HRMN 467 Global Human Resource Management

AvoidTheseGlobalCompensationandBenefitsPlanObstacles.pdf

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Avoid These Global Compensation and Bene�ts Plan Obstacles

By Donald C. Dowling, Jr.

April 22, 2014

Business imperatives push multinationals to expand at least some of their pay, bonus and bene�ts o�erings internationally. This is why in recent years we have seen

multinationals globalize many compensation and bene�ts plans that, back in the old days, would have remained completely local. Indeed, as multinational human resources

marches toward greater and greater international integration, compensation and bene�ts lead the charge. Global “rewards strategies” have emerged as multinationals’ most vital

integration tool for motivating workforces across borders and for internationally aligning human resources.

Multinationals now serve up a smorgasbord of regionally and globally aligned compensation, bonus and bene�ts o�erings. Examples include: regional sales commission plans,

global pro�t-sharing plans, international sales incentive plans, cross-border variable compensation/pay-for-performance plans, multijurisdictional executive retention bonuses,

international severance pay plans, cross-border equity/stock plans, global tuition reimbursement programs, expatriate medical plans—even international employee assistance

programs and global adoption expense reimbursement plans. Sometimes it seems that multinational headquarters looks at each compensation and bene�ts o�ering it makes

available to its local headquarters sta� and asks: Shouldn’t we expand this and o�er it to our teams worldwide? After all, our business case—the reason we launched this program

in the �rst place—is just as pressing across our operations abroad.

While the business case for globally expanding a bonus or bene�t may indeed be global, the mechanics here can get complex. Each of the world’s countries, in its own particular

way, locally regulates many aspects of employee pay and bene�ts. Every time a multinational headquarters launches, expands or improves some border-crossing bonus or

bene�ts scheme—and certainly every time headquarters internationally amends, reduces or discontinues one—the employer needs to �ush out and then overcome all the legal

obstacles in each a�ected jurisdiction.

Consider Payor Entity Carefully

The �rst question when launching any cross-border compensation or bene�ts o�ering should always be: Which corporate entity within our multinational conglomerate will fund

this plan? Even more importantly: Which entity in our group will directly tender plan payments or bene�ts to employee participants in each jurisdiction?

Headquarters funding—and particularly headquarters payment tendering—of an international pay/bene�ts plan opens a Pandora’s box of legal issues as to: payroll withholdings/

contributions/reporting; corporate and employee-participant tax/social security; currency regulation/reporting/foreign exchange; “permanent establishment” (unlicensed

transacting business abroad); and, as to stock/equity plans, securities law.

Separately, whenever a headquarters entity directly tenders money (sometimes even when it tenders stock options or shares) to employees of its own overseas a�liates,

headquarters risks becoming a co-/dual-/joint employer jointly liable, along with the local in-country employer a�liate, for local employment claims. A local employee only need

argue to a local labor court something to the e�ect of: I’m being paid by two bosses, so obviously I’m working simultaneously for both of them. One solution here is for

headquarters to have each of its local a�liates tender the bonus or bene�t to its own sta�, even if behind the scenes headquarters funds the grant and reimburses its local

a�liates. But this solution can be cumbersome in administering equity/stock plans. And in countries like India and Singapore, having headquarters directly tender the

consideration actually o�ers certain advantages regarding enforceability of clawbacks and choice-of-headquarters-country-law clauses.

Ripple E�ects

Total compensation includes base pay, bonuses and often the value of some fringe bene�ts. Accordingly, many countries roll bonuses and even bene�ts into their de�nition of

total compensation for calculating local mandatory extras like vacation pay, overtime pay, social security contributions, “thirteenth-month pay,” pension contributions and

severance pay. This can make a global bonus/bene�ts plan much more expensive than bargained for. Multinationals sometimes try to solve this problem by inserting into an

international plan a clause that purports to exclude plan pay-outs from these other calculations. But not surprisingly, local law in many places ignores these clauses. Be sure to

account for ripple e�ects when granting pay or bene�ts in a foreign country.

De�nitions Matter

Any global pay, bonus or bene�ts plan should clearly de�ne all key terms—even terms with meanings that seem obvious back at headquarters. For example, an American

multinational’s global plan might link eligibility to “regular” “full-time” status, or to being a “salaried” “exempt” employee, or to being neither “retired” nor dismissed for “good

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cause” during a plan year. These terms mean di�erent things abroad. Be sure to de�ne them in the international plan document.

Also, be precise in characterizing what plan payments are for—characterize payments in a way that works as intended in every relevant jurisdiction. This can be a big-ticket issue.

For example, if a plan sponsor wants payouts under a global separation pay plan to count as down payments toward employer severance pay or notice pay obligations under

local dismissal law, then make the plan terms explicit. In December 2013, the Supreme Court of Canada refused to let an employer characterize pension payments to a laid-o�

employee as severance/notice pay because neither the employment contract nor the plan terms characterized the payments as severance.

Cross-Border Alignment

We mentioned that a multinational’s headquarters human resources team sometimes looks at its headquarters compensation and bene�ts o�erings and decides that fairness,

good HR and a strong business case militate for extending some o�erings internationally. For example, American headquarters employees might get employer-provided medical

insurance, dental insurance, an employee assistance program, an adoption-reimbursement plan, even a company severance pay plan. Meanwhile, headquarters executives at a

multinational based in France might get a pro�t-sharing plan and company cars. Headquarters will inevitably wonder: Isn’t it only fair to extend these o�erings to our teams across

our overseas o�ces?

Maybe, maybe not. When considering whether to internationalize some local compensation term or bene�t, �rst verify that the underlying business case really does reach abroad.

For example, American employers o�er medical insurance and employee assistance programs because the United States has no broad-based socialized government medical

care system—Obamacare notwithstanding. And some U.S. employers o�er severance pay plans because U.S. employment-at-will does not require severance pay. The

environment is very di�erent abroad, making the need, overseas, for these particular o�erings far less urgent. Meanwhile, Continental European multinationals give their

headquarters executives company cars because cars are expected and sometimes tax-advantaged in Europe. Of course, while sta� everywhere appreciates a free car, in markets

like the United States, benchmarking and tax analysis usually militate against a bene�t so expensive. In short, when expanding a bene�t beyond its indigenous market, be sure to

align with overseas environments. Does expanding it justify the cost?

Eligibility and Local Pay Laws

Be sure the eligibility criteria for a cross-border pay/bonus/bene�ts plan select participants in the target jurisdictions in a way that is legal and consistent with foreign pay

discrimination laws. For example, pay discrimination laws in Europe and elsewhere can actually force an employer giving a bene�t to one class of workers to o�er that same

bene�t to all equivalent-or-higher employee groups.

Further, laws in Europe bar the common U.S. practice of limiting a bene�t (medical insurance, for example) to full-time sta�. Laws in the Middle East prohibit compensating

foreigners, including even inbound expatriates, more than locals. And equal protection laws in Germany and South Africa may e�ectively impose an “objectively reasonable” rule

for selecting bonus and bene�ts plan participants.

In addition, bonus and compensation plans that pay a signi�cant percentage of employee compensation can trigger quirky local pay laws. Always check whether each a�ected

jurisdiction imposes any local pay regulations that reach the proposed global o�ering. The poster boy example is the �nancial services industry bonus cap across Europe.

Labor Consultation

In many countries, to propose a new bonus or bene�ts plan (even one limited to management) amounts to a mandatory subject of consultation or bargaining with local worker

representatives—works councils or trade union committees. Be sure to involve local worker representatives, as required, in any decision to launch or expand—and particularly in

any decision to reduce or discontinue—a bonus or bene�t. That said, there are some exceptions. Austria, for example, empowers works councils with broad consultation rights

but excludes “competence” over pay and bene�ts o�erings.

Employees and their representatives usually welcome new compensation and bene�ts programs, so worker reps rarely object when their employer rolls out a new plan. But they

sometimes push for tweaks or start horse-trading for di�erent bene�ts. And again, collective consultation becomes a huge issue when a multinational wants to amend, cut or

discontinue some element of compensation or bene�ts.

Vested/Acquired Rights

We have been discussing formally installed, ongoing compensation and bene�ts plans. But sometimes a multinational o�ers a special or ad hoc one-o� cross-border bonus or

bene�t—say, a one-time broad-based stock grant that the employer may re-grant again the next year and maybe even yet again the following year. In many jurisdictions

employees might be able to claim they acquire a vested right to receive these o�erings forever. So any international one-time-only grant or �xed-term pay plan with an end date

needs to declare its temporary status loudly and clearly.

Ideally, have employees or their representatives acknowledge that they accept the one-o� award knowing they may never get another. That said, as time goes by, this

acknowledgement may not prove enforceable. Consider the rami�cations of vested rights.

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Consents

As mentioned, cross-border compensation and bene�ts grants often include participant acknowledgments consenting to plan terms for each bene�ciary to sign. Sometimes the

plan terms being consented to even pepper in substantive changes to employment terms unrelated to plan administration—for example, stock option or equity plan grants

sometimes add in a noncompete provision.

While employee consents can prove vital, a consent is worth little when the law will not enforce it. Employee consents outside the pay and bene�ts plan context (particularly in

Northern Europe and parts of Latin America) can be susceptible to being held invalid as inherently coerced—the theory is that when a manager asks a subordinate to sign a

consent, the subordinate has little choice. The good news is that even in jurisdictions skeptical of employee consents, a consent should be fully enforceable where it links to an

extra bonus or bene�t the employee was free to reject. That is, most jurisdictions should enforce an employee acknowledgement where the employer can show the employee

was free to withhold consent at absolutely no detriment other than nonparticipation in the plan.

Rescission of Prior Plans

Often an updated version of a pay/bonus/bene�ts plan replaces an earlier arrangement. This is particularly common, for example, among employers that launch annual

commission plans and annual variable pay plans across regions. Trading in an old international pay or bene�t plan for this year’s model raises a number of issues including the

need to rescind the old plan completely.

Launching the new plan alone is never enough: What if overseas sta� later point to the old plan and argue that it remains in force alongside the new one? Take the steps

necessary under local law formally to revoke the earlier plan—notice, board resolution, employee consents, worker representative consultations and the like.

Clawbacks

Clawback clauses are common in bonus and bene�ts plans because they disincentivize undesired employee behaviors. Think, for example, of retention bonuses that require

employees who quit early or get �red for cause to pay back part of the bonus. Or sales commission plans that let the employer claw back paid but unearned commissions. Or

tuition reimbursement programs that let the employer claw back tuition from a participant who �unks or drops out of the course early, or who quits his job upon graduation.

But actually enforcing employee clawbacks can be particularly tough in many countries, including Denmark, France, Japan, Korea, Sweden and much of Latin America. An even

bigger challenge is enforcing a clawback provision that purports to let an employer deduct clawback-owed funds from paychecks or severance payouts. Before drafting clawback

and pay-deduction clauses, understand the enforceability challenges under applicable law.

Choice-of-Law and Dispute Resolution

In most countries, choice-of-foreign-law clauses in employment agreements tend not to be enforceable. But choice-of-headquarters-country law clauses can sometimes actually

be enforceable in cross-border bonus and compensation plans, at least as to plan administration topics that do not touch on fundamental employee rights. For example, a choice-

of-headquarters-country law clause is obviously a vital term in an international equity or stock plan administered under the law of the jurisdiction that issues and trades the stock

shares. Still, countries like Argentina and Chile may hold even these choice-of-law clauses void if a dispute over the plan arises locally and lands in a local labor court.

Separately, dispute resolution provisions in compensation and bene�ts plans will likely be held void in most jurisdictions outside the United States, because local labor courts

usually enjoy mandatory jurisdiction over employment disputes, including even compensation and bene�ts disputes. In the compensation and bene�ts context, an employer will

usually be able to enforce a choice-of-foreign forum clause only by convincing a local court that the dispute is over a plan that is separate from employment. So think carefully

before including a choice-of-foreign-forum clause in international employee pay or bene�ts plans.

Language

Laws in Chile, Belgium, France, Quebec, Poland, Portugal, Turkey and elsewhere require that most all employee communications—including written compensation and bene�ts

plans—be communicated locally in the local language. For a multinational to have declared “English is our o�cial company language” is no excuse to �out those laws. Be sure to

translate cross-border plan documents and communications at least in those jurisdictions that require translations.

Cross-Border Data Transfers

Administering a global compensation plan, particularly an employee equity/stock plan, can require transmitting local participant data back upstream to headquarters, so

headquarters can administer the plan and track employee grants. But in Argentina, Canada, Europe, Israel, Hong Kong, Mexico, the Philippines, Uruguay and a growing pool of

other jurisdictions, “exports” of plan participant data require special legal channels—like (in Europe) model contractual clauses, safe harbor and binding corporate rules.

Otherwise, have plan participants sign data processing consents as part of the enrollment process.

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SHRM provides content as a service to its readers and members. It does not o�er legal advice, and cannot guarantee the accuracy or suitability of its content for a particular purpose.

Disclaimer (www.shrm.org/about-shrm/Pages/Terms-of-Use.aspx#Disclaimer)

Equity Plans

Cross-border employee equity plans— stock options, restricted stock, phantom stock, stock purchase plans—raise their own additional list of equity-speci�c legal issues in both

the headquarters jurisdiction that issues the stock shares and in local plan participants’ home countries. These issues include securities law, insider trading, foreign exchange, the

social security e�ect of grants, and the tax treatment of grants both for the grantor employer and for plan participants. When launching or updating any global employee equity

plan, be sure to cover equity-plan-speci�c topics.

Donald C. Dowling is a partner in the New York o�ce of White & Case.

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