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How to Continue Paying Your Employees When Closing an Overseas Branch

Companies with overseas branches can run into situations where they need to downsize their operations or make other adjustments that could affect their current employees.  There are numerous reasons that can occur that have nothing to do with the employees’ work performance, such as political instability, change in regional focus or business efficiency.

One of the decisions to make can be whether to close a branch where a company has set up a legal entity, and no longer needs a formal corporate presence in the country.  In that case, the company will need to find a way to retain and keep paying key employees.  There are important choices to make about how to handle existing personnel, especially if they have a valuable skill set or are a key team member.

How to continue employing your employees when closing an overseas branch

If your company has reached the point of closing a branch in a foreign country you will have a few options for keeping all or a few of your employees.

End the employment and hire them as a contractor

One simple solution is to lawfully terminate your employee, and then re-hire them as a contractor.  This is more cost-effective as you save on employee-related entitlements and benefits, but it could send the wrong message to the employee as though they are being ‘downgraded’ in status and compensation.

However, the real risk is that of misclassification, where the employee claims they are not a contractor at all, and still your employee.  This is an easy case for them to make if they have been an employee previously, and you still treat them that way.

Steps for transferring your employee to a contractor:

  1. Explain to the employee that you are closing your local branch, but would still like to utilize their services as a contractor.
  2. Initiate a lawful termination of the employee according to host country statutes on notice periods, just cause, and severance.
  3. Set up a new contract with the worker as a self-employed, that spells out their role and compensation. (Avoid a fixed ‘salary’ amount to minimize misclassification risk)
  4. Inform them they can manage their own work schedule as long as they meet project timelines and parameters. In most countries, misclassification revolves around ‘control’ of the worker by the company.
  5. Agree to a payment method that works for both parties, which can be handled by a third party escrow or P&I service if you want an intermediary.
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Employ your employees through an employer of record

A more seamless method is to keep them as employees, using an employer of record (EOR).  The EOR steps into the shoes of your former local entity, and administers every part of employment in complete compliance with local regulations.

This is helpful for both parties, as the employee will continue to have the full range of benefits and labor protections they are used to, and your company will retain their loyalty, experience, and talent.

Steps for transferring your employees to an EOR:

  1. Enter an agreement with an EOR service in the country, and arrange to hand over the employees on a set date.
  2. Have a discussion with the employee(s) to let them know you are closing the branch office but their employment will continue uninterrupted through a local employer of record.
  3. Terminate the employee with your local branch/entity along with statutory guidelines.
  4. A letter of assignment will be prepared by the EOR that details all the terms of the new employment.
  5. The EOR will execute a new employment contract directly with their local entity, ready for the employee’s signature.
  6. Once the employment contract is signed, the employee will be placed on the EOR’s payroll.
  7. Your company will remit the entire invoiced labor cost each month, and the EOR will withhold taxes and contributions prior to issuing a payslip.
  8. You will continue to manage the employee remotely, as the end client and beneficiary of the relationship.

How to avoid compliance issues when transferring your employees

Aside from the misclassification risk with contractors, the main compliance issue could be when the employee is terminated from your entity prior to transfer to the EOR.  They may not understand how it will work and could construe it as an unjust dismissal, or a ploy to terminate them for performance issues.

Depending on the country, even an informal discussion about a possible termination can be enough for an employee to bring a claim with a labor tribunal.  This is why it’s important to engage the EOR early so they can advise you on how to structure the transfer and communicate the new situation to the employee.  Because the EOR is staffed by locals, they can assist with overcoming any cultural and language barriers with the employee.

Some employees might use the transfer and new contract as an opportunity to re-negotiate compensation or their role.  That is within their rights to do so, but if it’s too unreasonable, your company is also within its rights not to re-hire them.  The key is to make it as informed and amicable as possible while preserving the employment entitlements they need.

Using Shield GEO to employ your employees

Shield GEO has a network of EORs in most major markets, who are already set up and ready to payroll your employees.  With the guidance of your account manager in the region, you will be advised on how to handle the offboarding of the employee to remain in compliance, and then given the steps to set up the new employment with the EOR.

Shield GEO stays engaged with the EOR throughout the duration of employment, communicating any changes in labor laws, taxes or entitlements, so you are always maintaining a sound rapport with the employee.  Your company will manage their work and time, while the EOR administers the employment tasks you used to handle DIY when you had your own entity.

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