Avoiding Costly Workarounds that Can Lead You Astray
Some companies try to cut corners by using contractor agreements to replace local employees, thus doing away with Social Security costs and payroll systems. Yet regulators in places such as Argentina and Brazil require contractors to provide information about their engagements with an overseas company in an attempt to identify a permanent establishment (PE)—which, if proven, will generate local corporate taxes that are often much higher than they would have been had you established a local employment relationship.
Buglass, today’s guest columnist, is Vice President of Human Capital Consulting for Radius. He is an expert on global employment law compensation and benefits, stock options, expatriate tax, and immigration-related issues. Find out more about Stuart Buglass and international consultancy Radius here:
https://www.radiusworldwide.com/about/executive-team/stuart-buglass
stuart.buglass@radiusww.com
Another shortcut involves the extended use of business travelers as overseas employees to avoid hiring local workers and their associated tax and Social Security costs. However, playing the system where travelers cross borders to refresh their visas is fraught with danger and likely to expose the individual to immigration violations, tax residency issues, and PE risks.
Note that local officials have been quick to catch on to these activities. Many see business travelers as a soft target to increase their tax coffers, because such foreign executives are well paid and, more crucially, they’re nonvoting in the local electorate.
Budgeting for Leave and Termination Costs
It’s important to realize that costs for annual leave, sick pay, and termination can also vary greatly from country to country. For example, workers in the Netherlands are guaranteed a vacation bonus of 8 percent of the annual base pay per leave year, along with their basic salary when taking a day off.
The cost of termination is another thorny area, because most countries recognize an employee’s right not to be unfairly dismissed. The evidential bar to prove a “just” termination is often very high. Therefore, in addition to paying out the notice periods detailed in an employment contract, employers will often pay large severance sums in return for a release of an employee’s statutory rights.
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The appetite to pay out rather than run the risk of a claim can be further fueled by shortcomings in the local legal system, such as in Japan, where a successful claimant is entitled to back pay covering the period between termination and court judgment—and it can take a number of years for a case to be heard.
In territories where “just cause” to terminate is a factor, it makes sense to understand whether the attainment of such rights is contingent on a threshold event, such as the employee’s length of service (such as 1 year in Australia or 2 years in the UK) or head count thresholds (such as 10 employees in Germany), and then timetable your terminations accordingly.
Obviously, HR professionals have a duty to understand the legal landscape and potential problems when moving into new global markets. But, sometimes the local rules and regulations can be opaque and not so obvious. That’s why it makes sense to seek out expert advice to address any problems before your low-cost overseas bargain turns into a high-risk overseas failure.
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