Best Practices in Employment Contracts for Overseas based staff
We commissioned the following article from a US employment law specialist to help American companies understand how to structure employment contracts for workers based overseas.
Foreign Offices – Best Practices in Employment Contracts
For American multinationals, the business has never been more global. As a consequence, it’s also never been more complicated. As you expand your overseas activities into more and more countries, you need to staff your foreign offices, projects and initiatives with qualified workers who are often your most valuable asset. In doing so, it is essential to have the right Employment Contract or Contracts in place, after taking into consideration the relevant practical and legal factors.
Short of opening your own office and doing everything in-house, engaging a foreign PEO service provider is usually the most effective way to get workers hired and signed to proper employment contracts that satisfy all applicable laws and regulations. For purposes of this article, let’s assume that to avoid the administrative headaches, costs and risks associated with managing a foreign workforce yourself, you’ve decided to bring on a foreign PEO to get things done and help you manage your local workforce needs.
What are best practices, and wise considerations, for securing appropriate employment contracts for your existing and new employees in your foreign office?
Client Service Agreement
You establish your company’s relationship with a PEO through a client service agreement (CSA). This CSA defines and sets forth which functions the PEO will perform, and which functions your company will retain, in the securement of your foreign-based workforce.
Customarily, the foreign PEO becomes “employer of record”, pays your local employees, and ensures compliance with all laws, regulations and customs of the host country. Except in rare cases, your Company will hire, fire and otherwise be 100% responsible for the direction and control of all employees. (Whether taking 100% control is the right move will be addressed below.)
To understand how your Employment Contracts should work, and the consequences and risks potentially involved, let’s start by breaking it down into two groups — U.S.-based employees who are U.S. citizens (and being assigned to a foreign office), and what I’ll call local hires, i.e., workers hired out of the foreign office who do not already work for your company in any capacity anywhere.
When a worker is based in the U.S., is a U.S. citizen, and already works for you, or is hired in the U.S. out of your U.S. office with the plan to immediately transfer him/her abroad, that employee should become a joint or co-employee of the foreign PEO and your U.S. company.
This individual’s employment will be governed by two sets of employment contracts: (1) the standard, written the U.S. Employment Contract (U.S. EC) that the employee will already have signed before being transferred, and which often references your Company’s standard Employment or Policy Manual (PM), and (2) the local, Foreign Employment Contract (Foreign LEC) that complies with all host country laws and regulations, and that will be issued by the foreign PEO to the employee on arrival in the foreign office.
With this context, let’s further address two categories of employees, as this helps clarify the landscape: the already-hired U.S. employee, and the new U.S. employee hired specifically to be assigned overseas.
Already-Hired U.S. Employee: This employee may have been working for you for months or years. Presumably, he/she has signed your standard U.S. EC which references your standard U.S. PM. When doing this person’s paperwork, the question arises whether it would be wise to terminate the U.S. EC and novate it with the Foreign LEC, i.e., replace it, leaving only one employment contract in place (the one in the host foreign country). Alternatively, might it be wise to put the U.S. employee on some kind of leave, pending his or her return to the states? Both of these approaches seem inadvisable due to the employee’s joint employment relationship.
Best practices would suggest the U.S. EC stay in place. Anticipating situations such as this, this Contract should include provisions informing the employee that his general rights, duties, benefits, tenure, and responsibilities will remain the same if he ever transfers to a foreign office. A standard clause in that contract should provide that the U.S. EC will continue in force when an employee is transferred overseas, to the extent its provisions are not inconsistent with or in violation of the laws and regulations of the host country, in which case those offending provisions will be deemed not to apply, but the remainder of the provisions will remain in force.
Upon arrival at the foreign office, the PEO engaged under your CSA should then issue and obtain signatures from any transferring U.S. employees on the Foreign LEC and any local paperwork. This Local contract, ideally, will expressly refer to, incorporate by reference, and make binding “the terms and conditions of the Employee’s U.S. Employment Contract and Policy Manual, except where those terms and conditions are inconsistent with or in violation of any of the laws and regulations” of the host country. That way it is crystal clear to the employee and PEO that the employee’s rights, duties and responsibilities are simultaneously governed by the terms and conditions of both sets of Contracts.
One simple document can ensure that the PEO and employee both understand the joint nature of the employee’s relationship. This document, signed by the PEO and the employee, should outline in simple language that the Foreign LEC shall govern on local matters, and the standard U.S. EC and PM shall govern on everything else unless it would be contrary to host country law. If you keep a Policy Manual on-site at the foreign office, a Notice to this effect can best be posted right on top of the Policy Binder.
b. New U.S. Employee Hired Specifically For Assignment Overseas: Because your U.S. office may be better suited to find, interview, and hire new employees in the U.S. for immediate transfer overseas, the question arises as to whether these employees should be signed to the standard U.S. EC. Theoretically, an international PEO could send a qualified hiring agent from the foreign office to the U.S. hiring office to sign this employee only to the Foreign LEC. In doing so, the Foreign LEC would need to be crystal clear that the local law of the foreign office, as well as foreign jurisdiction and venue, would govern.
However, since many U.S. laws will apply extraterritorially to any U.S. Citizens assigned abroad anyway (see discussion below), and since you often will want to return this employee to the U.S. for continued employment, best practices might be to have the U.S.-based, U.S. citizen sign the standard U.S. EC in the states, and then sign the Foreign LEC upon arriving at the overseas office. That way uniformity of practice and procedure is accomplished, and in the long run, a more loyal, satisfied workforce is established.
For new foreign hires, you have two options: (1) you can have your foreign PEO sign them to a Foreign LEC only and supply them to you, thereby putting them in an independent contractor relationship with you, or (2) you can have your foreign PEO jointly employ them as co-employees of the PEO and the Company, under a joint employment relationship, as recognized by U.S. law.
The significant difference between these two approaches is this: if you only sign your foreign-based, local workforce to a Foreign LEC, they will not enjoy any of the benefits, and you will not enjoy any of the protections, of any of the legally-enforceable provisions of the U.S. EC and PM. These employees, except for U.S. citizens as discussed below, will be subject only to the host countries’ laws and regulations.
When comparing these two general scenarios, the question arises as to which practice might expose your “parent” company to greater legal liability. This is a tricky area, and whether you have one contract or two, may not matter, depending on the issue at hand. For example, in reaction to a 1991 U.S. Supreme Court decision holding that American corporations were not bound by the provisions of the 1964 Civil Rights Act in its overseas operations, Congress passed a new law giving the Act extraterritorial application. In doing so, it limited the protection of the new law to (1) employees, and (2) only those employees who were U.S. citizens.
Thus, under U.S. law, while a Burger King operator in Paris cannot lawfully discriminate against its employees there who are U.S. citizens, there is nothing to prohibit that same franchise (under U.S. law) from discriminating against its local French or foreign workforce. In that situation, since the 1964 Civil Rights Act only applies to U.S. citizens, putting the foreign employee under a joint employment contract would not increase your company’s legal exposure, unless you expressly adopted the same provisions by contract. It does, of course, lead to the potential of inconsistent legal results and inconsistent treatment in the workplace. But on this issue, the controlling factor is whether the employee is or is not a U.S. citizen.
Let’s take this scenario one step further. Suppose your PEO hires a U.S. citizen overseas and then supplies that employee to you as its employee, not yours. In other words, suppose the relationship of that worker to you is one of an independent contractor. In general, U.S. federal law imposes many requirements on you when your workers are classified as employees, and far fewer, if any, when your workers are properly classified as “independent contractors.” So this is a huge distinction when it comes to potential legal liability.
U.S. federal laws making the employee/independent contractor distinction include the National Labor Relations Act, the Fair Labor Standards Act, the Social Security Act, the Internal Revenue Code, the Employee Retirement Income Security Act, Title VII of the Civil Rights Act of 1964, the Age Discrimination In Employment Act, the Americans with Disabilities Act, the Worker Adjustment and Retaining Notification Act, and the Family and Medical Leave Act. All of them apply to U.S. citizens only, and many of their provisions apply to U.S. employees working overseas. By sharp contrast, as a general rule, none of them applies to U.S. citizens working as independent contractors, whether overseas or not.
Accordingly, the most risk-averse practice toward the application of U.S. law to your foreign office’s employment practices would dictate the following: 1/ have all foreign citizens employed by the foreign PEO under a Foreign LEC only, thus making them independent contractors (not employees), and 2/ have all U.S. citizens not already U.S. company employees hired by the foreign PEO under a Foreign LEC only, thus making them independent contractors as well (not employees). The independent contractor status thus protects you from extraterritorial liability for the conduct of any independent contractor hired out of the foreign office.
Of course, engaging workers as independent contractors for more than a temporary purpose, especially where your company has total employee control over work hours, job performance, hiring and firing, etc. (all the factors that classify workers as employees vs. independent contractors under U.S. law), may be troublesome. Not only might the host country deem you in violation of their laws on employees, but U.S. courts might also ignore the independent contractor label you’ve given them and treat the workers as employees for purposes of applying the federal laws listed above.
Influenced mostly by whether your company is making a temporary or permanent move, you as the U.S. company will thus find yourself in one or more of the following scenarios:
- Hiring U.S. citizens into a foreign country to staff your local foreign office;
- Hiring foreign citizens in a foreign country to staff your local foreign office;
- Hiring U.S. citizens in the U.S. with the intent of immediately transferring them to your foreign office;
- Hiring foreign citizens in the U.S. with the intent of immediately transferring them to your foreign office;
- Transferring existing U.S.-based employees who are U.S. citizens to your foreign office; and
- Transferring existing U.S.-based employees who are not U.S. citizens to your foreign office.
- Transferring existing foreign employees between foreign offices.
Three simple rules will guide best practices in addressing each of the categories:
- Keep all employees who are already signed to U.S. ECs on their U.S. Contracts and also sign them to a concurrent Foreign LEC, under the co-employer or joint employment protocol;
- Sign all new permanent employees to both U.S. ECs concurrent Foreign LECs, under the co-employer or joint employment protocol (you might defer having them sign the U.S. EC until after a probation period or set time, such as one year, has expired and you’ve made the decision to make them permanent); and
- Sign all new temporary employees hired out of the foreign office to Foreign LECs with the foreign PEO, thus putting them on an independent contractor status with your company (assuming, of course, that these workers meet U.S. criteria for independent contractor status, an entirely separate topic of discussion for another day).
Using these categories and guidelines, let’s consider best practices for entering into Employment Contracts in several of the scenarios set forth above, and the reasons why.
This employee will serve two masters and have two employment contracts. One employment contract will be with the foreign PEO, complying strictly with foreign laws, regulations and practices, and one employment contract will be the standard U.S. EC with your Company, including all the detailed language on works made for hire, and copyright assignments, trade secrets, confidentiality and non-competition. Both Contracts will provide that the U.S. EC, to the extent it conflicts with the law of the host country, will not apply, but that the remainder of the contract will apply. Thus you get legal consistency and compliance in both worlds.
Assuming they are already parties to the standard U.S. EC, best practices would be the same as for #1.
Best practices would depend on whether the move is intended to be temporary or permanent. If temporary, it would be best to keep the two previously-existing contracts in place (assuming there is an existing Foreign LEC and the U.S. EC), and then sign the employee to a Second Local Employment Contact that, ideally, references the prior two. This Second Local Employment Contract would ideally contain a provision to the effect that it governs over or supersedes any employment terms or conditions of the pre-existing Employment Contracts that are offensive to its laws and regulations. Engaging a PEO with offices in both foreign countries, knowledgeable of the local laws of each, would be highly valuable. Theoretically, then, one could imagine a temporary employee (temporary to the second foreign office) having three contracts in place. In the case of a long-term assignment, best practices would probably dictate terminating the original host country LEC and replacing or novating it with the new Foreign LEC which references the U.S. EC as previously described.
For workers who do not qualify as true employees under U.S. law, sign them to the foreign PEO’s Foreign LEC only, thereby making them independent contractors to your company. If they qualify as “employees” under U.S. law, under application of the established factors for distinguishing employees from independent contractors, consider following the best practices described in #1.
In certain circumstances, employers covered by the extraterritorial application of Title VII, the ADA and ADEA can take otherwise prohibited actions against U.S. citizen employees without violating the U.S. employment laws by invoking the “foreign law defence.”
Under the foreign law defence, an employer will not be liable for acts violating these employment laws where compliance with the U.S. laws would require the employer to violate the law of a foreign country.
The extent of this foreign law defence is a point of contention among U.S. courts, as some courts have defined “foreign law” to include even foreign collective bargaining agreements.
For instance, one court found that a Delaware radio broadcast company did not violate the ADEA when it required its Munich, Germany, workforce, including U.S. citizens working in Munich, to retire by the age of 65 according to a German collective bargaining agreement.
U.S. multinationals with foreign offices have two fundamental choices when it comes to Employment Contracts: (1) hire the worker under two separate contracts, one the standard U.S. EC and one the Foreign LEC issued by your foreign PEO, or (2) require the worker to sign under one contract only, the Foreign LEC issued by your foreign PEO.
Best practices are determined by a variety of factors, including citizenship (U.S. or not), existing employment with your U.S. company (or not), and the status of the worker as a true employee or as an independent contractor. Of course, costs, risks, knowledge of local laws, and the administrative burden will also influence your decision.
Perhaps most importantly, remember that under U.S. federal law it is well-established and well-accepted that an employee can be simultaneously signed to two separate Employment Contracts, one from your company (the U.S. EC) and one from the foreign PEO (the Foreign LEC). As long as the Foreign LEC governs over the U.S. contract to the extent the U.S. contract runs afoul of the laws and regulations of the host country, you are good to go.
Disclaimer: This article provides general information related to the law and subjects covered. It does not provide legal advice. No attorney-client or confidential relationship exists or will be formed between the reader, publisher or author or any of their representatives.
About the author: Steve Eggleston is a law school Valedictorian, award-winning law professor, former business/employment/entertainment/trial attorney, frequent lecturer and speaker, and author of best-selling employment law book, ” Labor and Employment in California: A Guide to Employment Laws, Regulations, and Practices, Second Edition (LEC),” published by Lexis- Nexis for 22+ years. LEC provides easy-to-understand overviews and explanations of complex labour and employment law issues facing today’s employers. Steve has advised hundreds of employers over the years, written numerous articles on the subject, and drafted countless employment contracts. Steve is currently CEO of Eggman Global, an international consulting company that advises companies from start-ups to Fortune 100. EggmanGlobal.com, Steve@EggmanGlobal.com(link sends e-mail), 702-772-3286.