Operating in a country different from the headquarters location

What are the considerations and potential pitfalls as the employer?

Setting the scene

Establishing or expanding operations in a different country is often an important part of a company’s growth strategy. Such a strategy can have many benefits but can also carry several hidden risks and costs, especially when the company is employing local staff in the new country.

Depending on whether the company has a legal presence or entity in the new country, and of so what form, employing staff locally needs careful consideration to ensure the company is operating in compliance with the domestic and international rules and legislation, also from a headquarter location perspective.

What is the issue?

When a company wants to establish or expand into a new country or region, it may initially not wish to establish a branch or incorporate a subsidiary there. Often, the company prefers first to explore the market and business opportunities locally a bit more before taken the step to formally create a legal corporate presence. To achieve this, companies often work either with independent contractors or, alternatively, they employ someone locally in that new country.  

 Irrespective of the employment structure or relationship, when a company is employing an individual in foreign country, careful consideration needs to be given to all the local rules and regulation an employer needs to adhere to both in the foreign country, as in the country where the company is established. If such an employment is not structured properly, it may lead to considerable risks for the company and the employee, ranging from financial,legal, security and reputational risks.

 The areas which most commonly will have to be considered and reviewed are the following:

- Labour law: local regulations regarding working time and conditions such as overtime, holidays, working on Sundays and public holidays, minimum salary requirements, etc. Also ensure to be aware of applicable collective labour agreements relevant for the industry sector the company operates in.

- Compensation and benefits: local practices with regards to the payment of specific compensation items (e.g. 13th month salary) or specific benefits in kind.

- Work authorisation/Immigration: many countries have regulation in place according to which companies must register the employees they employ, especially when they are employed by foreign or overseas companies. In the EU, the Posted Worker Directive needs to be complied with. In Switzerland, when you do not have the Swiss citizenship, the employee always requires a formal work authorisation prior to starting employment activities,in the form of an online registration or a work permit.

- Social security, health insurance and pension: employer and employee will often become subject to the social security regime of the country of employment and social security contributions, as well as potentially contributions to health insurance and pension funds, will need to be paid to the local authorities. Often this requires the foreign employer to register with the local social security authorities in the country when the employee is physically performing his activities and may be a very cumbersome administrative process.Moreover, it may also lead to an unplanned increase in the cost budgeted for the employee.

 - (Shadow) Payroll reporting and withholding: Even though the company may pay the employee remotely and operate the payroll in the country where the company is located, very often there is also a requirement in the country of employment to submit payroll or withholding taxes to the local tax authorities. This may then also lead to the requirement of operating a shadow payroll or even an actual payroll in the country where the employee is working.

- Insurances: Many countries have regulations with regards to mandatory insurances that the employer needs to have for its employees, such as occupational accident insurances, medical insurance and sickness or loss of income insurances.

- Security/Duty of care: Lastly but also very important is to be aware of any regulations which may be in place in the country of employment with regards to security and the duty of care of the employer such as ensuring safe and healthy working conditions and environment,office space, provision of working tools and protective gear, etc.

Examples

Many companies are attracted by Switzerland and its potential market. Although Switzerland has an open market, especially due to the bilateral agreements it has in place with the EU/EFTA and many other countries, there are still many legal requirements to comply with.

We have worked with companies without an entity or legal presence in Switzerland, who had already signed an employment agreement with an individual residing in Switzerland, only to realise at the next stage that the person will be subject to the Swiss social security regime and both employer and employee contributions need to be paid. Such individuals have a special status – the so-called ‘ANobAG’ – and several specific formalities need to be taken care of.  Moreover, there is a legal requirement for EU/EFTA based employers also to offer a Swiss pension fund to such employees. This, in addition to the mandatory insurances, will increase not only the administrative burden but also the overall employment costs substantially.

Recommendations

It is always recommended to do an upfront review of all employer obligations that a company needs to adhere in a specific country prior to starting to employ staff there to ensure you have a clear overview of all the legal requirements, the risks as well as the costs.

Conclusion

By obtaining a clear overview of the employer obligations timely upfront, the company can avoid unnecessary costs and risks, and even take potentially advantage of some planning to reduce the overall costs. It also ensures that the company operates in a compliant way in the new country and avoid issues with the authorities and potential penalties and reputational damage.

You should always consult with a global mobility expert before you act.

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