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Table of Contents
- Achieving Global Domination Without Being Eaten by Red Tape
- Charting New Water: 4 Dangers Every Expanding Company Should Avoid
- Onboard Navigation The Global Employer of Record Model
- Why Work With Globalization Partners
- Final Tips: How to Successfully Navigate The Global Market
Achieving global domination
without being eaten by red tape
You’re about to scale globally. Like intrepid explorers setting out across the open 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, 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 you 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 some of the biggest mistakes companies make and offer some tips on avoiding them — then we’ll offer our own take on how to use a global Employer 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 significant 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 major 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 trouble)
In the case of establishing and maintaining international workforces, what you don’t know can hurt you — even if that workforce 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.
Germany
Potential pitfalls:
- Extensive business regulation and
GDPR compliance - Strict “play-by-the-rules” culture
- Slow to process paperwork
Germany is Europe’s largest market, with companies strictly adhering to a “play-by-the-rules” approach. Prior to hiring in Germany, 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 weeks.
Labor laws are 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 percent of annual global revenue at minimum, and the greater of 4 million euros, or 4 percent 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 largest economies and most stable markets and is 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.
Argentina
Potential pitfalls:
- Unexpected taxes at all levels
- Costly labor and payroll regulations
- Inflation and currency fluctuation
- Litigation is common and favors
workers
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 may take companies by surprise. For example, social security costs average approximately 64 percent on top of payroll. If you offer to pay someone the equivalent of 100,000 U.S. dollars per year, by the time you’ve paid all statutory benefits, your total cost of employment could be $164,000. This is 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 six 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 you cannot justify decreases in salary for the same work.
United Kingdom
Potential pitfalls:
- Labor is dictated by lengthy contracts.
- Termination notice and leave time periods are longer.
- 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. 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. 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 percent. 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.
In the UK, 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 sought-after benefit. For these reasons, we recommend our customers provide more on the pension benefit and less of the supplementary insurances (if they must make a choice).
Japan
Potential pitfalls:
- Being unfamiliar with relationship-based cultures and associated workstyle differences
- 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 one of the world’s largest economies with significant economic opportunity.
It is important to bear in mind that 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 establishing long-term trusted relationships.
There are a variety of cultural nuances to consider when entering any market, from hierarchical differences, to varying levels of autonomy and worker/manager expectations.
In Asia, and notably Japan, the onus is on the listener to hear what is being said indirectly. When managing a Japanese team, paying attention to what is not said can be as important as what is stated directly.
Employees in Japan may also hesitate to directly say the word “no.” People will hint around at “no” without saying it, as it can be considered too direct and conflictual, so it is important to pick up on the indirect cultural cues associated with expressing the word no to avoid confusion.
Takeaways
For applying these examples globally
These were four country-specific examples of some of the challenges you may encounter as your company expands globally. 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 will only take a few weeks for you to get acclimated — others could take a year. The more local awareness you have, the better. “Think globally, act locally,” absolutely applies to doing business pretty much anywhere in the world.
- Don’t go in alone. No amount of internet research is going to prepare you for the reality. Find reliable broad-spectrum specialists or source reliable individuals in each country who will understand candidate expectations and can help you navigate the local labor 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 vastly 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 one 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 percent and an extensive network of Collective Bargaining Agreements. You will also find in the end, that’s it’s ultimately cheaper to provide employees with attractive benefits packages from the get-go than dealing with the repercussions down the line.
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. For example, a $100,000 U.S. dollar salary in Brazil will actually cost companies about $185,000 U.S. dollars. 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.
In a CTC model, a base salary may only be 40 percent 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 employment packages in many countries. 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 and assuring it aligns with local tax laws. Then, turn it over to your local accountant to work out the details with the candidate. You never want to try to figure this out across twelve time zones.
Takeaways
For building an equitable international benefits system
- 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.
- If you need to provide a benefits package, country-specific laws may not require that it include expensive benefits like medical, dental, and vision. One thing is certain, though — if you attempt to provide all the sought-after benefits 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 with certain expectations that your competitor may not be as prepared to meet. The trick is knowing what to offer, and where. If you need support, we’re always on standby to help. Or, refer to our published GlobalPedia — an online, readily-accessible guide to help everyone negotiate in various countries by knowing what’s the market norm.
Problem 3: Worker misclassification
Why hiring internationally requires expert guidance
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. But you could be introducing significant non-compliance risk.
If your workers are operating as employees, according to the legal definition of local labor law, it is illegal to pay them and treat them as contractors.
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 changes and you need to terminate, your noncompliant contract will likely come to light.
Your organization will then be liable for significant back employment taxes, unpaid benefits, and other punitive damages. Let’s review a scenario where a company misclassifies an international contractor:
- 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, who in turn 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.
And the employee is 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.
- A compliant path forward is key. Find a partner that can offer the required expertise to ensure you hire international contractors while remaining compliant with local laws and regulations.
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 the individual’s work is not meeting the appropriate standards. There’s pressure on you to terminate immediately. And why not? We expect everyone to do their jobs and keep up their end of the contract or leave.
Before you act: Stop!
First and most importantly, do not terminate an employee without doing your homework first. 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. There are major protections in place against corporations unjustly terminating employees. Therefore, 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.
Understand country-specific requirements
In the U.S., “at-will employment” is standard — it is the principle stating you can be hired or fired at any time for any reason. Most other countries, however, require at least seven days’ notice to terminate employment and very detailed employment contracts. In fact, many countries require much more notice and also require companies to follow very detailed notification procedures.
To terminate 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 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 the case even if you only hire someone for a couple of 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 in an effort to avoid paying severance.
In addition, there are instances of misrepresentation in Mexico, I which employers are strongly encouraged to have employees come into the office for 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 expert local advisors to help you every step of the way with termination internationally.
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.
Takeaways
For employee terminations
- Leverage the employment contract: Getting a locally compliant employment contract at the outset of an employee’s engagement may not be your top priority, but it is the best way to protect your interests. For example, when you work with Globalization Partners, we provide compliant employment contracts in every country that carefully manage each detail on behalf of our customers. 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 3-6 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.
Onboard navigation
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 (EOR) 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. It refers to a company that outsources its back-office human resources work to a third-party vendor that handles HR management, compliance, payroll, and benefits across the U.S. The PEO co-employer model was pioneered by companies like ADP, Insperity, TriNet, and Paychex. The 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 EOR is not a co-employer. We are the sole employer. This 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 EOR 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 EOR solution enables other companies to use our worldwide legal infrastructure, software, and services to expand into more than 185 countries around the globe quickly and easily — all while avoiding the need to figure out country-specific legal systems. This approach to global business has revolutionized international 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 customers.
Via our global EOR platform, Globalization Partners simply 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. This strategy — in which our customers choose a candidate in any country, and we put that person on our in-country payroll — enables companies to rapidly hire global teams in multiple jurisdictions via our outsourced global legal infrastructure. Our solution 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 EOR, no problem — we have them covered. We provide our same quality of localized HR, legal, compliance, and technology support to our customers 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 customers’ global workforce in their own branch offices as we use to support the people we employ on behalf of our customers 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.
Final tips:
How to successfully navigate the global market
If you are faced with the burden of having to hire, onboard, and manage a global workforce, there is clearly a lot to consider. What you’ve read here is only the beginning. Employment — no matter where you’re hiring in the world — 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: Are you working with a high-quality global EOR partner?
The global expansion industry is flourishing, but not everyone gets the deep level of compliance necessary to fully indemnify customers and legally deliver high quality services.
You’ll need:
- Experience and reliability: Choose an established firm that will stand the test of time, helping you to set up your operations today, but also be there 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 that is indemnified and will follow the HR laws in each country where you have a presence, or are looking to have one.
- 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 in alone?
If you decide to do this on your own, bear in mind the following:
- Do your homework: Make sure you understand every aspect of the legal requirements and cultural norms in the countries where you would like to do business.
- Be careful: Make double and 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 cause costly issues down the road.
- Budget appropriately: 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.
