Be Careful When Drawing Up Expatriate Agreements

March 26, 2013 | Pamela Babcock

NEW YORK—There are several ways to structure expatriate agreements, and multinational employers should select the one that best meets business needs. But that doesn’t mean organizations can reuse the same forms over and over, said international employment law attorney Donald C. Dowling Jr., a partner at White & Case in New York who works on cross-border HR law issues.

Just as entrepreneurs who want to start a business entity would give thought to what kind of structure they need—a partnership, corporation, LLC or nonprofit—those who are developing expatriate agreements must make sure they understand the nuances of overseas assignments, he said.

“You can’t say, ‘Give me an expat-assignment letter form … we sent Josh to England last year, ‘Where’s his form?’ You need to say, ‘What kind of expat assignment are you talking about?’ ” Dowling told attendees at a March 14, 2013, seminar presented by the New York Chapter of the Worldwide Employee Benefits Network.

Just Who Is an Expatriate?

It’s important to be clear on who is—and isn’t—a business expatriate, since the distinction often leads to confusion, Dowling said. A business expatriate is someone who was originally hired by an employer in one country who later is assigned to work at an overseas location for that same employer or an affiliate.

For example, if Dowling’s law firm recruited an English citizen from a London law firm to be a lawyer in its New York office, that person wouldn’t be a business expatriate but just a foreign hire working in a domestic local position in New York. Likewise, an Indian employee recruited from India for a job with Microsoft in Redmond, Wash., is a foreign hire, not an expatriate, he said.

Four Possible Scenarios

Dowling provided details on at least four ways expatriate assignments can be set up:

Foreign office. The person is employed by, paid by and renders services for the home-country organization or company but works from an office in a foreign host country. Dowling said this is the least common arrangement.

Although there are exceptions, this structure “almost certainly violates host-country payroll law” and may give rise to a “permanent establishment” problem of illicitly doing business abroad, he explained in an e-mail to SHRM Online after the event.

Secondment. A “secondee” is employed by the home-country organization but renders services for the host-country entity. Depending on the structure, the secondee may be paid either by the home- or the host-country entity, perhaps using a so-called “shadow payroll.”

Not all secondees are expatriates. A New York law firm, for example, may second an associate to a client—say, Goldman Sachs—for six months, but that person is not an expatriate, Dowling said.

Expat localization or transfer. The expatriate is temporarily transferred to the host-country affiliate and is now employed by, paid by and performs services for the host-country entity.

For instance, a U.S.-based company may send John to work in Italy for a year. John resigns from the U.S. parent company and simultaneously is hired by the Italian entity for a year. John may or may not get expatriate benefits and may or may not have a formal “side agreement” to get repatriated home after the assignment ends. But the expectation is that John will return to work in the U.S., because if this were not the case, John would be a transferee, not an expatriate, Dowling explained.

Dual, co- or joint employment. The expatriate simultaneously works for both the home- and host-country entities and has two employers. Depending on the structure, the expatriate may be paid by the home- or host-country organization or both, and may render services for the home- or host-country entity or both.

The employment relationship with the home-country company may be active or passive—meaning that the home-country employment relationship may be subordinated and “hibernating.”

“Sometimes the parties believe an expat was localized, but if they failed to terminate a pre-existing home-country employment contract, the expat may be an accidental dual, co- or joint employee,” Dowling explained in an e-mail.

Benefits, Payroll and More

Here are other factors to consider:

Benefits. Not all expatriates get to participate in an expatriate benefits plan, and some who aren’t business expatriates can, Dowling said.

Thus, a foreign hire is not a business expatriate but may enroll in a company’s expatriate benefits program. A telecommuting “trailing spouse” may work abroad for a company as a business expatriate but is usually ineligible to participate in the company expatriate benefits program, he said. And while an employee of a U.S. firm who asks to be transferred to Bangalore to care for a sick mother would meet the definition of a business expatriate, “you’d almost never give an expat package to someone who is going to the other country for their own personal reasons,” Dowling observed.

And “stealth expats” may have shifted their place of employment abroad after extending a long business trip without the employer’s legal, HR and payroll departments acknowledging the move, Dowling said. “They are business expats, but they do not participate in the company expat benefits program.”

Payroll compliance and offshore wage payments. Structure assignments to ensure payroll compliance and to avoid illegal offshore wage payments, Dowling said. As in the U.S., most other countries have payroll laws for staff working locally that cover employer reporting, withholding, and contributions to local tax authorities and social security agencies and funds.

“Often you find out people are not being paid legally, and it’s a big problem,” Dowling said. “You’d be surprised how often even major multinationals, for whatever reason, end up ignoring all that stuff.”

Other Important Considerations

Stephen J. O. Maltby, a partner at Gibney, Anthony & Flaherty in New York who heads Gibney’s immigration practice group, also was featured at the event. Maltby, who oversees client immigration matters for the firm, spoke broadly about how immigration laws around the world “put a lot of bumps in the way of international assignments” but said that organizations should take into account the entire family picture and desires of the accompanying partner or children when considering international assignments.

“One of the most important real benefits that can be conferred is that benefit of certainty that the aspirations and concerns of all members of the family are being considered,” said Maltby, who represents clients in sectors that include financial services, pharmaceutical, Internet, technology, and media and entertainment. As part of any international benefits package, Maltby said that he encourages clients to ensure that all assignees have basic legal protection in case problems arise.

“Things can go wrong for a person in a career wherever they are, but when things go wrong in an international assignment, the challenges are often magnified,” he said.

In 2009, Maltby said he was hired when an assignee and his spouse were killed and there were challenges getting the grandparents of the deceased couple’s children to the country to bring the children back to the U.S. because “legal documentation was not in place in advance.”

“We always encourage our clients in human resources to insist that all people going on assignment take out wills, consider guardianship documentation, travel letters, health care proxies and financial powers of attorney,” he said. “At the end of the day, these items are not only employee benefits that are not expensive, but they can spare the employer a huge headache if something goes wrong in the international assignment.”

Pamela Babcock is a freelance writer based in the New York City area.