Managing Termination Risk During Expat Assignments

NEW YORK—Organizations should manage employee termination risk long before an expatriate assignment comes to an end, to avoid potential claims under home- or host-country protection.

“Expats should always have a shadow HR person from their home country or a very savvy local HR person who understands what the risks are associated with expats,” said Laura L. Becking, a partner in compensation and benefits who leads the global equity and employment team at Orrick Herrington & Sutcliffe in New York, speaking March 25, 2014, at the New York Totally Expat Show.

Additional issues to be aware of include employees becoming localized without ending a contract, people becoming “accidental expats,” and tax liabilities that remain after an employee is terminated.

Claims Under Home-Country Protection

Here’s an example of how potential claims might arise under home-country protection:

Pat, a long-term employee in the London office, is sent on a two-year expat assignment to New York. As part of the process, the U.S.-based vendor conducts a standard background check. Pat is asked to work much longer hours than she does in the U.K. and isn’t paid overtime since her manager considers her an exempt employee in the U.S.

Pat’s performance goes downhill. Her N.Y.-based manager and HR team move some of her reports to another manager. A U.S. performance improvement plan is put in place. Pat’s manager warns her that if her performance doesn’t improve within a month, she’ll be terminated. Pat fails the plan and is fired, then claims unfair dismissal protection under U.K. law.

What went wrong? Becking said the company should have done the following:

In advance of the assignment: Briefed the host-country manager and HR and included a home-country HR person in major HR decisions so they understand “that this person is not your plain-vanilla U.S. employee,” Becking said. For example, they could have discussed whether a background check itself may give rise to a claim since checks “are far more limited outside the U.S.,” and Pat may have a potential claim under the laws of the U.K.

During the assignment: Included the home-country HR person in major HR decisions and assessed whether negative actions such as a demotion, change in reporting line or change in duties could be viewed as disciplinary. It also should have assessed whether home-country performance management rules should apply. When the N.Y.-based manager and N.Y.-based HR team decided to move some reports away without first discussing the action with Pat, that could be viewed as a disciplinary action and give rise to claims under U.K. law.

At termination: Followed the home-country termination process, if required. Also, if a separation or release agreement is entered into, make sure it covers and is effective in both the host and home countries. When Pat was terminated, she filed an unfair dismissal claim under U.K. law. Among other things, she cited that the company did not put a disciplinary procedure in place that gave her a fair opportunity to improve her performance. “The regime [under U.K. law] is very clear,” Becking said. “You have to go through a series of two to three disciplinary procedures.”

Claims Under Host-Country Protection

Potential claims can arise under host-country protection as well. The key is at what point does the “nexus” between the home and host countries become tight enough that the person can bring claims.

Rob is sent from the U.S. on a one-year assignment to France. At Rob’s request, his contract is extended for another two years, which is not unusual. Rob is fully integrated into the French office and reports to a manager in France.

He follows the French holiday schedule but continues to receive expat perks (e.g., housing allowance, school allowance for children, home visits and tax equalization). Rob requests and is given an extension for another two years.

But before long, the business changes and Rob’s skills are no longer needed in the U.S. or France. He’s terminated with six weeks’ severance, based on applicable U.S. rules. He claims protection under French laws and seeks compensation for wrongful termination based on his total compensation, including equity compensation grants, under his expat package, which is “usually quite big,” Becking noted.

What went wrong? Becking said the company should have done the following:

In advance of the assignment: Established a localization policy that clearly documented home-country choice of law and jurisdiction, as well as clearly delineated between base salary, perks and variable compensation.

“You should not have the Robs of the world say, ‘I think I’ll do another year, I think I’ll do another year,’ ” Becking explained. When base salary, perks and variable compensation are lumped together, “it’s more likely you will be paying the severance and damages on the basis of total compensation,” she added.

During the assignment: Tracked whether the link with the home country was being lost and re-established it where possible, as well as followed a localization policy or implemented one as requests for extensions came. Rob’s example is not uncommon. Because he has been in France for about six years, although he may still be able to make claims under his home-country jurisdiction, “he certainly will be able to make claims under his host-country jurisdiction,” Becking said.

At termination: Considered repatriation, although that’s not without risks because in this example, an employee might turn around and say it’s a de facto termination. The company also should have assessed its risk for host-country claims and managed the exit negotiation accordingly, Becking said.

Localization Without Ending the Expat Contract

Claims also can arise when an employee is localized without an expatriate contract first being ended.

For example, Niek takes a two-year expat assignment from Brussels to the Houston office. Two months into the assignment, his dream job opens up in Houston. He applies and gets the position.

At Niek’s request, and with his new manager and HR’s agreement, his expat assignment is amended to apply to this local role and he stays on his expat package. But four months later, there’s a performance issue and the manager is upset about the high cost associated with Niek.

It’s important to remember that Niek is a local hire at this point; this is not an expat role. If he’d been properly localized, as he should have been for a local position, “we’d be under U.S. law and everything would be good,” Becking said. It won’t be easy to terminate Niek. The company will have to follow procedures that apply in Belgium, which aren’t going to be as straightforward, she explained.

Accidental Expats

Some people can become accidental expats.

Take Gerard, a long-term employee who works out of the London office, but is originally from the Netherlands. His employer doesn’t have a corporate presence in the Netherlands. For the past two years, he’s frequently worked remotely from Amsterdam, eventually spending 80 percent of his time doing so. He has been productive, and his manager agrees that he can continue working remotely. Gerard continues to be processed through U.K. payroll. But five years later, things aren’t going well and Gerard’s employer wants to terminate him. He claims full protection under Dutch labor laws and flags tax compliance issues and corporate permanent establishment risk.

There may be tax compliance issues since Gerard has been processed through U.K. payroll and has had taxes withheld in the U.K. Although he hasn’t had all the expat perks, he has the ability to “shop” for claims where he’d like to be protected. And the Netherlands would offer far better protection than the U.K., Becking said.

Decisions like the ones made in this case “shouldn’t be made on an individual manager level,” she noted. “There should be company policy on remote working across borders” and very clear guidelines on income and corporate tax issues, she said.

Trailing Tax Liabilities

Trailing tax liabilities after an employee is terminated are another problem. Employers should clearly document what tax responsibilities will exist at the end of an assignment, including in case of termination. At the end of an assignment, post-employment obligations of both parties should also be clear.

“We see that quite a lot with tax-equalization deals in place,” Becking noted. “Twelve months after termination, there may be funds owed back to the company by the individual and we find those are hard to recoup because people have moved on.”

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

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