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Global HR Hot Topic – September 2008: "Floating" Employees Working in Overseas "Permanent Establishments" (Part 1)

September 2008
Global HR Hot Topic
DOWNLOAD PDF: Global HR Hot Topic, September 2008

Challenge: Local host-country employment laws and payroll requirements restrict employers with no local registered employer entity.

Multinationals entering a new market that plan to employ lots of employees in a local plant or office tend to invest the resources to enter the new market without taking shortcuts. They tend to spend the time and money to get it right, setting up a local representative office, branch or subsidiary; getting it fully licensed; and complying with local corporate laws, tax laws, employment laws and immigration laws. Entering a new local market in this way — "all in," formally establishing a registered commercial presence and complying with local laws, is always the best practice. The reverse — violating applicable law — is never a best practice.

But what about the employer new to an overseas market that needs just one or two local in-country employees? What about the employer that will operate only temporarily in some foreign country? And what about when an employee moves abroad for personal reasons, asking to work from a new home in a country where the employer otherwise does not operate? Must these employers always take the time-consuming and expensive "all-in" approach? Not surprisingly, many businesses and many nonprofits taking their first small steps into a new overseas jurisdiction prefer to avoid the "all in" model. They seem to prefer to place an employee in a target country without building the infrastructure of a formal licensed and registered in-country employer entity. We might call these arrangements "floating" employment, because the in-country "floating" employee is not anchored to any local employer-entity infrastructure.

These days there seems to be a marked upswing in floating employee arrangements. From a practical perspective, this trend should come as no surprise: technology facilitates the approach. In the old days (say, up to the 1970s and 1980s), a multinational's in-country local representative would have needed dedicated office space, a secretary and other support staff. But today's floating employee can work efficiently from home with little physical infrastructure beyond a computer, cell phone, express courier delivery and perhaps video conference software.

Technology may facilitate floating employee arrangements but legal issues frustrate them. The very same advances in technology allow tougher enforcement by local regulators. Floating employee arrangements are suspect and risky because they often violate local laws — especially where the nonresident employer entity is deemed to have an unregistered so called "permanent establishment" (local business presence subject to being taxed).

Multinationals' overseas employment operations inevitably raise structuring issues: How do we employ someone in a foreign country? Which entity should be the employer? How do we get comfortable that the arrangement complies with local law? Generally, the best advice is to avoid floating employee arrangements and get registered in each country where an employer employs people. But some see this full-registration approach as impossible. Fortunately, in certain circumstances there are legally compliant strategies for engaging overseas floating employees — strategies such as "seconding" an employee to an up-and-running local employer or engaging a legitimate independent contractor. But implementing a legally compliant strategy in this context requires addressing a number of disparate issues. Floating employee arrangements raise legal traps under local host-country laws, including commercial registration requirements, corporate income tax requirements, labor/employment law (payroll, "secondment" and independent contractor issues) and immigration law. We address each in turn.

Best Practices Tip: When employing a "floating" employee (with no local host-country employer entity) in a new country, implement a viable legal compliance strategy.

Commercial Registration
When a multinational has an employee who makes short, intermittent business visits into a country without establishing a local residence, without signing contracts and without generating in-country revenue, the employer probably does not cross the jurisdiction's local "doing business" threshold and probably will not be considered a local "permanent establishment." But once a multinational engages staff in a foreign country to develop the local market — or even just to work on local soil for the worker's own convenience — then the analysis gets complex. And it differs from country to country.

An employer that crosses a jurisdiction's local "doing business" threshold and is deemed under local law to be transacting business locally generally must register in the country's local "Companies Registry," "Commercial Registry," or other local equivalent to a US secretary of state corporate registration office. Usually this registration means fulfilling the requirements for some category of locally recognized corporate registration status. In the Philippines, for example, an incoming foreign corporation that wants to do business locally has three registration options: representative office, branch, or wholly owned (locally incorporated) subsidiary. In countries such as Ethiopia, a company will need both to register locally and also apply for a "business license."

Our question becomes: When does an employer operating abroad cross the "permanent establishment" threshold and become obligated to register itself in the local companies registry? The answer differs by locale. Malawi, for example, requires only those businesses with a "local established place of business" to register — but Malawi uses a broad definition for "place of business" that can include, for example, even a government department office that hosts a local company employee. By contrast, Qatar requires every natural or "juristic person" to register before "engaging in commerce" — but Qatari commercial registration law is murky as to what "engaging in commerce" means. Other countries, like Syria, set out illustrative lists of factors that determine when a foreign business triggers the local registration requirement. A Syrian decree sets out five factors:

1. Hiring workers paid by the employer (our "floating" employee situation)

2. Buying or renting local real estate in the employer's name

3. Opening a local bank account in the employer's name

4. Listing the employer in a local telephone directory

5. Subscribing to a post office box (in Syrian parlance "a telegraph address") in the employer's name

This discussion of floating employee arrangements continues in the October issue (which will address tax and employment law concerns) and concludes in the November issue (addressing "secondments," independent contractors and immigration).

White & Case LLP thanks Howard Stovall for significant contributions to this discussion.

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