August 30, 2018 ILN

Structuring Employment Contracts for Border-Crossing Employees

By Donald C. Dowling, Jr.

Because multinationals operate internationally, they often post staff overseas. Properly documenting an international assignment is the most important step to shore up an employer’s position that the selected expatriate structure is legitimate.

Expatriate postings traditionally came about when a multinational tapped an employee to go work abroad for one of three reasons: to support a foreign affiliate, as a broadening assignment, or to work overseas for the home-country employer’s own benefit. Today, though, multinationals increasingly see these “traditional” expatriate assignments as less effective—employers these days turn to new mobility models like commuter assignments, extended business travel, rotational assignments, and “local-plus assignments.”

We now see more “floating employees” moving abroad to work in countries where the employer has no registered entity, and we see more employee-driven international moves—expats convincing their managers to let them work overseas and telecommute for personal reasons, such as, for example, employees who have to move back to their home countries to nurse a sick relative, and so-called “trailing spouses” married to other companies’ expats.

My article in the Spring Edition provided an overview of who is and who is not a business expatriate, the common expatriate structures, and tips on how to select the best structure for an international assignment. See Donald C. Dowling, Jr., Advising Clients with Globally Mobile Workforces: Going Beyond Immigration Law, 46 Int’l L. News 1 (ABA Spring 2018).

After settling on the best structure for a given expatriate assignment, you then need to decide how to memorialize or document the posting.

Two Common Types of Expatriate Agreements

There are two very different kinds of written expatriate agreements, also commonly referred to as expat agreements. You can document an expat assignment using one or both agreements, as appropriate.

  1. Expat assignment agreement. This is an agreement between the expat and the employer. The employer can be the home country entity, host country entity, or both.
  2. Inter-affiliate assignment arrangement. This is an agreement between a home country employer entity and host country employer to which the expat is not a party.

Expat assignment letters or agreements with expats themselves are important in most all expat postings, whereas inter-affiliate assignment documents tend to be relevant only in assignments structured as secondments and co-/dual-/joint-employment postings.

In crafting inter-affiliate assignment agreements, factor in balance-of-power issues. For example, in a secondment, the nominal (home country) employer usually retains the ultimate power to make employment decisions like setting pay/benefits, imposing discipline/ termination, and determining length of assignment.

Two vital issues in documenting an expat assignment are “hibernating” home country employment agreements and choice-of-law clauses.

"Hibernating" Home Country Employment Agreements

The primary agreement of a co-/dual-/joint-employee expat is often with the host country employer entity, but by definition a co-/dual-/joint-employee expat retains privity of employment contract with the home country employer.

The expat’s home country employment arrangement may become dormant or may “hibernate,” but it is not extinguished. Hibernating home country agreements complicate expat dismissals when they “spring back to life.” Be careful to suspend or hibernate home country employment arrangements in a way that will not surprise anyone later. Guard against unintended hibernating home country employment agreements—the scenario of the employer that had tried to structure a temporary transfer/localization but inadvertently failed to extinguish the home country employment agreement.

The problem of the hibernating home-country employment agreement unexpectedly springing back to life tends to arise in the situation of an employer that had thought it was temporarily localizing an expat but inadvertently ended up allowing the expat to work as a co-/dual-/joint-employee. Any employer intending to localize an expat must extinguish the underlying home‑country employment contract, such as by having the expat sign a resignation letter resigning from the home country entity when simultaneously “onboarding” with the host country employer (usually getting retroactive service credit).

Choice-of-Law Clauses

Too many expat assignment documents, expat benefits plans, and expat restrictive covenants contain home country choice-of-law clauses that might ultimately backfire against the employer.

As soon as an expat’s place of employment becomes a new host country, local (host country) employee protection laws—laws regulating work hours, overtime, vacation, holidays, wages, benefits, payroll, health/safety, unions, restrictive covenants, discrimination, harassment, and severance—usually attach and protect the expat by force of public policy.

Think carefully before sticking a home-country choice-of-law clause into expat documents, because the clause may well pull in home country employee protection laws without shutting off the mandatory application of host country employment protections. (There are some exceptions, such as China.) When an expat assignment ends or when an expat gets dismissed, a home-country choice-of-law clause more often seems to help the expat rather than the employer because it empowers the assignee to cherry-pick from two sets of employment protection laws. Rather than a home-country choice-of-law clause, consider a host-country choice-of-law clause, or a clause simply calling for the law of the “place of employment,” or even no choice-of-law clause at all. (The extraterritorial reach of home country employment laws in some scenarios—such as U.S. discrimination laws attaching to U.S. citizens working abroad for U.S.-controlled employers—can be a complication, but not one that eliminates the risks of home-country choice-of-law clauses in expatriate arrangements.)

Conclusion

When structuring a cross-border assignment, posting, or secondment, first determine whether the assignee will actually be an expatriate. Globally mobile staff who do not qualify as expats—for example, business travelers, permanent transferees, and foreign hires—are easy to structure. But misclassifying an actual expatriate as a nonexpat, or misclassifying a nonexpat as an expat, increases costs and introduces complications. Expatriate postings come in many forms but ultimately fit into or among four categories: foreign correspondent, secondment, temporary transferee (localized), and co-/dual-/joint-employee.

Structure each expat assignment into the most appropriate category. Structure expatriate assignments strategically. Address business needs and comply with legal mandates. Immigration is a primary legal issue, but also account for payroll laws, employment laws, and “permanent establishment” (host country corporate presence and corporate tax exposure).

Carefully document the expat assignment to reflect the selected structure. Take other steps to shore up the position that the selected expat 1 is legitimate. Unless all structural and legal issues happen to be identical, do not simply copy the documentation package of the previous expat.

An earlier version of this article was published by Littler Mendelson PC in October 2017.

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