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Global HR Hot Topic – November 2008: Solutions to "Floating" Employees Issues – "Floating" Employees Working in Overseas "Permanent Establishments" (Part 3)

November 2008
Global HR Hot Topic
Donald C. Dowling, Jr.

DOWNLOAD PDF: Global HR Hot Topic, November 2008


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


The September and October issues introduced the challenge of employing a "floating" employee in a country where an employer has no local entity or infrastructure but could be held a "permanent establishment."

Payroll. A special employment law compliance problem in the "floating" employee context involves local laws related to payroll. An unregistered overseas employer with no local taxpayer identification number will find itself unable to contribute to the local tax authorities and "social funds" (state retirement, housing, unemployment, socialized medicine, workers' compensation and other mandatory welfare agencies). Outside payroll providers can tender these payments, but payroll providers cannot administer payroll until the employer gets its required employer payor numbers. Violations of payroll requirements can come to light in an audit and are especially likely to emerge when an employment relationship terminates. Arrearages, plus interest and fines, can be surprisingly expensive.

"Secondments." A common strategy for sidestepping all these local registration and payroll hurdles is for the overseas employer to "second" (post) the local resident floating employee onto the payroll of some already-up-and-running local employer, such as: a corporate affiliate sister entity, one of the multinational's local commercial agents or distributors, or even a provider of HR staffing services (say, one of the international staffing firms Adecco, Manpower, Inc., Randstad, or a local-market provider).

Under a secondment arrangement, the in-country employee gets employed by, and goes onto the payroll of, the local business partner while serving the nonresident principal. The principal reimburses the nominal employer for all costs (plus, usually, an administrative premium). Secondments of this sort can be an ideal way to resolve many of the legal issues inherent in a floating employee arrangement, but they introduce other problems including: the extra expense, the principal's lack of direct control over the employee, the employee's reluctance to work for a third party (expect employees to be particularly reluctant to work for a staffing firm), "dual employer" challenges and special immigration issues (discussed below). Also, even a business operating in-country through a seconded employee remains susceptible to a charge that it runs a local "permanent establishment" subject to commercial registration and tax requirements, especially if the seconded employee transacts business on the principal's behalf and has agency authority to bind the principal. Indeed, the concept of "secondment" can raise special challenges in civil-law jurisdictions.

Independent contractors: Another strategy for sidestepping local employment law hurdles is for the multinational employer to engage a local services provider not as a floating employee but as a floating independent contractor (or "consultant"). The principal can get an extra layer of protection here if its independent contractor incorporates locally and the parties enter a business-to-business services contract with the contractor's company, not with the contractor personally.

But independent contractor status is fragile and a contractor can easily be held a de facto employee. Structuring an independent contractor relationship instead of hiring someone directly is a less-than-ideal solution where the arrangement seems a subterfuge. Always ask: If an independent contractor relationship is such a great idea, then why don't we also engage this person's counterparts, back home, as independent contractors? Often there will be a simple answer: Because that would never fly — these people obviously work as employees, under the applicable tests. If the set-up would fail the employee-vs.-independent contractor tests back home it will also likely fail the tests in the host country. (These tests are surprisingly similar from country to country. The law tends not to defer to parties' choice of labels when determining the true nature of the relationship, but rather imposes a "facts and circumstances" test. See Global HR Hot Topic for September and October 2007.) Additional issues arise if the contractor qualifies under laws regulating "sales agents," such as in the EU.

Even a business operating in a country through a legitimate independent contractor remains susceptible to a charge that it runs a local "permanent establishment" subject to commercial registration and tax requirements, especially if the independent contractor transacts business for, or has agency authority to bind, the principal. Liability for getting this wrong (either mischaracterizing a de facto employee as a contractor or ignoring the "permanent establishment" ramifications) can be huge. Exposure becomes especially likely when the relationship ends. Yet in situations where a principal can implement a legitimate independent contractor relationship that avoids being held a local permanent establishment, the independent contractor approach can be an excellent resolution to the floating employee conundrum. Usually this will be possible where the overseas services provider is truly an independent agent, free to work for others, paid by the task, not subject to the principal's supervision or discipline, not identified as an employee of the principal and not compensated like an employee.


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.


Immigration Law
A multinational faces immigration law challenges when a floating employee (or independent contractor) will live outside his home country. Non-citizen resident employees need a residence visa, a work permit, or both, and any foreign assignment — no matter how brief — needs to address immigration. In countries including US, Brazil, Mexico, Saudi Arabia, U.A.E., Kuwait and Qatar, an inbound expatriate immigrant often needs to find some local national (or locally-registered business) to act as a visa/work permit sponsor. Often the sponsor must hire the expatriate and the visa/work permit is tied to the job. In these cases our "secondment" scenario (out-of-country principal employer arranges secondment with in-country visa sponsor) poses a problem if the local visa/work permit prohibits the sponsored employee from serving another employer.

Multinationals that take steps into a new country always face challenges and some of the biggest involve employing staff. Employers moving into a new market with just one or two people on the ground may feel tempted to avoid getting formally registered to do business and administer a local payroll. But "floating" employees — employees based in a country where the employer has no legal registration or physical infrastructure — are likely to trigger a "permanent establishment" implicating local laws on commercial registration, income tax, labor/employment and immigration. Confront these challenges directly, such as by registering or by arranging a "secondment" or engaging a legitimate independent contractor. Trying to do business overseas on the cheap, in violation of applicable laws, can carry a high price.

White & Case thanks Howard Stovall, lawyer in Chicago, for significant contributions to this discussion.


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