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A Guide to Understanding Hidden Employment Costs in International Markets

By May 22, 2017September 30th, 2020No Comments
A Guide to Understanding Hidden Employment Costs in International Markets

One of the most difficult aspects of expanding into international markets is navigating complex labor laws and hidden employment costs. In each market, you’ll run into various regulations and compliance requirements that can become costly for your organization. Not to mention the costs associated with setup, tear down and any unexpected fines.

International-payroll

In this post, we’ll explore hidden employment costs you may encounter during international expansion and how to prepare your company for a successful expansion.

What are Hidden Employment Costs?

Hidden employment costs are extra payments in addition to wages that are required by law or are cultural expectations. They may be extra taxes that an employer pays based on a percentage of their employee’s income or they could be a mandatory bonus in addition to the agreed-upon wages for an employee.

For each country below, employment benefits are divided into those required by law and those expected by employees.

Social Fund Contributions

Social fund contributions are taxes paid by the employer, usually based on the employee’s salary. These taxes fund social security programs such as health insurance, pensions, and unemployment insurance. Many countries incorporate contribution caps, so as salary increases for an employee, the contribution percentage decreases.

  • Germany: Employers pay approximately 20% tax on the employee’s income for programs like health insurance, long-term nursing care, unemployment, and pensions.
  • Mexico: Employers pay nearly 20% for social security programs, plus 5% for unemployment insurance and pensions.
  • Netherlands: Employers pay approximately 18% to support unemployment, disability, and health insurance.
  • Argentina: Employers pay either 23% or 27% for social security programs, depending on their turnover rate at their business. These percentages are also based on the highest monthly salary the employee receives, so bonuses and commissions can drastically increase the cost to the employer.

Paid Vacation Time

Many countries mandate paid vacation time for employees, often based on the number of years worked. In some instances, employers must pay a premium when employees take vacation days. Governments use this to encourage employees to take vacations. Some countries mandate paid time off for national holidays.

  • Israel: As of 2017, employees who work 5 days a week receive a minimum of 12 days of paid vacation. For those who work 6 days a week, they receive 14.
  • Mexico: Minimum of 6 days after 1 year of employment with additional days granted for each year after that. Employers also pay at least an extra 25% of the employee’s wages for those vacation days.
  • Germany: Minimum 24 days per year not counting weekends and public holidays. 24 days for EEs working 6 days a week and 20 for EEs working 5 days per week. Basically, it’s 4 weeks.
  • New Zealand: Minimum of 30 paid vacation days including public holidays. 4 weeks paid vacation and 11 public holidays, so technically 31.
  • Afghanistan: Employees are entitled to 20 days leave minimum, but this includes sick days.

Sick Leave

In addition to paid vacation, labor laws frequently protect employees when they are sick. Benefits vary from country to country, differing by the amount of time off and how
much compensation the employee receives.

  • Austria: Employers pay 100% of wages for twelve weeks. For the next four weeks, the employer pays 50% and social insurance pays 25%. The National Health Insurance System will then provide partial pay for the next 52 weeks.
  • Brazil: Employers pay a full salary for the first 15 sick days. After that, social insurance pays at a lower rate. Collective bargaining agreements often require employers to continue contributing after 15 days.
  • Trinidad and Tobago: 14 days per year.

Maternity Leave

Maternity leave can be paid or unpaid, and most countries designate a period before and after birth.

  • Germany: Employers give expectant mothers a minimum six weeks leave prior to birth and 8 weeks after birth. Employers pay a stipend during this period.
  • Iceland: The mother and father may take three months with an additional three months afterward for one of the two. They receive 80% of their wages during this time.
  • Latvia: A mother may take 112 days for maternity leave at full pay.

Bonuses

Some countries mandate bonuses for employees usually paid out at the end of the year.

  • Israel: 13th month bonus equal to one month’s salary. While this bonus is not mandated by law, many employees expect it as a part of their salary.
  • Mexico: At least 15 days’ wages to be paid by December 20th.
  • Brazil: 13th month, or a Christmas bonus equal to one month’s pay. They are paid in two installments in November and December.

Before expanding operations in a foreign country, an entrepreneur should find a local expert to help calculate these hidden employment costs.

Avoid surprises and unexpected costs by working with an in-country expert. Reach out to Velocity Global to see how we can help you understand international labor laws and guide you through a successful global expansion.