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Employment Contract Basics for International Employers

By April 12, 2016 October 17th, 2017 No Comments
Employment Contract Basics for International Employers

Managing the employment contract process during your international expansion is complex, but you need to have a firm grasp on the subject to avoid compliance traps. Each country has its set of regulations that are managed by a specific employee or an outside consultant.

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“At-Will” Employment Doesn’t Exist

In the United States, employers and employees have the leisure of firing and quitting when they choose, respectively. This lax attitude doesn’t exist in foreign countries. Essentially, there is no “at-will” employment, and there are very strict termination requirements that include time and severance pay. These requirements vary in each country.

International Termination Variations are Strict

If you have an employee on your team that isn’t working out, you need to think twice before pulling the plug on their contract. These termination variations vary by each country.

As previously reported by Velocity Global, Colombia’s employment relationship terms allow both parties to terminate the labor agreement unilaterally without cause and prior notice. But, there are still restrictions, which revolve around the grounds for termination. If an employer terminates an employment contract, it must start the disciplinary action process to guarantee the employee was terminated for just cause. If this process isn’t performed, the courts will likely rule that the employee was unfairly fired. The employee is entitled to severance and other benefits, which vary in each country.

Establish a Reasonable Probationary Period

Due to the restrictions presented by the lack of “at-will” employment and termination variations, it’s imperative that you establish a reasonable probationary period for all new hires. Each country has a set timeframe for this.

For example, Germany permits a six-month probationary period, while periods in China are not restricted to one timeframe. It allows six months for open-term contracts, one month for fixed-term contracts of less than one year, and two months for contracts longer than one year.

Address the probationary period in the employment contract and be sure to discuss the grounds for termination during that timeframe. This clear understanding protects you from the concerns mentioned above.

Plan for the Required Payroll Contributions

Similar to the US, there are specific contributions that employers are responsible for managing for employee income. International employee contributions are more complex and vast than the US, so it may be wise to use a specialist for your international payroll. Typical contributions include:

  • Paid time off accrual and payment
  • Bonus payment schedules
  • 13th-month pay laws
  • Monthly, quarterly and annual payroll tax filings
  • Pension, unemployment, and other employer mandatory social charges
  • Benefits deductions for regular salary and 13th month, if applicable

13th Month Pay is Not a Bonus

We mentioned the 13th-month pay laws in the contributions list. Note that this is not a bonus. It’s a mandatory monetary benefit in many international markets that is equivalent to the basic monthly compensation received by your employees. This pay is computed by taking their salary for the entire year and dividing that by 12. If the employee worked for you for less than one year, their 13th-month pay is determined by their total current salary divided by the number of months they worked for you.

Tax Withholdings

Income tax withholdings are also different in each country. In the US, employers withhold the required amount of income tax from each paycheck based on earning, marital status and dependents for each employee. While many countries have similar withholding structures, some do not.

For example, in France, the only income tax currently held is from non-resident taxpayers who earn money from French-sourced employment and other investments.  Employees currently save money throughout the year and pay income tax for the French government by September.  This is slated to change in 2018 and French employers will begin withholding employee income tax and paying the government directly, similar to the process you’re already used to.

Expatriates Withholdings

If you have expatriates that are permanent US residents working overseas, you m withhold income taxes on wages paid to them regardless of whether the compensation for services was earned in the United States or a foreign country. The amount of the tax withholdings paid to the country they perform their work varies from each country.

Address Intellectual Property in Employment Contract

In foreign countries, intellectual property is not protected by default. You must clearly articulate the protection of your company’s IP in your employment contracts for both employees and contractors.

Non-Permanent Employees Still Entitled to Benefits

In the US, some employers choose not to provide benefits to temporary or part-time employees, but that is not the case in many foreign countries. These type of employees need to receive the same entitlements and benefits that your permanent employees receive, which include:

  • Holiday pay
  • Probationary period
  • Family benefits
  • Time off requirements
  • Weekly working hour limits

In addition, many countries require a minimum amount of hours that your part-time employees must receive. The employee can choose whether or not to work those hours. However, you must provide them with an option.

For independent contractors, they must remain autonomous with their work in order for you to avoid providing them with the permanent employee benefits mentioned above.

Remember that one size does not fit all for your employment contracts. Let’s start a conversation about getting your global expansion plan ready to go in an affordable and timely manner. Give us a call today!