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Overview of Compliance Issues for Multinational Companies

The global mobility programs of multinational companies are subject to a wide array of regulations and laws, both at home and in new foreign business locations. While the logistical and operational challenges are often the focus of initiating business activity in foreign markets, it is equally important to assess the compliance issues that can arise when sending employees on assignment.

Compliance with both home and host country laws can be divided into three primary areas:

  1. Employment Law
  2. Immigration and Work Permits
  3. Tax and Social Security Withholding and Payment

Each area will have its own specific host country authorities that enforce local laws, and in some cases compliance standards will differ due to bi-lateral treaties with the home country government.

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The Importance of Compliance for Global Mobility

Most companies understand the need to adhere to local laws and regulations when entering a foreign market, and will not intentionally violate those rules. However, due to the complexity of learning each country’s laws, there may be instances where compliance can become an issue. The implications of non-compliance may be far reaching for a company, and should be evaluated before entering a new jurisdiction.

1.     Employment Law Violations

The majority of countries have detailed employment laws designed to protect employee rights under local labor laws. Those laws will control the interpretation of employment agreements, notice periods, legal termination reasons and severance pay. In some cases, employees may retain employment rights in the home country as well as the host country, further complicating the assignment.

In the event of a conflict with the employee, the host country laws will likely supersede any contract terms, and violations could lead to penalties for the company, payment of severance and back pay. One outcome in the case of termination could include reinstatement of the employee to the position, if the termination was unlawful and found to be without cause under local rules. Even a simple transfer back to the home country could violate host country termination rights if there was insufficient notice to the employee.

Common Examples of Employment Law Violations:

  • Termination without cause or proper notice
  • Non-payment of severance
  • Illegal non-compete clauses prohibiting related work
  • Failure to provide agreed benefits or allowances

2.     Immigration and Work Permit Violation

Immigration laws are used to regulate the length of stay and type of business activity for employees on assignment. For long term assignments, a valid work permit sponsored by a local, legal entity is required to employ foreign nationals to comply with immigration laws. In some countries, this can be a costly and time-consuming process.

As a result, a company may elect to send employees on shorter trips and use the standard business visa as an alternative to the work permit process. Many governments are increasing scrutiny of frequent business travelers to determine if they fall within the requirements to obtain a valid work permit. In the event that business visa limits are exceeded and immigration laws have been breached the consequences might include:

  1. The employee being prevented from entering the country in the future, along with the resulting loss of expertise, revenue and business opportunities.
  1. Other company personnel may lose the right to enter or be otherwise restricted by immigration, limiting the company’s presence and activity in the country.
  1. In some cases, governments can levy fines, penalties or other legal remedies against the non-compliant company.
  1. Length of stay and revenue creating business activity may trigger permanent establishment, and local corporate tax liability.

Common Examples of Immigration Violations:

  • Overuse of business visas for multiple entries
  • Engaging in business activity that requires a work permit
  • Overstaying a visa or exceeding cumulative days limits
  • Failure to establish a proper legal entity for work permit sponsorship

3.     Tax and Social Security Violations

Another area of statutory compliance is the local tax and social security withholding requirement for employees in the host country. This may be complicated by the structure of the contract and payroll used, where an employee is potentially subject to both home and host country withholdings. If a company is using a split or dual payroll, there may be a need to allocate withholding between both the home and host country. Attempts to run a remote payroll in some jurisdictions may fail without a locally incorporated entity to fulfill payroll requirements.

Further, if an independent contractor is misclassified and found to be an employee, the company may be liable for past due withholdings for both tax and social security. Some countries will levy penalties and interest as well, depending on whether the violation was intentional or fraudulent.

Common Examples of Tax and Social Security Violations:

  • Misclassification of an independent contractor
  • Illegal attempts to run a remote payroll and withholding without a local entity
  • Failure to withhold taxes and social security in the host country under a dual payroll structure

How Does a Multinational Company Ensure Compliance?

When operating a business within any country’s legal or regulatory system, there is always the possibility of violating a local law when sending employees on assignment. There are steps that a company can take to minimize this risk, while maintaining a viable and efficient foreign presence.

Research and Compile the Host Country Regulations

Thorough country research and use of local legal and payroll experts is an essential aspect of preventing non-compliance. Each country has very specific laws and limitations on employment, immigration and taxation that must be understood prior to entering the new market. Reliance on host country legal or employment resources may be the only way to fully ensure that all requirements are known ahead of time.

Evaluate Any Home Country Legal Remedies or Treaties

Home country laws may also be applied to foreign employee assignments in the areas of tax, social security, health care and other benefits. In addition, there may be treaties between the home and host country that will directly affect compliance, such as those designed to avoid double withholding for employee income taxation.

Implement a Tracking System for Each Area of Compliance

Once each area’s compliance standards are compiled, a tracking system should be used to ensure ongoing adherence to local rules. Since business activity and length of stay can change, there is a need to continually monitor employees on assignment and anticipate any potential violations of immigration and employment laws.

Create a Contingency Plan in the Event of Non-compliance

Even the most comprehensive compliance efforts will not be able to anticipate and avoid every potential violation. A contingency plan should be implemented to correct the area of non-compliance. Several options include:

  • Use of local partner or subsidiary to legally employ the assignee and withhold taxes and social security payments
  • Send the worker abroad as an independent contractor, eliminating the need to establish payroll or obtain work permits
  • Establish a legal local corporate entity to run a compliant payroll and sponsor work permits
  • Utilize a third party service such as Shield GEO to act as local employer of record for purposes of payroll and immigration

If a company finds itself in violation of local laws and facing the consequences, there are ways to rescue the situation, and future articles will address these remedial measures in each area of compliance.

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