Achieving Global Domination
Without Being Eaten by Red Tape
You’re about to conquer the world. Like intrepid explorers setting out across the seas, your team is on the verge of expanding your business into the far reaches of the globe—gaining footholds in the markets of Europe, or the Pacific Rim, or South America. Your research is done, your strategy is in place, and you have a straight shot to a fast grab of international market share.
But what about the parts of your map that are marked “unknown:” murky areas around hiring; legal shoals surrounding benefits; storm clouds lurking over employment taxes and fees? These dark areas of the map could put you at risk, maybe even sink your chances of success when you least expect it.
Unfortunately, no single international legal system exists that applies across all countries. No single compass can guide your HR, legal and staffing choices in a way that universally protects your company against risk. Does this mean you will need to chart your own course in each country to are expanding into—some of which have very treacherous legal waters? Will that kind of research and preparation be a huge drain on your resources—when what you really want is to be establishing
your local business.
This guide is intended to be your first map, to offer some preliminary advice as you embark on your exciting journey of world market domination. We’ll unpack our of the biggest mistakes companies make and offer some tips on avoiding them—then we’ll offer our own take on how to use Global Employers of Record to avoid the danger altogether—so you can focus your real energy on winning market share.
Charting New Water:
4 Dangers Every Expanding Company Should Avoid
If you’re expanding into a new international market, your executive team is already under pressure to identify and navigate the laws of each country. Executive teams spend insane amounts of time, money, and energy building out complex legal and tax infrastructures while trying to comply with the regulations of every country. Employment law is really the icing on this cake.
Most companies know they are risking significant legal issues if they get international hiring and employment wrong. Let’s talk about four of the most common problems your management and HR teams will face as you try to onboard and manage an international workforce.
Problem 1: Lost In Translation
Transferring Your Processes & Policies Into New Markets (Without Getting In Big Trouble)
In the case of establishing and maintaining international workforces, what you don’t know can hurt you—even if that workforces is only a single sales representative. One of the mistakes many companies make is trying to simply graft existing processes and policies onto a new location without understanding the local laws, practices, expectations, and cultural differences.
To illustrate what this can look like, we’ve highlighted four common examples below, from different parts of the world. While these are all attractive and well-developed markets, each country comes with its own unique set of challenges.
- Extensive business regulation and
- Strict enforcement culture
- Slow to process paperwork
Germany is a hot market, but Germans run companies with strictness, and the country takes a “play by the rules” approach for which their entire culture is famous. Prior to hiring in-country, companies normally need to set up a company in-country, which requires 25,000 euros be deposited in a local bank account for capitalization before a first hire can be made. There are several financial filings to make and to manage. It’s rare to see the paperwork completed and accepted in less than 3 to 4 and generally much more protective of the employee than the employer. After a company reaches 10 employees, an employee works council must be formed, and you will find yourself with a unionized labor force in one of the most employee-friendly jurisdictions in the world.
Recent legal developments mean that companies must factor in the EU General Data Protection Regulation (GDPR) if expanding anywhere in Europe. GDPR is a sweeping data privacy regulation activated in the EU (and around the world) in May 2018. Lack of compliance with the regulation carries penalties of the greater of 10 million euros or 2% of annual global revenue at minimum and the greater of 4 million euros or 4% of annual global revenue. This regulation impacts any company that transmits or stores data into or out of an EU country — especially sensitive data, such as that required for employee payroll.
Administrative matters aside, Germany is well worth investing in. It’s one of the world’s hottest and most stable markets. We love the Germans and their frank approach to doing business, and there are few areas of the globe we enjoy working with more. If you believe in following the market, Germany is likely a great location for future sales growth for most businesses. Most of our clients reach success in Germany relatively quickly compared to other markets that are difficult to enter
- Unexpected taxes at all levels
- Costly labor and payroll regulations
- Inflation and currency fluctuation
- Litigation is common and favors
Establishing and operating a business in Argentina from afar is rewarding, but also challenging and complex. There are few English-speaking HR consultants to help you navigate a complex tax system, where taxes are collected at the national, provincial, and municipal levels—and the labor regulations and benefits laws heavily favor employees over an employer.
This can take you by surprise. For example, social security costs average approximately 64% on top of payroll. If you offer to pay someone the equivalent of $100,000 per year, by the time you’ve paid all statutory benefits, your total cost of employment will be $164,000 – before you consider a suite of supplementary benefits common in Argentina!
Inflation is another major complication. The Argentina peso fluctuates so often that many employees— understandably—want to be paid in U.S. dollars.
Social security costs and other costs must be paid in pesos to the local government and it would be virtually impossible to calculate the exchange rate of the social security deductions if you’re paying net salary in a foreign currency.
One solution here is to tie pesos to the U.S. dollar—re-evaluating every 6 months, with any delta being paid to the employee. This is not a perfect solution, because once you increase the salary, you can’t then decrease the salary again without a good reason. If you end up in labor court— which is very likely in Argentina—you cannot justify decreases in salary for the same work.
- Labor is dictated by lengthy contracts and “at-will” employment does not exist
- Longer termination notice and leave time periods
- Different laws surrounding stock options require care when issuing grants
- Pension is a benefit employees look for as a priority over healthcare
There are many cultural similarities between the U.S. and the UK, and by international standards, the UK is not a complicated country in which to do business. But don’t make the mistake of thinking you can just run an American business as usual. Labor law is much more detailed and employee-friendly in the UK as compared to the U.S., where at-will employment is a norm. In the UK, as in many countries, an employment contract is set out at the beginning of an engagement which outlines almost everything about what’s expected of an employee. Key things to watch out for when negotiating with an employee in the UK include the much longer market norm on notice periods. One to three months of notice prior to terminating employment is quite common in the UK, but this can surprise U.S. employers. The notice period must be carefully constructed in an employment contract.
In the UK, stock options under a non-UK approved option scheme incur an employer gain of almost 13.8%. This can be costly if you don’t manage it properly at the outset; a bit of work on the front end with a good advisor can save heartache and headache down the road when those options become valuable.
Finally, benefits are important but much less so than in the U.S. In the UK—and most countries outside the U.S.—people have reasonable public healthcare and get taxed on some supplemental insurances. Pension is the most sought-after supplementary benefit in the UK. Pension is becoming mandatory and your employees will negotiate hard for more-than-the-minimum pension. Globalization Partners has found that many people are panic-stricken when it comes to retiring in the UK, so employer pension is a very hot benefit! For these reasons, we recommend our clients provide more on the pension benefit and less of the supplementary insurances (if they must make a choice).
- Relationship-based culture can be insular
and difficult to enter
- More hands-on intervention between levels
in an organization
- Communication style differences can create
confusion and frustration
Japan is a business-friendly country. Companies often are intrigued by the opportunity to enter the Japanese market by hiring local sales and marketing teams, because Japanese consumers are well known for being willing to pay premium prices. It’s also a huge economy and represents a significant economic opportunity.
On the other hand, the Japanese market is notoriously challenging to break into, specifically because it has a unique culture which is reflected in the way business is done by longterm, established relationships.
There are a variety of cultural nuances to consider when entering any market, but we have found this especially true in Asian markets, and most especially true in Japan. In Japan, it’s common to have an intermediary intervene in conflict between workers and upper management. Your U.S. team members may get calls from local employees, asking you to explain something to their headquarters team, so they can avoid a confrontation across geographies. This can seem unusual to Westerners who are used to fairly direct business communication.
Asian culture is also more strictly hierarchical, so people often expect to be told what to do by their managers. Comparatively, if you are an American VP hiring a local sales team, you really want them to tell you what they need to be successful. In the U.S., the onus is on the speaker to make himself or herself clear.
In Asia, and especially Japan, the onus is on the listener to hear what is being said indirectly—because it would be impolite to tell someone else what to think, much more so if he or she is your boss. When managing a Japanese staff, a Western manager would be well-advised to pay attention to what is not said as much as what is stated directly – otherwise, that manager may miss the intended message.
Employees in Japan may also hesitate to directly say the word “no.” People will hint around at “no” without saying it, which is a guaranteed way to create confusion to someone used to the business culture of the West. What may seem like a “maybe” to an American, was likely intended as a categorical “no” from a Japanese employee, and the resulting communication disconnect can grow frustrating and even result in a complete breakdown of communication from the Japanese side—as silence is another way of saying no. It’s also suitable when one is confused.
For Applying These Examples Globally
These were four examples of some of the scary challenges you’ll find out there in just a handful of countries. What about the other 190 nations in the world? The reality can be overwhelming. So what are the takeaways here that you can apply universally? Here are three:
- Everywhere is different. You have to bend toward the needs of each individual country, municipality, and situation. That means not just on a country level, but by region and even in some cases down to the city or towns you are hiring in.
- You can’t wing this. You’ve got a lot of homework to do in advance. Some countries take a few weeks to get started, others could take a year. The more local awareness the better. “Think globally, act locally” absolutely applies to doing business abroad.
- Don’t lone wolf it – No amount of internet research is going to prepare you for the reality on the ground. Find reliable broad-spectrum specialists in the U.S. or source reliable individuals in each country who will understand the expectations of the candidates and laws in those countries or regions.
The upshot? Hiring internationally requires a lot of knowledge and expertise across HR and legal areas. Globalization Partners can be your centralized resource for all the knowledge and experience you need to take on the world.
Problem 2: Leveling the Field
Providing Equitable Benefits for Employees Across Wildly Different Cultures
Benefits vary from country-to-country and from individual-to-individual. So how can a global company adhere to the idiosyncrasies of each country’s laws and customs and still offer “equal” benefits to all employees?
The truth is, there really is no singular way to roll out a single equal benefits plan for all your international employees and remain competitive and profitable. The cost of creating a “common denominator” plan that meets every country’s laws and norms would be prohibitively high. On the plus side, so many countries have statutorily provided benefits plans that your company may not even be on the hook to provide supplementary benefits at all.
The goal here should be not to provide equal and identical benefits, but rather equitable benefits that result in the same level of impact on employees within the context of their own culture and economy. This requires an intimate understanding of the comparative value of benefits around the world.
Let’s take a look at how benefits might work in three separate employment situations ranging from cookie-cutter simple to deeply complex.
Easy: Mandated Standard Benefits
The good news is that standard mandated benefits are easy. The bad news is they are mandated, and rarely cheap. In France, for example, all benefits are mandated by the government. These benefits are provided by way of employer taxes of 46% and an extensive network of collective bargaining agreements. You also don’t have any choice: you are going to provide your employees with a fabulous benefits package whether you like it or not. Easy does not always equal cheap.
Given that so many benefits are mandated by this kind of regulation, you may think twice before offering additional benefits to French employees or extending equal same benefits to your U.S. employees. For example, you may offer your U.S. employees stock options in lieu of the 6 weeks of vacation you are mandated
to offer your French employees.
Challenging: Collectively Bargained Benefits
Another approach to benefits taken by many countries—particularly those in South America—is collectively bargained benefits, making things a bit more challenging. This is good and bad for employers. On the upside, you and your competitors will likely be providing the exact same benefits, making it easier to negotiate for employees within your industry. However, the nuance of working with unions that negotiate across an entire industry can be a lot to keep up with. Similar to the above example, there is very little wiggle room on what companies must provide.
The challenge is each country has different rules employers must follow in their bargaining for benefits. For example, in Brazil employees must be paid vacation pay before they take their vacations. Employees are also entitled to statutory severance, retirement severance, and 13th-month pay (a type of required annual bonus). This could amount to close to twice the cost to employ someone as you had expected. A $100,000 USD salary in Brazil will actually cost you about $185,000. On the flip side, employees pay very high taxes, so that salary isn’t worth what it might be worth in a different region or under a different agreement. Once again, benefits should be balanced against other collective agreements or employee benefit models.
Difficult: The “Cost to Company” Model
And then we have Cost to Company (CTC) model for benefits. For example, in India, compensation packages are notoriously complex to negotiate. Doing the accounting for CTC benefits seems more like black magic than mathematics.
In a CTC model, a base salary may only be 40% of an employee’s total CTC. The rest of the compensation is made up of a series of allowances, such as house-rent allowance, medical, travel, and vehicle allowances. These types of benefits are not usually part of U.S. employment packages. Worse, the appropriate allowances are not one size fits all. The best way to deal with this is usually to agree to the total, all-inclusive compensation salary (inclusive of allowances) and agree that you’ll work with the employee to figure out the best way to make the package tax-efficient for both parties – as long as it’s legal. Then, turn it over to your local accountant (or us) to haggle out the details with the candidate. You never want to try to figure this out across twelve time zones.
For Building an Equitable International Benefit System
- First, don’t panic. In many places around the world, especially in the EU, benefits are already provided statutorily, so you may not even need to figure anything out. You might have to add what we call “top-up” benefits—but this is nothing like it is in the U.S.
- Second, if you are on the hook to provide a benefits package, it may not be as expensive as in the U.S. It may not include medical, dental, vision, for example, which are of utmost importance in the US. The U.S. insurance market and medical care benefits being tied to employment are uniquely American. One thing is certain, though—if you give everyone everything you offer in every jurisdiction, soon you will be offering everything to everyone, everywhere. This is why balancing benefits across the globe—and being locally competitive—is the best approach.
- Benefits can also set you apart as an employer. If you’re on target with your benefits offerings (and even with your top-up strategy) it will look far more attractive to a candidate expecting certain things than your competitor who may not be as prepared. The trick is knowing what to offer, where. If you need help, we’re always on standby to help and have published GlobalPedia — an online, readily-accessible guide to help everyone negotiate in various countries by knowing what’s market norm.
Problem 3: The Contractor Trap
Why Hiring Independent Contractors Can Be Fool’s Gold
At this point you may be thinking: “This is hopelessly complex. Why can’t I just bring on my global workforce candidates as independent contractors in every country and skip benefits?” Technically, you can. For about three months. Beyond that, the party is over.
If this employee is working full-time and exclusively for you, the same holds true in most other countries as in the U.S. If it walks like an employee and talks like an employee, it’s an employee. You’ll be opening yourself up to legal risk if you try to play games with these laws and you’ll be outright breaking the law if you pay people under the table.
That might feel like it is worth the risk—especially for a one-off employee or an unknown term of employment—but if the relationship sours and you need to terminate they can very easily blow the whistle.
Your organization will then be on the hook for significant back employment taxes, unpaid benefits and other punitive damages. Let’s review a scenario where a company can be trapped employing contractors internationally:
- A company hires an employee as a contractor and gives that employee stock options.
- The employee didn’t pay any taxes on his stock option gains.
- Local tax authorities go after the employee and he sues the company–claiming you should have notified him of his tax liability, withheld the taxes, and been responsible as an employer in accordance with the laws of that country
He’s not wrong.
This has happened and who do you think paid this employee’s=million-dollar tax bill? You guessed it: the employer.
Takeaways for Hiring International Contractors
- If you like ‘em, hire ‘em. (Legally). It’s the harder route, for sure, but both parties will be happier and more secure in the long run.
- There are no shortcuts. There’s the right way and the wrong way. Breaking or bending the law isn’t worth it. What seems less trouble or cost in the short run can be infinitely more complex or costly in the end.
- Even one contractor can be a liability. Things could appear to be going well, but the second anything sours, your contractor could turn on you and cost your company a lot of time, money and legal trouble.
We work with many companies that have “skeletons in the closet,” and come to us because they need to get out of the contractor trap. Like any other problem in business, it’s easy enough if handled proactively. We are here to help.
Problem 4: The Final Exit
Dealing with International Employee Terminations
Terminating employees is the most challenging part of running a business.
Having to terminate an employee who works in a different country can be one of the most contentious and difficult components to global workforce management.
This is why: let’s say an employee working under you has to be terminated; either that employee has committed a fireable offense or their work is not meeting the appropriate standards. There’s pressure on you to terminate immediately. And why not? This is done in the U.S. every day, right? We expect everyone to do their jobs or leave, no questions asked.
Before You Act: Stop!
First and most importantly: Do not do anything (yet!). Most countries in the world have significant limitations in terms of what a company can do when it comes to letting an employee go, either for conduct, performance, or any other reason. In fact, immediately firing an employee can expose your company to a major lawsuit. In many countries, employees have easy access to labor courts. The employee is seen as the “little guy” and there are major protections in place against corporations abusing employees. Especially in any country with a history of socialism, you have to protect your company to ensure that all details of an employment agreement—and the end of that relationship—are very carefully managed.
“At-Will Employment” is a Foreign Concept
“At-will employment” is standard the U.S. — it is the principle stating you can be hired or fired at any time for any reason. This is not at all the case internationally. Most countries require at least 7 days’ notice to terminate employment and very detailed employment contracts, and many countries require much more notice and also require companies to follow very detailed notification procedures.
To get out of a relationship with an employee—even in a layoff—your organization has a lot to assess prior to initiating the process. For example, is it worth terminating employees without the notice period if you’re going to owe them several months of salary and other state-regulated payments?
Lack of performance is also very challenging to prove. If you had to terminate an employee for lack of job performance, you could expose your organization to a lawsuit. In most countries, labor law sides heavily with the employee—in other words: you’d lose and you’d owe. In many jurisdictions, a negotiation to persuade the employee to leave with a reasonable amount of paid notice is the best approach.
So, how is this realistically dealt with outside of the United States? Here are a few examples from around the world.
Example: 90-Day Pay in Mexico
Mexico is very labor-friendly. Protections are put in place for the good of the employees, but sometimes this has the backlash effect of making it hard to do business. For example, did you know that there is a 90-day severance payment required after you terminate an employee in Mexico?
That’s literally the case even if you only hire someone for a couple months. There is a 30-day probationary period, but it’s hard to show that you need to terminate after 30 days, so most companies end up paying out the 90 days. It’s generally deemed “worth it” as compared to the cost of going to court and trying to avoid paying severance.
In addition, there tends to be a lot of instances of fraud in Mexico. Employers in Mexico are strongly encouraged to have employees come into the office and fingerprint resignation and termination paperwork. The risk is that an employee might say “that’s not my signature” to retroactively claim there was disagreement over a settlement. For this reason, we recommend always having great local advisors to help you every step of the way with termination in a foreign country
Example: Can I See That In Writing? It’s the Law in Germany.
To terminate for cause in Germany, the notice of termination must be served in writing within two weeks of the employer gaining knowledge of the underlying facts leading to the termination. The notice is only effective as of the last date of the month.
There’s no severance requirement in Germany, but settlements are generally negotiated. Why is a settlement usually reached? Eighty percent of the time in Germany, employees contest their terminations. There are so many procedural issues around terminating employment, it’s easy to miss a step. Ultimately, it’s easier to settle and negotiate a peaceful transition for everyone.
For Employee Termination
- Leverage the Employment Contract: Getting a locally compliant employment contract at the outset of an employee’s engagement may feel like a nuisance, but it is the best way to protect your interests. For example, when you work with Globalization Partners, whether via our Employer of Record Platform or via GrowGlobal, we provide compliant employment contracts in each country for the employees that carefully manage each detail on behalf of our clients. The contract comes into play at the start of the relationship, but it is the most important thing to have in place at the end of an employment relationship.
- Use the Probationary Period: The probationary period is when the employee may effectively be treated as an employee at will, or with minimum notice if one has to terminate employment. In many countries, probationary periods in employment contracts are permitted and can serve as a useful tool for employers regarding terminations. The rules and standards for probationary periods vary between periods of 3 to 6 months. Be cautious about eliminating the probation period from any contract. If you agree to remove it, and the employee subsequently doesn’t work out, you will end up paying significantly more money to the employee upon termination. It’s also worth making sure that the employee is the best possible fit for the role before hiring.
The Global Employer of Record Model
If you are feeling pessimistic about your chances of navigating the waters of international employment without running into trouble, you’re not alone. There’s a model that can simplify this entire process for you: a Global Employer of Record is the one stop global expansion solution you need.
You may be familiar with the Professional Employer Organization (PEO) or an “Employer of Record” model in the U.S. It refers to a company that outsources its back-office human resources work to a third-party vendor who handles HR management, compliance, payroll and benefits across states. This co-employer model was pioneered by companies like ADP, Insperity, TriNet, and Paychex.
The Global PEO, or Global Employer of Record is not quite the same thing. On paper, the word “global” serves as a minor distinction, but the business model is completely different from that of a U.S. PEO.
A Global PEO is not a co-employer. We are the sole employer.
The Global PEO model frees clients from the legal, tax and other compliance matters normally required for managing a global workforce. Labor law varies greatly from country to country, and often, from city to city. Given that a Global PEO employs international employees on behalf of companies, it’s our responsibility to manage the compliance of HR, legal, and tax infrastructure around the globe.
Why Work With Globalization Partners
Welcome to a new global era — where you can hire anyone, anywhere, just as easily as you hire people in your home country. Globalization Partners’ Global Expansion Services Platform enables other companies to use our global legal infrastructure, software and services to expand into 150 countries around the globe quickly and easily, and while avoiding the need to figure out the legal system of a foreign country. This approach to global business has revolutionized global business expansion entirely. We are the most trusted brand in the international business services industry, having built our own in-house infrastructure to meet the legal requirements of our Fortune 1000 clients.
Via our Global Employer of Record Platform, Globalization Partners simply, elegantly, and effectively helps any company expand into new international markets, within a few days of finding recruits globally, and without complex international tax and legal planning. Use of this strategy—in which our clients choose a candidate in any country, and we put that person on our in-country payroll—enables companies to rapidly hires global teams in multiple jurisdictions via our outsourced global legal infrastructure. Our platform is rapidly becoming the norm when it comes to smart global business practices.
For companies whose local teams expand beyond the ideal size for our Global Employer of Record Platform – no problem, we have them covered. GrowGlobal™ provides our same quality of localized HR, legal, compliance, and technology support to our clients where they have grown into their own subsidiaries—thus, whether “our payroll or yours,” you can rest assured that your local team is well supported in accordance with best local HR practice. We use the same systems, software, and local HR team to support our clients’ global workforce in their own branch offices as we use to support the people we employ on behalf of our clients via our own in-house subsidiaries.
“As an entrepreneur, my vision is a world where anyone can work with any company, anywhere, regardless of jurisdiction. My vision is also a scalable, easy-to-use global platform that meets the standards of America’s Fortune 1000 companies. My vision is a world in which high-growth companies can not only dominate the globe but also delight their clients and their employees. I’m honored to say that my exceptional team has made this vision a reality and taken many companies global along the way. I’d like to share the wisdom we’ve garnered over the years, as well as our platform, to enable you to accomplish the extraordinary vision that
you and your team have set out for yourselves – and to grow globally, beyond your wildest imagination.” – Nicole Sahin, CEO, Globalization Partners
How to Successfully Navigate The Global Market
If you are faced with the burden of having to hire, onboard, and manage overseas employees, there is clearly a lot to consider. What you’ve read here is only the beginning. Employment—in the U.S. and abroad—is extremely unique and individualized, even beyond the labor-friendly rules and cultural nuances.
Here’s a reminder of what to consider when embarking on your international journey: Working with a high-quality Global Business Expansion Platform partner?
The global expansion industry is flourishing, but not everyone gets the deep level of compliance necessary to full indemnify clients and deliver services according to the high standards required of a well-run, U.S. public company.
- Experience and Reliability: Choose an established firm who will stand the test of time, helping you to set up your operations today, but who will also be here to help you meet all your employment obligations down the road.
- Legal Expertise: You’re essentially outsourcing your global legal platform, so make sure you choose a partner who is indemnified and will follow the HR laws in each country where you have a presence.
- Local Expertise: Choose a partner that comprises legally recognized business entities around the world, has a legal bench, and in-region HR professionals to support you with real world international labor experience.
- Breadth and Scope: Your Global Employer of Record must keep you compliant with labor laws everywhere in the world where you are doing business—or where you may someday do business.
Going it alone?
If you decide to do this on your own, bear in mind the following:
- Do your homework: Doing business outside the U.S. is nothing like it is inside the U.S. Make sure you understand every aspect of legal requirements and cultural norms in the countries where you will do business.
- Be careful: Make double & triple sure you choose the right people! Interview hard and test skill sets before you sign on the bottom line.
- Follow the law: Never bend the law, even for a short term. It will come back to cost you.
- Be proactive: Get the contract right at the outset, so that it won’t bite you.
- Budget high: Assume you’ll make mistakes and allocate more than you think you need.
- Ask for help: It’s never too late to fix your mistakes by turning to experts. Don’t be afraid to invest in good advice up front or ask for help along the way.
If you need help with global expansion, get in touch with us today.