Vol. 52, No. 3
Are your overseas assignments creating risky ‘stealth-pats’?
International commuters—employees who work in a foreign country but return home with some frequency—have become ubiquitous on the global business scene, but their routine cross-border travel, if not monitored closely by HR, could expose their companies to unsuspected liabilities.
There is no single type or length of assignment that defines international commuters. Some assignments are treated as traditional relocations, with the family staying behind and the employee traveling home regularly, perhaps on weekends or for a full week once every month or two. Others are less-structured, “frequent flier” assignments in which the employee travels between home and the host country on no fixed schedule.
Both types of scenarios—and a variety of permutations—are becoming common for a number of reasons, says Ben Garfunkel, who is based in Short Hills, N.J., as national partner in charge of the International Executive Services (IES) division at KPMG, an international accounting and advisory firm. Multinational business growth in Western Europe is fueling much of the growth, “and the development of the European Union has made it easy to work across borders.”
Such assignments are particularly suited to Europe, where inexpensive flights and short distances make spending weekends at home feasible. John Pfeiffer, senior manager of client programs development for Associates for International Research in Cambridge, Mass., recently returned from a seven-year assignment in Brussels, where, he says, he “saw an increasing amount of this activity—working in one country and living in another on a weekly basis,” especially in the region that encompasses London, Paris, the Benelux countries and even Scandinavia.
Pfeiffer says another common practice is like that used for years in the oil and gas industry, where “rotators” go to work in the Middle East for 14 or 28 days in the oil fields, and then have an equal amount of time off to spend in their home countries.
“We also see [international commuters] when the assignment duration is limited—in cases of mergers and acquisitions, for example,” says Achim Mossmann, national director of KPMG’s IES program in New York. “One of our clients has a lot of employee movement between [its U.S.] headquarters and Canada, and they’ll spend three or four days a week in the foreign location. Generally, companies have a better handle on the costs of this type of relocation because it is planned in the mergers and acquisitions project plan.”
Commuting is also being seen more often in longer assignments, driven by the rise in dual-career couples, for whom relocating the family is a much more difficult and unappealing prospect. Atlas World Group, which tracks data on why employees refuse to relocate, found in its 2006 Corporate Relocation Survey that 81 percent of those declining these assignments cited family issues. Similarly, more than two-thirds of respondents to the 2005 GMAC Global Relocation Trends Survey reported that family was the main reason for assignment failure.
The most recent GMAC survey of 125 multinational companies also found 19 percent of employees embarked on assignments without their spouses or partners, up from the historical average of 14 percent. Companies seeking alternatives to long-term assignments (longer than one year) were at an all-time high (62 percent), up from 49 percent in 2004. The chief reason by far was cost, cited by 93 percent of respondents.
Commuting is replacing many long-term assignments, according to the Institute for Global Mobility’s (IGM) 2006 report, Strategic Trends in Global Mobility. Of the 57 members of the IGM surveyed in late 2005—all global mobility specialists—58 percent saw growth in global commuting assignments, 42 percent said they remained the same, and none of the respondents cited a reduction. Meanwhile, 59 percent indicated they would reduce or keep level traditional two- to three-year international assignments.
This commuting scenario typically begins with a suggestion from an employee who has been tapped for a long-term overseas assignment, says Denise R. A. Oemig, director of client relations for Runzheimer International’s Global Mobility Services division in Rochester, Wis. “The option is often employee-driven, and not created by the company or line management, which would almost always prefer a short-term assignment or a long-term relocation to a commuter arrangement. But an employee might offer to commute as a counterproposal to a family relocation, when he or she has kids in school or a working spouse. From there it becomes an approval process among supervisors and HR, which will vary from company to company.”
What many HR managers know is that while a structured commuter assignment may sound like a work/life balance solution for the employee, the reality of this existence takes its toll on the family when a spouse or parent is present for only a few days a month. Commuters face a higher risk of family problems and failed assignments, Pfeiffer says. “It can be very difficult and can cause a lot of friction in the family. Some companies have flat-out canceled [commuter] arrangements because they’ve seen rises in divorce and broken assignments.”
Oemig has observed similar employer hesitancy. “At least one company we work with will not approve them at all; others say commuting should last no more than two years.”
Crossing the Line
But many employers allow, and even encourage, short-term global commuting in an effort to mitigate the costs of relocating an entire family. It’s easy to see that the global commuter’s relocation experience and expenses differ from those of the traditional long-term expatriate: “One of the myths is that a commuter assignment is less costly and easier to administer,” Mossmann says, because the employee may not need moving expenses, a home buyout or even long-term housing. In addition, the cost-of-living top-up that traditional expatriates often receive may be deemed unnecessary.
Often, though, what starts as an experiment in work/life balance becomes a mobile money pit. “In my experience, commuter assignments are generally open-ended, and not structured like a long-term international assignment,” Mossmann says. And this is how the line between the commuting expat and the frequent flier becomes blurry—and costly. “HR people who deal with global mobility have come to realize that when you do these commuter assignments in a compliant manner, it is not cheaper or easier to administer,” Garfunkel says.
“Travel costs mount up quickly,” Pfeiffer says. For a weekly commuter, for example, “that’s four round-trip air tickets a month, usually flying at peak times,” he says. Housing too can be a costly expense when the expat’s family remains in the home and the employee needs to be housed—often in hotels—at least part time in the host country. “Housing arrangements are all over the board in [commuter] assignments,” Mossmann says. “Sometimes it’s hotels; other times it’s corporate housing. It comes back to the question of how we define these assignees, and what do we provide for them? Ideally, companies should arrange temporary housing” for their commuting employees.
The blurry line is fully crossed when managers completely circumvent HR’s relocation processes and make an overseas assignment to an employee directly, creating what global HR professionals are calling “stealth expatriates”—employees who travel so frequently to another country that they begin to create costly liabilities for the company and themselves. “The challenge I see is when business managers perceive these to be easy, short-term commuter assignments, and move people without HR’s knowledge. They are not briefed as well as they should be on international assignments, so HR has to resolve the issues,” which inevitably come up later, Mossmann says.
Perhaps the greatest risks facing the global commuter—and the employer—are tax liabilities. Very often, managers will assign an employee to a project that requires frequent travel to a foreign destination, not recognizing the implications. “Middle managers who may not be well-versed in international HR will think it’s pretty simple to buy a plane ticket and send someone off, but this exposes everyone to risk,” Garfunkel says. “There is no malintent on the managers’ part; they just want to get the job done, but without giving thought to the tax issues.”
When employees receive a per diem or expense reimbursement—which often happens in casual commuter assignments—they are typically paid on a tax-free basis. “But working away from your tax home for a significant period and reimbursing expenses through the often non-taxable ‘travel and entertainment’ budget, the tax authorities may take exception,” Mossmann says.
And that’s just one of many potential tax exposures. Employees—and their employers—may think they are protected by the “183-day rule,” a common provision in tax treaties between the United States and many other countries that allows employees to work in a host country for six months or less over the course of a year and not be liable for paying taxes in that country. “But that’s not always exactly true,” Garfunkel says. Certain conditions sometimes have to be met, such as the employer being headquartered outside of the host country, or the 183 days occurring during a 12-month period rather than in a calendar year. “And not every country pairing is covered by such treaties. In making these assignments, employers need to study the domestic laws of the host country and how tax treaties may impact the situation,” he adds.
Social security can be another hidden trap. Traditional expatriate programs administered through HR will coordinate social security coverage to avoid taxation in both countries, but more-casual overseas work arrangements may overlook this potential liability. “Managers—and HR—really need to get the corporate tax people involved at the very beginning, as soon as a border is being crossed regularly,” Oemig says.
Another potentially significant risk, Oemig notes, is when a commuting employee triggers corporate tax liabilities against his or her own company. “In some countries, if an employee spends more than X number of days in a country on business, then the corporation may appear to have an office there,” and corporate taxes will be levied. Korea, for example, “is infamous for that kind of tax regime,” she says.
The same risks can arise when employees are conducting certain types of business activities without expatriate status. One such exposure may occur when an employee signs binding contracts on behalf of his or her company, or conducts certain types of sales and marketing activities. If there is a pattern of such business, a government can say the company is operating there and should be taxed. “The way contracts are written has to be scrutinized by the legal department very carefully,” Oemig says.
Garfunkel agrees: “Commuters flying under the radar can’t really evaluate their own risk.”
Stealth expatriates did exist 10 years ago, Mossmann says, “but there is a higher awareness of them now due to compliance measures like Sarbanes-Oxley and increased scrutiny by immigration and tax authorities to identify these people.” The challenge for HR now is to find better ways to identify them within the company, “putting a framework in place and providing a structure to these assignments so that businesses can utilize them better.”
According to a 2005 Worldwide ERC and Cendant Mobility study, 45 percent of respondents say they uncovered stealth expatriates by “chance.”
A more formal approach HR professionals can take to reveal global commuters, Pfeiffer says, “is to communicate with line managers about this issue and the need to keep HR in the loop” regarding international frequent fliers. “The best practice is for HR to be up front and ready to tell managers the risks and to outline specific policies. These assignments can’t be done as a backroom deal.”
Another step is to get HR involved in developing or updating the company’s overall travel policy, “to make necessary changes appropriate to these types of arrangements,” Oemig says. But business travel is a big category for many corporations, “so you may want to classify travelers into groups” that can better identify stealth expatriates.
Companies have come up with some solutions for identifying and tracking stealth-pats. One company working with Oemig is developing its own software program that requires international travelers to log their trips, with the data collected into a format where HR can review it for red flags.
Another possible tool is a system that tracks overseas travelers in real time. It could be based on where people use their corporate credit cards, or when they make airline reservations or check in at airports. “One novel approach was used by a company that tracked employees through its security card system; HR could download data on who was swiping their badge and where,” Garfunkel says.
But perhaps the most important measure HR can take is to have well-established policies in place regarding global commuters and frequent fliers. “On one hand, HR is still somewhat reactive,” Mossmann says. “Very few have well-established policies in place, or have not necessarily evaluated the ones they have. A lot of [what’s being done] is ad hoc to accommodate employees’ wishes or business requirements, but we will see more policies in coming years.”
Policies “need to involve corporate tax folks and the legal department” and should “go beyond the individual to look at corporate security and compliance issues,” Garfunkel says, adding, “You need a solid process to communicate [the policy] to managers.”
One company Oemig works with conducts an annual meeting with all line managers on the topic. “They are also considering a corporate policy that HR must sign off on all foreign business trips over a certain number of days.” It may sound impractical, she says, but even the suggestion “certainly helps managers understand the high risks involved.”
Garfunkel adds that global commuters “absolutely have a place in global business because they are filling a need,” even though compliance hasn’t caught up. “On the evolutionary scale, [this issue] is very young, but not embryonic.” Managing commuters “will become part of the mainstream job of the global mobility professional.”
Martha J. Frase is a freelance writer based in Martinsburg, W.Va.