Being Competitive on Pay & Benefits in International Markets
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The shift to remote work has opened up the possibility of hiring a global workforce. The benefits of hiring a global workforce go beyond widening the talent pool as a method of addressing skill gaps, though that is undoubtedly a huge benefit. It also allows a company to develop market understanding, connect with audiences in other markets, and results in a rich workplace culture.
Global workforces – and global remote workforces – come with challenges. An obvious challenge involves the logistics of hiring and onboarding, as well as remotely integrating workers from around the world into your company culture in a compliant manner. Additional challenges include budgeting appropriately to engage with international talent and correctly documenting the employment relationship.
Negotiating compensation and benefits with a candidate in the same city or state as the business can present complications, but most HR departments are skilled at addressing those situations. Negotiating compensation internationally, however, is a completely different undertaking. Attracting key talent requires providing competitive compensation packages. In order to develop competitive offerings, your business needs to understand compensation components and expectations globally.
Understand the Social Charges
Social charges – or mandatory contributions to taxes, pensions, social funds, etc. – are calculated on top of the salary paid to the employee. These amounts are mandatory costs of engaging with talent in country and can vary widely by country. Social charges are therefore a critical budgeting consideration.
France has one of the world’s highest social charges: employers pay an additional 45% of the worker’s salary to various social security funds covering illness, old age coverages, maternity, disability, family allowances, work-related accidents, and unemployment. The contribution amount may be reduced for exceptionally high earning individuals, but even with the reduction the social charges in France are a significant budgeting consideration.
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Other countries with social charges greater than 25% of salary include Greece (25.06%), Argentina (32%), Belgium (27%), Mexico (27.5%), Sweden (31.42%), Colombia (33.2%), Czech Republic (33.8%), Spain (34.37%), Russia (34.45%), Slovakia (35.2%), and Brazil (37.3%).[i]
On the other hand, Australia and Canada have comparatively low social contribution requirements, at 9.5% and 7.2% respectively. This contribution is to Australia’s Superannuation Fund, which is an accrual pension fund for workers. Canada’s contributions fund Canada’s Pension Plan as well as Employment Insurance. Countries with charges under 10% include the United States (7.65%), Romania (6.25%), Chile (6.7%), and Peru (9%).[ii]
Considering social charges is a necessary first step in understanding what your global workforce costs will be.
Understanding Compensation Requirements
In addition to base salary, you should be prepared to pay for additional compensation requirements. Competitive employers budget for all required aspects of a compensation package, and many jurisdictions require compensation packages to contain elements other than base salary. For example, in Portugal and elsewhere, all employees are entitled to a “13th month” bonus, which is an additional month’s pay due at the end of the year. A company that would like to pay an alternative bonus scheme may do so in addition to the 13th month, but the 13th month is mandatory.
Spain is another country where additional monthly salaries are mandatory, with the specific number of additional salaries dictated by the applicable collective bargaining agreement. Some collective bargaining agreements require four additional monthly salaries paid throughout the year.
In Mexico employees are entitled to a share in the company’s profits, currently fixed at 10% of the company’s pre-tax income, as well as a vacation premium that amounts to an extra 25% of their usual salary during vacation, and a Christmas bonus equivalent to 15 days’ salary. Knowing this information allows companies to and effectively budget for global workforce costs.
Benefits Structures
Benefit packages also vary on a per country basis. In some cases, benefits such as health and unemployment insurance are covered in the required social charges. But in some countries, the norm is to provide other supplemental benefits that may be unheard of in the U.S.
A good example is childcare. In many Latin American countries it is not unusual for employers to provide childcare subsidies and food allowances. In other countries cultural and sports activity vouchers are common. American employers may not expect to budget for or offer these types of benefits and incorporating them early into the requisition process leads to a more successful recruiting process.
“If you are a planning on hiring employees around the world, it is important to remember that compensation and benefits packages that are considered standard (or required) in the home jurisdiction may not be in another country,” said Nicole Forbes Deputy General Counsel, Globalization Partners. “This is a common mistake companies make as they start to grow their business in unfamiliar regions.”
Understanding Required Documentation
Having budgeted for and identified your ideal candidate, it can be tempting to reach out with an offer letter or letter of intent to finalize the arrangement with that person. Though offer letters and letters of intent do not carry legal weight in all jurisdictions, sometimes they can create a legally binding document. That means you cannot change your mind once the letter goes out, and you’re going to be bound to the compensation package offered in the letter.
Additionally, at-will employment is not recognized outside of the US. That means, if you send an offer letter or enter into an employment agreement with an international candidate, terminating that relationship can be difficult and costly.
In the Netherlands, in general, an employer cannot terminate an employee without first obtaining prior approval from the courts or the Uitvoeringsinstituut Werknemers Verzekeringen (the “UWV”, the government agency responsible for, among other things, implementing employee insurances).
In Korea, if you unlawfully terminate an employee, you may be required to pay back pay and also to rehire the individual. At a minimum, you’ll want to examine the local employment laws and consider what type of employment agreement you want to offer them before moving forward.
What About the Contractor?
Over the last ten years, hiring independent contractors has become common practice, as companies want to minimize the impact of a direct hire or feel they have no other option for bringing on international talent. In the international context, hiring independent contractors presents a significant risk associated with a claim that workers have been misclassified. If a court agrees, the penalties include back pay and benefits for the full period of employment, plus other fines and taxes that may be assessed by country.
“Most countries have strict definitions and standards in order for an individual to be considered an independent contractor rather than an employee,” Forbes said. “Companies that try to classify international employees as independent contractors run the risk that if local authorities determine they have misclassified any employee as a contractor, they will face considerable legal and financial repercussions.”
Another risk factor that comes up around contractors is intellectual property. Generally, intellectual property created by an employee belongs to the employer by law, even if it is not addressed in an employment agreement. By contract, intellectual property created by a contractor is not automatically owned by the employer, even upon payment to the independent contractor. The assignment and ownership of intellectual property must be clearly documented in a written agreement to be effective. If not documented correctly, this leaves the employer in a precarious position if there is an acrimonious separation.
References:
[i] Ius Laboris Global Social Security Chart, available at https://theword.iuslaboris.com/hrlaw/social-security-guide. Accessed 8/11/20.
[ii] Ibid.
