Consider these 10 issues before sending your employees overseas.
Sending employees overseas is becoming increasingly common in today’s global market. You should be aware of the considerations that go into selecting an employee for international assignments and what’s involved in managing the assignment. Here are 10 considerations.
- Find the right people
It’s costly to send an employee overseas. Obviously, you want to make sure your candidate has the knowledge and skills needed to perform the job. But it’s also important to determine if the candidate has a personality that will adjust to working in a foreign country. Are there any spouse or family needs to be considered prior to commencing the assignment?
Employees working in foreign countries will require additional compensation. Allowances for housing and higher costs of living are common. Employers often provide tax preparation services in the United States and abroad and adjust pay to offset the increased tax liability. Concerns such as education and spouse employment need to be considered as well.
- Assignment letter
This is a critical step in the overseas assignment process. The assignment letter should spell out the agreement between employer and staff, with clear explanations of position and duties, the period of assignment, and the terms of compensation.
- Know and comply with local employment and immigration laws
Failure to follow rules related to immigration and work visas can result in deportation or worse. When sending an employee overseas, most employers handle immigration matters pertaining to visas and work permits themselves.
- Cultural assimilation
Foreign assignments work best when employers take steps to make sure that employees understand the language and culture of the country where they’ll be working. Cultural sensitivity training is important, and language barriers must be overcome, either through training or by providing a translator.
- Risk management
Not every overseas assignment is “April in Paris.” Employers sometimes need to send employees into countries where they might face safety and health risks not typically encountered in the United States. In these situations, employers need to be up front about the risks and provide information and services as needed to reduce risk and help staff return home safely.
- Tax equalization
A tax equalization policy attempts to neutralize any adverse tax effect on employees posted overseas. The employee contributes an amount toward his worldwide tax liability equal to the obligation if still working in the United States. The employer makes up the difference.
- Payroll and HR administration
Employers need to understand the tax withholding obligations in the host country. Both parties need to agree and understand where pay will be delivered, either in the employer’s home country or the host country for the assignment. In some cases, a “shadow payroll” may need to be maintained if pay is delivered in the United States but host country taxes are required to be remitted.
- Social security considerations
An international assignee is typically subject to social taxes in both the home and host countries. The United States maintains “Totalization Agreements” with 24 countries to avoid double social taxes where possible. It’s also possible to structure the international assignment to eliminate the international assignee’s requirement to continue to participate in the U.S. social security system. However, this will limit the international assignee’s access to the U.S. company’s employee benefits including participation in its 401(k) plan.
- Returning home
The international assignee’s need to be tax equalized may continue for two to three years after the assignment ends.
Whether it’s your company’s first foray into a new country or the 400th, these 10 steps cover the due diligence to make sure the overseas experience benefits both your company and international assignee.
International assignments: Key issues to consider
Gareth Wadley, February 26, 2015
What legal issues do you need to consider when it comes to sending employees overseas?
The number of employees working abroad is increasing. As it becomes more common, some assume this will lead to greater standardisation, with template assignment letters the norm.
However, the legal, tax, pension and other variables involved in international assignments require a more bespoke approach, leaving little room for standard documentation. We outline some key issues to address below.
What is an assignment?
Also referred to as a secondment or transfer, an assignment might be internal (to a different role abroad with the same employer) or to an external employer. A key characteristic of an international assignment is that an employee from one legal entity and country ('home' country) temporarily performs services in another country ('host' country).
Potential assignment structures
There are a number of different ways in which assignments can be structured and documented. Which approach is appropriate will depend on a range of issues including employment law, tax, pension, social security and regulatory implications as well as the expectations of employees. Five frequently used assignment structures are:
- the employee continues to be employed solely by the home employer;
- the contract with the home employer is suspended and the employee enters into a local employment contract with the host employer for the assignment;
- the contract with the home employer is terminated with a promise of re-employment at the end of the assignment. In the meantime, the employee enters into a local employment contract with the host employer;
- the contract with the home employer is suspended and the employee enters into a contract with an international assignment company (IAC) within the employer group; or
- the contract with the home employer is suspended and the employee enters into a contract with both an IAC and the host country employer.
Which is best?
When deciding on the best structure for the circumstances, some questions to consider are:
- Do the host country’s laws require employment by a local entity, ruling out sole employment by the home employer?
- Where there is no contract of employment in place with the host employer, could local laws presume that the host is the de facto employer?
- If the home contract is “suspended”, is the home employer prepared to accept the legal uncertainty, in employment law terms, that this status brings?
- In a dual contract structure, who will bear the greatest risk of being liable for employment claims – host, home (or the IAC)?
- Will the employee accept the termination of his/her home contract?
- What is the impact on pension and benefit schemes, social security and tax?
Are there key terms in the home contract that require special consideration and protection, for example, restrictive covenants and confidentiality?
Which national law applies, when and to what? Which courts would have jurisdiction in the event of a dispute?
Who pays for, and manages, the employee during the assignment and will the employee return to the home country?
It is inevitable that documenting assignments will become a smoother process as employers become more familiar with the issues involved. However, the range of significant personal, legal and financial implications will mean that a degree of tailoring will always be necessary, in order to avoid negative repercussions.
Gareth Wadley is principal associate at Eversheds