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The international mobility of employees is a critical part of most successful global supply chains. They often span multiple countries and involve numerous suppliers and subcontractors. This makes it challenging to ensure compliance with labor laws, regulations, and standards across the entire chain.
This article looks at the key issues that arise from an HR and legal perspective in connection with internationally mobile employees.
Operational and logistical challenges
Diligence is key prior to engaging internationally mobile employees
Most countries operate an open labor market and do not require employees to be engaged by an entity registered in the country where the employee works. This means there is often a lot of flexibility regarding which corporate entity should be the employer of internationally mobile employees. However, great care needs to be taken because the entity that acts as employer will often be subject to the same tax and employment law requirements as a local employer, even where the employee is working from home (overseas) on a laptop.
Permanent establishment risk
Further, if there is no taxable presence in the place the employee is working, the employer will want to ensure it is not inadvertently bringing itself “onshore” for corporation tax purposes in the country where the employee is working. This “permanent establishment” tax risk is a key issue when looking at the engagement model. Great care needs to be taken when choosing how to engage internationally mobile employees, whether through a local employing entity or their home country entity (or a third-party provider such as an “employer of record”).
HR operational risk
There are also frequently thorny practical issues that make it difficult for an employer to employ someone overseas. For example, many benefit providers will not accept payments from an overseas bank account, and setting up a bank account overseas in a place where an employer has no legal presence can be challenging. Careful diligence of these legal and compliance burdens and practical issues needs to be undertaken before deciding on how to engage internationally mobile employees.
Compliance with local labor laws
The employer will want to ensure compliance with the local laws of the country where the employee is normally based, but it has the additional burden of ensuring compliance with the overseas host country’s labor laws. The general rule (regardless of what the employment contract says on choice of law) is that employees are protected by the laws of the country where they are normally working. These local mandatory employment rights (including dismissal protection) cannot be overridden by a choice of law clause in an employment agreement. This can create confusion and legal risk where there are performance and conduct issues during the period of internal mobility. Anticipating this and building safeguards into the relevant employment documents is essential.
Tax protection and equalization
A key issue for internationally mobile employees is taxation, particularly if the employee is moving from a low-tax to a high-tax jurisdiction. The most common forms of support include tax protection from the employer (where, at the end of the tax year, the employer keeps the employee whole so the employee is not worse off, based on what they would have paid in their home country) and tax equalisation, where the employer essentially takes over responsibility for the employee’s taxes in both countries and ensures that the employee who is working overseas is taxed based on what they would have paid in their home country. Tax protection is less burdensome for the employer but can trigger significant cashflow problems for the employee. Tax protection comes at a significant cost for the employer. In either scenario, the employee will likely need professional support to complete tax returns in multiple countries. The employer will also need to protect its position by ensuring it obtains any tax credits paid by the tax authority to the employee in connection with these tax arrangements.
Employee well-being and COLA
HR must consider support systems such as health insurance and assistance with relocation, housing, travel, additional leave, and support with school fees for employees' families. While there is often no legal requirement to offer this support, it is often practically necessary for the internal assignment to be viable. Similarly, employers will need to assess the impact of an employee moving from a low-cost to a high-cost jurisdiction from a cost of living perspective. That may include a cost of living allowance taking into account the price difference between a basket of supermarket goods in the home and overseas country.
Conclusion
Incorporating international workers into supply chains is crucial as it allows companies to leverage diverse skill sets and perspectives, enhancing innovation and efficiency. Additionally, understanding and managing the complexities of international employment ensures compliance with global employment laws, thereby mitigating risks and maintaining the integrity of the supply chain.
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