stock incentives

• Project-based services achieved without ongoing direction • Contractor provides own office and equipment, sets own hours• Limited duration, mutual right to terminate without cause• Contractor free to work for, and preferably does work for, other customers• Avoidance of use of company business card, titles, e-mail address• Contractor is preferably a business entity, with contractor free to use other

individuals to provide services• Where applicable, contractor registers with local trade and/or tax authorities

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Recharacterization

• Disputed termination by company of contractor relationship

• Tax audit of contractor• Contractor holds itself as company

representative to third parties• “Mission creep” as contractor takes on more

responsibilities over longer time period than originally intended

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Consequences of Recharacterization

• Back payment of social tax contributions and associated penalties

• Back payment of overtime, mandatory holidays and leaves, other employment benefits

• Termination of contractor agreement treated as unfair dismissal subject to notice, severance, damages

• Possible “permanent establishment” tax exposure• In some countries, criminal fines and even

imprisonment of legal representative

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Representative/Liaison Offices

• Many countries provide for a form of representative office which is simpler to create and maintain than a local subsidiary

• Functions generally limited to exploration of opportunities, market research, etc.

• May be possible to retain a representative outside the local labor/employment law

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Scene 2

In several markets, the Company has determined that a subsidiary and employee presence will be necessary to carry out its business objectives. Eddie Earnest has reached out to Human Resources for assistance in hiring staff for the new office. He figures that he needs a staff of 5-10 salespeople, along with 2-3 office support staff who will handle orders, marketing, and customer service. He wants to use current company employees (US citizens) on ex-pat assignments to serve as the office staff on a 2-year rotation. Your HR manager, Holly Stepstraight, has come to you for some guidance. You immediately call a meeting with Holly, Eddie Earnest, and Polly Pushhard to discuss the issues. What are the other relevant employment-related issues you need to consider?

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Employment-Related Issues

• Pre-hire Contingencies – Legal/HR Considerations– Drug screens– Background checks– Skill/ability testing– Reference checks– Other types of employment testing

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• Residency/Work Authorization– For Expat personnel

• Business/Tourist Visit Visa – Duration and Scope Limitations and Restrictions– Risks, Cost and Benefit Considerations

• Residency and Work Authorization– Requirements– Timing– Process– Cost

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• Total Compensation & Benefits Package– Statutory Elements– Competitive Elements– Equity Considerations (US National, Foreign National, Local

National)– Minimum Wage Considerations– Engagement Rules and Options (i.e., commission-only

compensation)

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• Establishing Administrative Support Functions– Support Areas– Factors to Consider

• Corporate Control• Authority Matrix• Economics

– Support Approach• In-House• Outsource• Hybrid

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• Unique Issues for U.S. Government Contractors? – Licensing and Registration Requirements– Presence of a Status of Forces Agreement, Tax Treaty

or Diplomatic Note

• Immunities and Exemptions– Export and Trade Compliance– Engagement of Local Nationals (i.e., Saudization,

Kuwaitization)– Security Clearance Access Requirements– Compliance with Local vs. U.S. Federal Laws

• What happens when laws are in conflict?

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Other Considerations - Competition

• What restrictions are utilized in the local market by competitors who may challenge the sourcing and engagement of new personnel (from their ranks)?

• Is non-compete and non-solicit language used and enforceable in the local market?

• Do you need to secure a no-objection certificate (NOC) from the current employer to release its employee to join ABC Company?

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Other Considerations - Training

• To establish a local sales force, what are the competency training requirements for ABC Company personnel to represent and effectively market and sell ABC Company’s products?

• Are there any export control issues? • Are there any steps that must be taken to ensure ABC

Company’s product can be sold legally in the local market? • Any personnel licensing requirements and/or protection of

intellectual property implications? • Can you bring (US-developed) product training to them, have

new personnel come to US HQ for training, or do you need to develop new training to specifically target this new local market?

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Other Considerations – Doing Business In-Country

• At what point, if any, does ABC Company have to be licensed and/or registered to do business in the foreign country?

• Is a local tax ID required? • Need to produce adequate books and records to satisfy

commercial registration requirements? • Vet local/international accounting firm for annual audited

financial statements.

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Other Considerations – Doing Business In-Country (Cont’d)

• Need to retain local counsel to start subsidiary formation – Type of entity

– Capital requirements – Bank account minimums (need an internationally recognized

bank)– Will ABC Company be able to transfer funds outside of the

country (i.e., Libya – cannot transfer funds once deposited in Libya )?

• Is a letter of guarantee (or credit) required? • Conduct due diligence/vet local counsel

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Other Considerations – Foreign Sponsor

• Establish who will be the legal or foreign representative (i.e., sponsor), if necessary, of the subsidiary company for local legal purposes, such as signing employment contracts, filing required disclosures for the local government, signing off on hire/fire paperwork and representing ABC Company before various labor and social services ministries.

• What will be the role of the foreign sponsor regarding traditional non-labor matters?

• Determine how to preserve the appropriate internal controls while at the same bestowing a sufficient amount of autonomy to be successful. What are the legal means to accomplish (i.e., job description, separate employment agreement, or authority matrix )?

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Other Considerations - Taxes

• Is there a bi-lateral tax treaty or diplomatic note in place which would yield any relief for US Expats as it relates to personal income tax on earnings in country? – If no, what is the strategy to mitigate costs to employee and risk to the

ABC Company with regard to US expat personnel in country – tax protection?

– Tax equalization?

• Do the costs associated with tax protection/equalization present a situation in which office functions should be transitioned from US Expat personnel to Local National (LN) personnel?

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Other Considerations - Banking

• Is the employee required to open a local bank account?

• Receive pay in local currency? • Is there a minimum? • Any limitations as it relates to payroll source (US or

local, or both)?

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Scene 3

Polly Pushhard is now sending daily emails asking Holly Stepstraight when ABC Co. can start hiring local employees and sending some US employees to the newly established office. Holly has asked you to provide appropriate employment contracts for the local salespeople and for the ex-pat office staff. You are now preparing for a call with your outside counsel to discuss what kinds of contracts or other documentation are necessary. What issues will you need to address?

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Establishing the Employment Relationship

• The local employment contract– Required in many countries– Even where not required, contract terms may be

better than default terms in labor code– Protection of confidentiality/inventions,

commitment to and acknowledgement of compliance obligations, non-compete/non-solicitation, post-employment cooperation with litigation/investigations

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Drafting Global Employment Contracts

• Globalized, “one size fits all” approach—headquarters pushes down a global template with local variation only as required by law, collective labor agreement, or strong custom

• Every contract is local based on templates created by local HR and local counsel

• Hybrid approach—headquarters identifies certain desired provisions which are incorporated into a local format

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Advantages of Standardization• Consistency across businesses and countries• Ensuring that key corporate requirements (e.g. confidentiality,

appropriate use of restrictive covenants, post-employment cooperation with litigation and ongoing investigations) are included

• Maximizing flexibility in assignments and restructuring, consistent with local law

• Highlighting commitment to compliance with law and Company policy

• Facilitating management of workforce by HR/managers with global organizations, and legal support by headquarters or regional counsel

• Avoiding counterproductive “freelancing” by local management/HR

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Challenges of Standardization• Complexity of adapting a template to local legal requirements

across jurisdictions• Even within country, complexity of applying same template to

multiple business units with different collective bargaining agreements and/or works council arrangements

• Local language requirements• “One size fits all” approach can lead to lengthy contracts with

material irrelevant to individual employee• Time, resources, aggravation involved in determining whether

local variations from template will be permitted• Cultural resistance to perceived “command and control”

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A Hybrid Approach

• Define a set of provisions to be applied as much as possible to all employees (e.g. confidentiality/invention, commitment to compliance, maximum permissible flexibility in place of work/nature of assignment/compensation)

• Define an additional set of provisions to be applied to senior-level or key employees (e.g. non-compete/non-solicitation, cooperation with litigation/investigations)

• Require that local contracts contain the designated provisions subject only to required local adjustment

• Otherwise use the local format and template provisions

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Key Expatriate Arrangements

•Expatriate assignment (including secondment)

•Global Employment Entity

•Dormant or Suspended Contract

•Transfer/localization

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Threshold Issues in Entering Into a GlobalMobility Arrangement

• Immigration/Work Authorization• Time, Expense, Complexity• Family residence permit/spouse work authorization

• “Permanent Establishment” Tax Issues

• Compensation/Benefit Issues• Maintaining key home country compensation and benefits• Allowances—housing, education, cost of living, hardship• Local payroll arrangements and benefits

• Documentation• Assignment letter• Secondment/services agreements• Local contracts

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Managing the Global Mobility Arrangement

• Practical Considerations• Turnover caused by management changes, employee failure to

adapt to the overseas position• High sophistication of many globally mobile employees in obtaining

beneficial individual treatment• Complexity in finding the right mix of global mobility support

functions (Law vs. HR, HQ vs. local management, inside vs. outside counsel, legal vs. accounting/tax) can lead to inconsistency and gaps

• Control of corporate governance, local contracts

• “Global nomad” phenomenon

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Scene 4

Holly Stepstraight has advised you that the local office is up and running. Holly wants to know if the new hires (and the transferring expats) should receive a copy of the Company’s Employee Handbook and Code of Business Conduct – and Holly is wondering if everything in the Company’s policy handbook is applicable to the employees in the foreign office. You are now back on the phone with outside counsel and, aside from wishing you had thought of this months ago, you need to address what issues?

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Corporate Handbooks/Policies

• General Issues and Implementation Concerns– Whether an employee handbook is

mandatory in the foreign jurisdiction (e.g. Japan, France, Netherlands, Belgium).

– In such jurisdictions, decide whether to use “standard” terms in order to conform to local law and custom.

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• Notice to and Consent by Employees: It is usually required or advisable to inform, consult and/or bargain with any unions (Work Councils) or formal employee representatives who represent your employees before rolling out any new policies. – In some countries (France, China) there is a very formal notice,

discussion, approval, and publication process that must be followed before any new company policy will be effective.

– In other jurisdictions (Germany, Italy) negotiations with a works council may be required before adopting any new policies.

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• Translations: In most cases it will be necessary to translate the policies into local language, even if all your employees are ex-pat US Citizens who speak only English.• Belgium, Chile, China, France, Portugal, Turkey,

Quebec, Canada, and others will not recognize or enforce policies that are distributed in English.

• A side-by-side translation will work in most places – but not all.

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• Communications to Employees – Acknowledgements of Receipt. – For some countries, formal acknowledgement is

required for enforcement – mouse click not enough– May need to formally amend employment contract– How to handle employees who don’t sign– Must maintain records of acknowledgements– HR Distribution and check-off is an option– Can tie consent to some discretionary payment

(bonus)

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• Amendment or Repeal of current policies and/or Work Rules. Formally amend or repeal any existing rules or policies so that you do not have two versions of the same policy in effect.– In Countries where published work rules are required

(including Japan, France, Netherlands, Belgium, Greece, Korea, Poland), check to ensure that new policy does not overlap with any published work rule.

– Expunge old policy statements from web site.

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• Policies Issued Locally. Policies should be formally adopted by and published by the local legal entity (subsidiary, Branch Office, etc.) in each country, rather than being published by the parent company.– Many local courts will not enforce a policy that has not

been issued by the employing entity, and formally adopted by the local company

– Local legal references may also be required. (Richardson v. Oracle, 2013 FCA 102 – Australia)

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• More Generous Benefits. Having more generous benefits than are required by local law may be good. But, keep in mind that establishing a more generous than required benefit may limit your ability to reduce benefits in the future.

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• Different minimum levels of benefits within the same country. In some countries (China, India) there are different minimum benefit levels required in different locations.• Mumbai and Delhi, for example, have different minimum

annual leave requirements.• Beijing requires a special benefit for “late” maternity –

when the mother gives birth to a first child after the age of 24.

• Consider whether to have uniform benefits (the greater of all required) or to permit local variations.

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• Covered Employees. In some countries distinctions among full-time, part-time, and temporary employees are not recognized. Carefully review and revise any policies for application outside the US if you don’t want the policy to apply to everyone.• Having a policy document that includes terms outside the

local lexicon may create confusion and potentially expand the application of your benefits beyond what you intended.

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• Government Filings. In some countries, copies of your policies must be on file with the local labor ministry or other agency. Get local counsel advice about the requirements and ensure that all amendments and new policies are properly filed to

ensure enforceabilty.

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• Specific types of Handbook Policies that May be Problematic:– Whistleblower hotline. In the US, Sarbanes Oxley requires the

existence of a whistle-blower process in which the whistleblower can anonymously report corporate wrongdoing. • In Spain, it is unlawful for a company to permit an

anonymous report – the system must provide identification of the complaining person.

• In the EU, the information provided via such an internal reporting process may contain private information that may not be transmitted to the home office. Privacy laws elsewhere may also apply to internal complaints and claims of the violation of local law.

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• Specific types of Handbook Policies that May be Problematic:– Anti-Harassment Policy. A general workplace conduct policy

calling on all employees to behave in a civil and professional manner may be fine. But specific prohibitions on discrimination or harassment in the workplace based on certain characteristics (e.g., sex, sexual orientation, marital status, military service, religion, etc.) may run afoul of local laws. The broader the scope of the anti-harassment policy, the more likely it will need to be modified for particular countries. Meanwhile, a US-based policy may not cover concepts such as “bullying”, “mobbing”, or “social harassment” that may apply under local law.

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• Specific types of Handbook Policies that May be Problematic:– Code of Conduct/Standards of Business Practice.– Confidentiality, Copyright, Trademarks, and other

Intellectual Property Issues.

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• Specific types of Handbook Policies that May be Problematic:– Non-solicitation and non-competition agreements– Notice required before resignation/Notice provided before

discharge.– Time Off – Sick Leave, Vacation, Personal Days– Leaves of Absence, including maternity/paternity leave and

disability– Pre-employment background checks– Hours of work & Overtime

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Resources

• Top Workplace Law Challenges Facing Multinational Employers Detailed Scenarios

• L&E Global Annual Publication – Employee v. Independent Contractor• Legal/Human Resources/Tax Questions for Local Counsel - Outside

Contiguous United States (OCONUS)• http://www.williamsmullen.com/news/international-business-planning-ad

visor-planning-tools-senior-executives

Link includes:– International Business Development Strategic Planning Issues– International Business Development Planning Checklist– International Business Development Model Matrix– International Business Development Country Localization Checklist

• An International Guide to Employment Law Across 26 Jurisdictions

http://www.williamsmullen.com/news/international-business-planning-advisor-planning-tools-senior-executives

http://www.williamsmullen.com/news/international-business-planning-advisor-planning-tools-senior-executives

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