Julia Yeo, legal director at Clyde & Co Clasis Singapore office, reports on a recent talk she co-presented with Mario Ferraro of Deloitte Consulting on Global Employment Companies.

Their talk focussed on the advantages of establishing these companies, as well as the challenges they pose.

Employers establishing their footprint overseas often need to move existing experienced staff to new offices to support their global business. The global movement of employees presents challenges for HR and legal counsel in terms of  the myriad of issues that can arise.

A resurgent trend these days is to establish a global employment company (GEC), a one-stop structure for the strategic management of international assignees. There are several key business drivers for establishing a GEC, which in turn throws up various challenges.

Global Employment Company – what is it?

The idea behind a GEC is simple: to incorporate a single company, usually in a tax/employer-friendly jurisdiction, make it the sole employer of all international assignees in the group and responsible for their secondment to various host entities within the group. As the single employer of these global nomads, the GEC handles their compensation and benefits, which it pays out from the service fee it charges to host companies for the supply of these employees.

Some key drivers

GECs are attractive to employers for a number of various reasons, including:

Operational and cost efficiencies

Functions can be streamlined and focussed, which is more efficient operationally and economically.

Reduced administrative complexity

All employee data, whether it relates to compensation and benefits, tax liabilities, the term of the assignment or the assignee’s role, is easily accessible. This is particularly important in limiting tax liability and ensuring regulatory requirements are complied with.

Consistency

A GEC can roll out a single HR policy for the group’s globally mobile workforce. This can extend to a global benefit scheme and global redundancy/retirement policies which are specifically tailored to the needs of these employees. This avoids ad-hoc schemes and terms managed by the local host company which often create a divide between expatriate staff and local staff.

Talent management

The GEC has all the relevant information to track the  career paths of its international assignees. With a clear overview of all the available talent within the group, the GEC is in a better position to match assignees with the  most suitable assignment. Mobilisation of the international workforce is therefore easier, quicker and more strategic. The same is true for the recruitment of new globally mobile employees and for succession planning, with retiring international assignees.

Some key challenges

Employment issues

To implement a GEC, the existing international employees must terminate their employment with entities in home countries and be re-employed by the GEC.

Although terminating these employment contracts can be useful as it achieves a clean break from the home country and any potential employment claims, it can be expensive, especially in those jurisdictions where there are mandatory severance payments on termination. These employees may also demand compensation for loss to their social security benefits.

Terminating their employment with their home country may also be problematic for employees who do not intend to be a global nomad indefinitely, and want to return home after a short international assignment. How will their employment with their original employer be reinstated?

Which laws would apply to these employees? Generally, the laws of the host country may give the employees certain benefits, even though the governing law of the employment contract is another jurisdiction.

Regulatory and compliance risks

The laws of the host country will generally apply to the employees, rather than the jurisdiction in which the GEC operates.

There may be currency regulations in the host countries which restrict how payroll must be paid to the assignees. Yet payment of compensation and benefits by the local company instead of the GEC may result in a dispute as to whether the GEC is in fact the “economic” employer, or just the “legal” employer.

Structuring an international assignment can inadvertently create a “permanent establishment”, where the employer is considered to be doing business in the host country and is taxed on its corporate income. There are various registration, filing and other compliance obligations imposed on permanent establishments. It is therefore important to determine which entity is the actual employer, to avoid creating unwanted permanent establishments, and to reduce business costs and manage tax exposure.

Closing thoughts

Having a pool of globally mobile employees is an essential element of a successful global business. Employers need to find an HR structure that can satisfy both the demands of its expatriate workforce and of management, in terms of the economic and financial benefits to the company.

Properly implemented, the GEC is potentially a model that can meet those needs. It is therefore not surprising that the GEC idea is finding traction among global multi-nationals which have a large expatriate pool, and Singapore, with its pro-employer law, low corporate tax rates and an efficient and transparent business environment, is therefore increasingly being viewed as a prime choice for the incorporation of a GEC.