Going Global — Navigating The Expat Employment Relationship To Reduce Litigation Risks
Corporate Livewire
Cross-border employment relationships provide valuable growth opportunities for employees while giving companies access to unique talent, skill sets, and points of view. Employees may seek expatriate opportunities for personal reasons or professional development. According to a recent Mercer survey, 70% of companies expected to increase their short-term expat assignments. Employers large or small, however, need to be aware that easy mobility raises complex legal issues. In addition to tax and jurisdictional consequences, employers need to consider litigation risks and what happens when the relationship ends.
Establishing the Employment Relationship
Many articles examine the tax ramifications of expat assignments, but from a litigation perspective the “who” and the “what” are equally important. Who is the employer? And is an employment relationship even necessary? Companies should consider whether they can use distributors, subsidiaries or other entities such as third-party agencies to shield the parent from having a presence in the foreign country. Other times companies desire to shield the host-country entity, and instead designate the home-country entity as the employer.
Secondments, dual employment, and localization have benefits and drawbacks. As experienced litigators know, however, it is not the label alone that matters. Companies need to be consistent. For instance, if the home-country entity is to be the sole employer, ensure the employment offer comes from the home country, the home country is actively involved in monitoring the assignment (i.e. fielding questions from the employee, guiding the employee through personnel actions like reviews, PIP’s etc.), the employee has a resource at the home-country entity, and the home country makes essential personnel decisions. If, instead, the home country desires to avoid jurisdiction or a presence in the host country, it should take a back seat and let the host-country entity control the employment relationship. Absent clear demarcation, the employee could be entitled to the protections and benefits of both countries.
A related consideration is whether the company structured its compensation package in a way that could artificially inflate a potential damages award. Companies that attempt to neutralize tax consequences for expats by inflating their base salary may be surprised when this inflated number is used to calculate damages.
Hoping to avoid legal and financial consequences of a foreign employment relationship, many companies turn to independent contractors. However, countries around the world closely scrutinise these arrangements and have different or more extensive requirements than the U.S.
Legal Landmines for Independent Contractors
As in the U.S., the main factor for determining independent contractor status in many countries is the control the employer retains regarding how tasks are performed, hours, location, business risk, payment terms, and other aspects of the relationship. A written agreement is just the starting point.
Some countries presume an employer/employee relationship exists (e.g. Mexico, Panama, Costa Rica, Venezuela, Chile, Peru, Portugal, South Africa, the Netherlands). In many, economic dependence is a critical factor. In Spain, for example, individuals who derive at least 75% of income from a single client are entitled to vacation, severance and other benefits.
1. Rules for Independent Contractor Agreements
In some countries, independent contractor agreements should contain special provisions. In India, for instance, the agreement should accurately state the contractor has a “permanent tax account number” and withholds and pays his own taxes. Reference to the Turkish Code of Obligations is required in Turkey, and in Indonesia the agreement should expressly invoke the Indonesian Civil Code. Various countries have specific registration requirements for independent contractors, (e.g. Russia, Israel), and the agreement must reference them.
Consequences for misclassifying expats can be severe, including government or agency actions for failure to withhold taxes and social charges leading to civil and criminal penalties and/or an action by the “contractor” for vacation, termination rights and other employee benefits.
2. Potential Liability for Misclassification
Companies on the losing side of a misclassification analysis face financial and operational consequences. In the U.S., liability usually consists of six categories:
1. Taxes
2. Social security
3. State unemployment/workers compensation insurance
4. Overtime
5. Employer plan benefits
6. Interest/penalties
Abroad, a misclassified contractor may trigger the above, plus additional liabilities:
7. vacation, back holidays
8. mandatory benefits (i.e. profit sharing, thirteenth-month pay, mandatory bonus, payments to state housing and unemployment funds)
9. Severance pay, notice pay and liability for unfair dismissal
10. Fines, percentages of unpaid withholdings, penalties for severe violations
Independent contractors who are improperly classified must be paid like employees (taxes, social benefits, paid childbirth leave, etc.). Misclassification may also result in an entity being deemed to have a presence in the foreign country, leading to severe tax and other consequences.
Handling Real and Perceived Cultural Differences and Discrimination
Regardless of whether an individual is deemed an employee or an independent contractor, companies with a global workforce face increased legal risks when expat employees are thrust into new environments. Real or perceived cultural differences and work habits can lead to discrimination or harassment claims. A good training program and dedicated HR specially trained to handle expats can help avoid misunderstandings.
Title VII and the ADA apply extra-jurisdictionally to protect U.S. citizens working abroad for American companies. Most other countries also have laws prohibiting discrimination and harassment in the workplace, and many countries have more expansive protections than the U.S., like prohibiting bullying or moral harassment.
In the U.S., employers may not discriminate based on national origin. Thus, employers may face liability if expat employees are treated differently because they are from a certain country or display the physical, cultural or linguistic characteristics of a particular national group. 29 C.F.R. §§ 1606.1. On the other hand, expats are not entitled to protections based on their citizenship status alone.
Joint Employment and Jurisdictional Concerns
Companies often confront litigation in one or more countries, against multiple corporate entities. Commonly, both the host and home entities are named as joint employers. For instance, where the home country is set up as the employer and payor, but the host country supervises the day-to-day workplace activities both companies would likely be named in the lawsuit. If avoiding foreign jurisdiction is of paramount concern, the home entity should minimise its oversight of the assignment. This goal must be balanced against the possibility the employee will be deemed an employee of the host entity, subject to the full protections afforded in the host country.
The broader implications of the company’s position on the “who” aspect of the employer relationship should also be considered. What jurisdictional challenges exist, and will they be undermined by the way the company has designated the employing entity? Have all the technicalities of the Hague Convention been satisfied, or does the host country afford similar protections and opportunities to the claimant such that the home entity can mount a challenge based on forum non conveniens? Also, can an arrangement be reached with opposing counsel to avoid costly legal challenges with potentially far-reaching ramifications on jurisdiction and entity status?
Conclusion
Expat assignments can be rewarding for both the employee and company, but it is important to consider what happens if things go wrong. Considering litigation risks and challenges unique to cross-border employees can help companies make the best choices when structuring the “who” and “what” of the relationship.
Call & Jensen is a full service civil litigation boutique that handles high stakes employment litigation and business matters throughout California and the country. Founded in 1981 with lawyers from the nation’s best law schools and the world’s most well respected firms, the firm’s clients include some of the largest companies in the world. Call & Jensen litigates with excellence and dedication to its clients’ objectives. In addition to countless defence verdicts and judgments, Call & Jensen has also obtained seven and eight figure verdicts, judgments, and settlements when representing its corporate clients as plaintiffs.
Attorneys of the firm practice at all trial and appellate levels, and represent clients in responding to federal and state agencies. The firm handles issues in all key areas including employment and labour, intellectual property, commercial litigation, complex class actions, real estate, false advertising and unfair competition, and product liability. Located near federal and state courts in all seven Southern California counties, Call & Jensen attorneys are regularly tapped to serve as counsel for cases across the country.
Call & Jensen offers its clients a team of attorneys with extensive expertise in all aspects of employment and labour law, including litigating discrimination, harassment and retaliation cases under Title VII and California’s Fair Employment & Housing Act. Some of the firm’s most notable results have included employer judgments and dismissals in wage and hour class actions, trade secrets cases, and employment-related tort claims. In addition, Call & Jensen attorneys regularly provide workplace and employment law advising.