An Often-Overlooked Budget Priority for International Compliance – Employment Relationships That Cross Borders

Companies crossed borders in 2017 at an explosive rate. International growth remains a viable business model in the near future. Everyone wants to get in on the action provided by an international market for products, international growth by acquisition or just plain cross-border expansion to take advantage of certain employment markets.  As you or your clients are taking advantage of world-wide markets, are you also considering the impact these expansions will have on employment costs? The issue is not payroll and benefits – those are obvious. The issue is the cost of expatriates creating a corporate tax presence; the cost of purchasing or maintaining expensive benefits plans that cannot be changed; the cost of acquiring an aging employment population that cannot be terminated. 

Stay up with changing enforcement agendas

During times of economic challenge, countries adjust their enforcement agendas to find low hanging fruit from which to extract additional revenues. Taxing businesses that do not correctly operate by classifying their “employees” as “contractors” or that send employees on a business visa to “scout” out the territory have become more prevalent as other tax revenues fail to cover government spending. Countries’ need to increase taxable revenue makes this previously “easy” solution to evaluating a new country expansion risky, and opens companies up to significant tax or penalty obligations.

Tailor your program to meet your needs

Companies often approach employment relationships that cross borders in two ways, both of which are wrong-headed and potentially costly. One way is to manage based on the laws of the country in which the company is domiciled. That is like saying, when in Rome, do as the Americans do. Americanized policies, procedures, benefits, and most importantly that concept of at-will employment do not export well, but sometimes there are options that allow for a hybrid approach that can save money. The other way is based on how similarly-situated competitors handle their cross-border relationships. This is akin to following your proverbial “friends” off the cliff without a parachute. A few might live through the experience, while others could end up facing significant fines or penalties. Neither way addresses the unique tax, employment, or immigration laws of the other country applicable to your operation, nor does it protect your company from the consequences of ignoring these laws. And it certainly does not allow you to have a program tailored to your specific needs while taking compliance into account.

Avoid unintended consequences post-acquisition

Expansion through acquisition is a favored way of ensuring a market presence and growing a business without having to do so from the ground up. Cross-border acquisition of entities with employees, benefits plans or other perquisites that exceed basic minimums may appear to result in easy solutions or changes. But frequently local laws and local practices often combine to make the process of change exceedingly expensive.  And in some countries, reducing headcount means eliminating the youngest employees first, given local protections of certain classes of employees based on age and social position (i.e. with a family; nearing retirement).  Thinking through this issue before the acquisition can reap tremendous benefits in avoiding unintended consequences following the acquisition. What you don’t know might truly hurt you.  

Make 2018 your year of employment compliance

Business-savvy transnational companies include in their legal budgets the cost of employment compliance to ensure against getting caught in these traps. If companies or clients have not taken a look at these issues in a while, now is the time to prepare for 2018 by putting this topic into the 2018 legal spend. As information-sharing among agencies in all countries becomes easier, the world becomes smaller, and infractions result in much greater costs for companies caught in non-compliance. If you are ready to tackle the management of your cross-border employment relationships with creativity and ingenuity, and make 2018 your year of compliance, now is the time to plan.