Risk mitigation strategies and understanding the legal liability as an employer when working internationally are the most common conversations we have. There are so many landmines and speed bumps that can catch a company off guard. Many times when something goes wrong it's not that the company was underprepared, it's that the environment they were working in had changed and there is not enough time in the day to stay on top of all the movement. Just consider that in the USA, the IRS has made almost 4,700 changes to the tax code since 2001 - this averages to roughly one per day. The IRS is just one of roughly four to five of the regulatory agencies that companies have to work with domestically; the situation is similar to worse internationally because many countries do not have the same level of information transparency and accessibility.
Every legal situation is going to vary greatly, but we wanted to put together some guidelines of how you might approach your own audit of your liability. Luckily a great global law firm we follow, Baker & McKenzie, has done this for all of us and we will just relay what they put together in this great document called "The Global Employer: A Primer On International Labor and Employment Issues.
How to Audit Your Legal Liability as an Employer
Below are some of the large items you should look into to better understand if you have a blind spot of liability in your international operations, or are preparing to establish international operations.
1) Independent Contractor Misclassification
Many companies are attracted to the idea of using independent contractors as their international staff because of the flexibility and lack of set up cost. We recently just put together a whole article about why you can not do this. Many countries will penalize you worse than the USA would if they figured out your independent contractor was actually operating like an employee.
2) Payroll Withholdings and Deductions
If a company chooses to engage an independent contractor who is actually an employee or pay an employee through a domestic payroll company you can put any future operations at risk in the target country. We had one client who ended up paying $300K+ to remedy this exact situation and regain the ability to operate in-country.
3) Wage and Pay
According to Baker & McKenzie, while outside the U.S., the exempt/nonexempt concept – and thus related misclassification and overtime claims – often does not exist, failure to comply with applicable wage and hour laws (including mandatory wage increases, working hour limitations, and equal pay laws) can result in significant liability. For instance, in some jurisdictions (e.g., Mexico and Taiwan), even managers may be entitled to overtime, and in others (e.g., France and Germany), there are potential criminal penalties for noncompliance with certain wage and hour requirements.
4) Employee Benefits
Most countries have statutory minimums for things like healthcare, vacation, profit sharing, life insurance, etc. Failure to comply with these minimums can result in serious fines, a lawsuit, or potentially a loss of country operations.
5) Expats and Mobile Employees
These two types of employees open up whole new liability risks including visa acquisition and costing, proper withholdings, or tax equalization. Many mobile employees may require both a home country payroll and a host country payroll in order to cover all liabilities.
Learn more: What Is an Expat? Pros and Cons of Hiring Expats
6) Discrimination and Harassment Laws
This form of liability tends to be far more prevalent in the U.S., but it does not mean it is not something to be aware of in your new host country. All states of the EU have adopted a directive that requires equality in the workplace and China is moving towards the same. It's worth looking into your host country laws to understand if any company-wide policies and trainings need to be implemented.
7) Occupational Health and Safety
According to Baker & McKenzie, similar to U.S. OSHA and state health and safety laws, occupational health and safety requirements abound globally.
In many jurisdictions, this even crosses into areas not traditionally thought of by U.S. employers as falling under the health and safety rubric, such as the need for employees to take vacation or holiday as a matter of health and safety in the UK.
In some jurisdictions, specific health and safety committees are mandated once an employer has a certain number of local employees, and such committees must be consulted with whenever a health and safety- related issue arises (e.g., France).
8) Works Councils, Unions, and Collective Bargaining Agreements
According to Baker & McKenzie, a key area that does not directly “translate” is the existence of employee representative bodies and collective bargaining agreements outside of the U.S.
Depending upon the number of employees, companies often must have a works’ council or employee delegates (e.g., in France and the Netherlands).
Further, often regardless of the number of employees, companies may be subject to nationally implemented collective bargaining agreements (e.g., in Austria, Brazil, France, Italy, etc.).
Noncompliance can result in significant liabilities, including criminal sanctions in some jurisdictions.
9) Termination Protections and Entitlements
According to Baker & McKenzie, absent a union, in the U.S., at-will employees can be terminated with or without notice and for any reason provided it is not an unlawful reason. Unless federal or state-specific plant closing/mass layoff laws are triggered, there are no particular notice obligations in the U.S.
This is very different outside of the U.S., and thus one of the highest areas of potential liability. For instance, outside the U.S., the audit should include compliance with notice and severance obligations, as well as employee representative or government notification or consultation obligations.
An audit should also include a review of any releases, as in some jurisdictions a release of claims requires ratification by local authorities (e.g., Mexico), while in others a release is not enforceable (e.g., Brazil).
Finally, an audit should ensure that the company properly closes the loop on any departing employees. This includes compliance with final paycheck requirements, as well as mandatory payouts of vacation or end-of-service gratuities (e.g., in Korea). Some jurisdictions (e.g., Germany and India) also require hand signed resignation notices.
10) Data Privacy, Record Keeping, and Codes of Conduct
According to Baker & McKenzie, with more and more focus in this area, every audit should include compliance with data privacy and recordkeeping requirements. While the EU still considers the U.S. an “unsafe” jurisdiction from a data privacy perspective, employee privacy protection (e.g., under HIPPA or under state constitutions, such as in California) is gaining ground in the U.S. as well and should be included in any audit.
Related thereto, there are numerous federal, state and foreign recordkeeping requirements that should be reviewed.
Finally, for the publicly traded U.S. multinational, compliance both with obligations imposed under SOX and exchange regulations and non-U.S. employment, record keeping and data privacy laws (particularly whistleblower hotlines in the EU) can create an unfortunate catch-22. [divider line_type="Small Line" custom_height="30"]
If you can take an objective look at your organization through all of these lenses you should be able to get a picture of whether you have outstanding liabilities or upcoming liabilities. Make sure to contact your attorney if there are any matters that are unclear. If you need help assessing your international expansion strategy feel free to ask us a question or reach out to our Global Consulting division.