Whether it is a small business setting up its first foreign outpost or a large multinational operating in 45 countries planning to start in its 46th, identifying and following the local ‘rules of the road’ relating to HR and employment law compliance can be daunting.

Employment law is normally where companies find the most regulation to deal with when going overseas.In any given country there are likely to be rules dealing with the content of employment contracts, minimum pay and benefits, maternity and paternity entitlements, working time, termination protection and discrimination.

In some countries worker rights will vary depending on whether the worker is blue collar or managerial and also the industry within which a business operates.

If you are looking to recruit overseas you will need to find out about all applicable statutory rights. Ensure too that you find out about applicable bargaining conventions. In many countries including France and Mexico employers are bound by sectoral collective agreements even if they are not a signatory.

Local statutory rights will apply regardless of whether you have tried to apply English law. Just as a foreign organisation employing people in England has to abide by our statutory laws, we cannot expect to avoid local laws when recruiting people abroad. This begs the question, is there any point in using an English contract for someone working abroad? Organisations often seek to do so, believing they will benefit from familiarity and consistency.

However, it is rarely sensible unless it is a temporary assignment. Doing so can result in the individual being able to cherry pick between English and local entitlements and enforcing the more generous of the two.  Instead, it is normally best to use a local contract and not complicate matters by seeking to apply English law as well.

There also traps for the unwary. For example, never use your UK restrictive covenant overseas. It is unlikely to be enforceable and can result in hefty compensation payments on termination, even if you do not seek to enforce it, especially in some European countries like Germany. Similarly, provisions on employee inventions need to be tailored to a country’s laws to ensure contracts quantify and contain exposure.

Before going in to a new country you should consider how easy it would be to exit if things go wrong. It is also advisable to learn from mistakes made by others. Ask your accountants, payroll provider, recruitment partner and lawyers which mistakes they see being made by companies coming in from abroad and how to avoid them.

Occasional visits are one thing, but if someone is permanently based overseas then you are likely to need to register the business. The main options are to register a subsidiary, branch or representative office. Which is best will differ from country to country. There are often also requirements for resident directors and shareholders.

Again, consider the exit strategy before bestowing these roles on someone. There may also be other requirements, like a need to open a local bank account, registering with local social security authorities and industry specific filings.

Penalties for non compliance can be harsh. In the Philippines selling products without registering locally can lead to 6-8 years in prison! Failing to register can also paralyse the business. In Norway for example you cannot open a bank account, rent office space or import goods without a registration number.

Multinationals entering a foreign market in a big way with plans to employ lots of employees tend to invest the resources necessary to do the job properly and avoid short cuts. Formally establishing a registered commercial presence is always best practice.

But what about the small employer who plans a bare bones operation with just one or two local employees? Large companies too will not want to go the full hog if it is just one employee they are taking on. For example, many of the software companies I advise are increasingly recruiting software engineers wherever they may live, be that Russia, Malaysia or somewhere else, as they can work effectively from home with little more than an internet connection, phone and video conferencing facilities.

Not surprisingly, many organisations taking tentative steps into a foreign country shy away from the “all in” approach. Instead, they place the employee into the target country without setting up the infrastructure around them. These workers are often referred to as “floating” employees as the employee is not anchored to any local infrastructure / entity.

Floating arrangements are risky as they often violate local laws, especially where the non resident employer entity is deemed to be a “permanent establishment” for tax purposes. Fortunately however there are some legally compliant arrangements for engaging people without setting up a local entity.

A common strategy for sidestepping all the local registration and payroll requirements is to “second” or post the floating employee to an up and running local employer. This might be a sister corporate entity, a commercial agent or distributor or a specialist provider of HR staffing services.

Under these arrangements the employee is employed by, and goes onto the payroll of, the local business partner but devotes his time to the non-resident principal. The principal re-imburses the local employer for the costs incurred plus an administrative premium, usually in the region of 15 per cent.

A secondment arrangement can be a simple and flexible way of achieving legal compliance. However, you do not have as much control as you get employing directly and the employee is often resistant to working via a third party.

Another strategy is to engage the individual as an independent contractor or consultant. Organisations often favour these arrangements as they avoid the statutory protection that applies to employees. However, these arrangements are notoriously fragile and susceptible to challenge on the basis that the contractor is in reality an employee. The legal analysis of this distinction is remarkably similar around the world. Basically, if the individual looks like an employee and quacks like an employee – there is a significant risk he will be found to be one.    

However, when the overseas services provider is truly an independent agent, free to work for others, paid by the task, not subject to the principal’s supervision or disciplinary procedure, not labelled an employee or paid as one, then Independent Contractor arrangements work very well.

There are some countries which do not require a local legal entity so an individual can be employed by your UK company (or indeed any other group company you wish to use). In these situations there is the advantage of familiarity and consistency as well as direct control. This works well in countries with minimal local laws and regulations such as many of the world’s tax havens.

Each scenario and country needs to be considered in its own light. Working out the best arrangement is a matter of risk analysis. Employers who feel it is not economically viable or sensible to set up formally should risk assess with their advisors the various options and decide what is most suitable for them.

• Roger James is a partner and head of the employment team at Taylor Vinters. He can be contacted on +44 (0)1223 225286; or via email at: This e-mail address is being protected from spambots. You need JavaScript enabled to view it

www.taylorvinters.com

@TaylorVinters