Challenge: Opening a company office or operation in a new country can expose a bewildering cluster of employment law issues.
A question recently posted on an international human resources Internet bulletin board asked: "Does anyone have any reliable sources for opening branches in foreign countries?" According to another post on that forum: "We could begin hiring Canadian employees. What employment laws should we be aware of before going down this path?" Yet another post: "We are looking at opening a manufacturing plant in South Vietnam. Any information would be greatly appreciated."
Launching operations in a new country can be daunting, regardless of the company’s overall size. A small business taking its first steps in Canada or the UK may be just as perplexed about local employment laws as a major multinational company opening its first outpost in Cameroon or Uruguay.
To bring structure to the process, this is a checklist of the HR questions that may arise when a business expands into a new country. Answers to the questions, of course, vary according to the country in question. The checklist is broken down into six stages of starting up a new operation abroad: (1) Business structure and contracting (discussed here); (2) Benefits/compensation; (3) Expatriates; (4) Local-hire issues; (5) Written employment contracts; and (6) HR administration (discussed in February and March Global HR Hot Topic).
Pointer: Tackle human resources matters in the new country head-on, using a checklist.
Stage 1: Business structure and contracting
Employer corporate entity: When entering a new country, the first legal question is "Which corporate structure to use for in-country operations?" Although this is a corporate law question, employment issues come into play. A parent (headquarters) company entity can usually carry on business and even employ people abroad as long as it gets registered as a branch or operating entity licensed locally. However, carrying on business overseas may well subject the parent entity to local tax liability as a "permanent establishment" (or local equivalent) and expose parent-company assets to host-country claims. Most companies opt for the strategy of incorporating a local subsidiary. Set up any such local entity before doing any hiring, to avoid later having to transfer staff into the locally incorporated entity, which can raise difficult issues of transfer liability.
Subsidiary structure: Structuring a host-country subsidiary may trigger employment issues. Different types of host-country corporations (in Germany, AG vs. GmbH) can carry different collective labor/employment obligations. In Latin America, multinationals sometimes incorporate a local "services" company—separate from the local operating subsidiary—to manage liability under local employee profit-sharing laws that require paying employees a percentage of annual employer profits. Account for these issues in forming the local entity.
Agents/officers: A host-country corporate entity presence usually requires having in-country shareholders, selecting in-country directors, issuing local powers of attorney and appointing local agents for process. On-the-ground, in-country employees are usually the most logical choices to fill these positions. The problems arise later. Multinational headquarters have been held hostage overseas by disgruntled ex-employees clinging onto stock interests, directorships, powers of attorney, or agency controls over a local subsidiary corporate entity: Under law in many countries, firing an employee will not dissolve these separate corporate relationships. Before bestowing corporate powers on host-country employees, work out an exit strategy, in case of an unfriendly separation.
Independent contractors: When taking first steps in a new country, engaging "independent contractors" instead of employees may seem like an attractive strategy. However, a "freelancer" working abroad as a de facto employee can be deemed an employee by operation of law, regardless of the text of the contractor agreement—thereby exposing the principal to significant tax and other liabilities. And even if the contractor is held to be a self-employed agent, local laws may still impose restrictions on termination. Plan accordingly.
Vendor partners: A business entering a new country often needs to contract with local partners, if only to outsource functions like payroll, accounting or janitorial services. Factor in the employment law exposure here if outsourced employees can later claim also to work for the principal as a "dual employer" (a particular issue in Latin America). Separately, some countries (chiefly Brazil) limit outsourcing of this sort.
Foreign entity monitoring: Some multinationals’ overseas heads-of-office have "gone bad" and abused autonomy, paid bribes or embezzled money. These problems arise more often after headquarters has put the foreign office on "auto pilot." Cede no more autonomy to an overseas office head than to a domestic counterpart. From the beginning, put in place tough accounting, oversight, audit, Sarbanes-Oxley and Foreign Corrupt Practices Act controls.
The February and March Global HR Hot Topics continue this checklist, addressing five additional stages of starting up foreign operations: benefits and compensation, expatriates, local-hire issues, written employment contracts and HR administration.