As businesses increasingly become global and multinationals seek the best platform for economic growth, cross-border assignments of executives have become more common and more important.
In a recent study, PricewaterhouseCoopers (PWC) predicted that, by 2020, there will be a 50 percent growth in cross- border assignments and that there will be "more assignees, more business travel, more virtual tools, and especially more quick, short term, and commuter assignments." PWC believes that these shifts will come about in particular because of the growing importance of emerging markets, which will result in skilled employees from those markets moving beyond their home countries. The study predicts that younger workers will view these assignments as "a rite of passage, an outlook that will change the way workers and organizations approach overseas opportunities in the future."
And, while technology "will play a key role in global working arrangements," it "will not erode the need to have people deployed 'on the ground.'"1
Another recent "talent mobility" survey conducted by Towers Watson and Worldwide ERC affirms that, particularly in Asia, traditional cross-border assignments will increase dramatically in the coming decades.2
The notion that expatriate mobility will continue to grow in the coming decades may seem counterintuitive when one considers the historically high cost of expatriating U.S. employees. Indeed, generous expatriate packages have been a way to convince talented staff to spend time in emerging markets, where their skills were needed.
Experts suggest that several trends are in fact reducing the cost (and frequency) of expatriate assignments. First, multinational companies are supplanting U.S. companies as the source of expatriate employees. European companies traditionally have not embraced the full expatriate packages that U.S. companies have adopted.
Second, while cross-border assignments become more the norm of business, the need for generous expatriate packages diminishes. As employees become accustomed to overseas assignments being a part of their employment, fewer incentives will be necessary to entice them to take such positions.
And third, while most experts agree that these assignments will increase in number, also increasing is the practice of hiring locally rather than assigning employees from the multinational's home base (or country). Indeed, this manner of staffing is becoming more common among major multinationals, whether based in the United States, Europe or Asia.
The practice of hiring locally has its own sets of challenges. Depending on the market, there may be a relative lack of educated candidates with multiple language skills or advanced degrees. Some multinationals are making significant investments in universities in China and elsewhere to try to increase the local pool of talent as well as their own companies' profile in those markets.
Multinationals are also providing better opportunities for women by hiring locally in jurisdictions where, traditionally, women's opportunities have been circumscribed, according to a recent study co-authored by professors from Harvard Business School, MIT, Hanshin University and the Korea Labor Institute.3 The study suggests that hiring local women increases profitability measurably. Unfortunately, the growth of multinationals hiring local women is not as substantial as it could be. Notwithstanding the benefit of using this underutilized talent pool, some multinationals are reluctant to do so where the local culture may be hostile to the practice.
The contrast, of course, with how U.S. multinationals are required by law to treat their U.S. citizen expatriates is stark: Title VII of the Civil Rights Act of 1964 prohibits sex discrimination occurring overseas against U.S. citizens who work for U.S.-owned or controlled companies.
Policies and Procedures
So, while the next decades will likely see an increase in cross-border assignments, what is certain is that employers who continue to practice global mobility must have in place appropriate policies and procedures that reflect best practices.
What are the key provisions for these policies? They need to cover the following areas:
• Distinguishing between long-term assignments and short-term business trips;
• Pre-departure (e.g., immigration, physical examination, orientation, language training, tax counseling);
• Living in a foreign country (e.g., transportation, temporary living expenses, housing, appliances);
• Compensation and benefits (base salary, allowances, differentials, tax equalization, currency exchange, payroll and payment mechanisms, health and medical benefits);
• Assistance programs (dependent education, home leave, emergency leave);
• Ending the assignment (termination, retirement, repatriation);
• Delegation of authority, restrictions on work for home entity in foreign justification, and corporate identity.
Generally, there are five international assignment options, and the nature of the assignment will dictate which option is most suitable. The first involves a business traveler who works on a short-term assignment of up to a month or two in another jurisdiction. This traveler will have his or her activities largely dictated by the limitations of the travel visa. A danger is that these travelers will unwittingly evolve into "stealth" expatriates who exceed the terms of their visas and whose activities could generate risks of tax liability (such as personal or corporate taxation) as well as immigration concerns in the countries in which they are working.
In a "secondment," the assignee remains an employee of the home entity and is "lent out" to perform work for another foreign entity (often an affiliate of the home entity), as a result of a need for home country expertise in the host country or as part of a global executive training program. In a secondment, the employment relationship with the home entity may need, under local law, to be suspended or placed in "sleeping" mode. The employer will likely provide special expatriate allowances, and may offer tax equalization. These assignments are generally not for assignments that last more than a few years.
In a cross-border transfer of an employee, the employee terminates his or her employment relationship with the home country employer and enters into a new employment relationship with the host country entity. The host entity may provide some special allowances for a limited period of time. Normally, the employee's past service within the group of companies is recognized for the purpose of benefit entitlement. Generally, this option is used to help the host entity to gain the experience and knowledge of the home entity long-term, or it may be made at the request of the employee.
Another approach, as mentioned above, involves the local hire of an employee who has requisite experience with the home country's market, but is available in the local labor market. This often involves an expatriate at another company in the host country who does not want to return to the home country. Here, the individual is hired as if a local country national, and on the same terms, with no special allowances.
And finally, companies may hire a local employee rather than an executive originally from the home country—an increasingly common choice for key positions that may have previously been filled by expatriates, as companies recognize that home country employees are not always the right answer from both a cultural and a cost perspective.
Selecting the international assignment structure normally depends on the business objective of the international assignment and its duration. However it is structured, it is important to understand the attendant legal issues and risks, and the documentation should consistently describe the selected structure.
Identifying the right person for an international assignment is a complex decision that requires weighing several factors, such as the individual's adaptability; their ability to work under pressure with limited resources; their ability to handle and manage the unexpected; and their experience working with a culturally diverse work force. It would be incorrect to assume that an individual who has traveled internationally for pleasure or who speaks a foreign language would necessarily be a good candidate for an overseas assignment. Nor will generous expatriate allowances cure any problems with difficult expats.
Interestingly, according to the Towers Watson study referenced above, family situations are a key contributing factor to assignment failures. The study suggests that other key reasons for failure of expatriate assignments are "the employee's inability to adapt to the host country's culture, language barriers and inadequate infrastructure (healthcare/schools) in the host country."
Any expatriate program must also anticipate the individual's return from the overseas assignment. Rather than merely returning the individual to his or her former position, the organization should have a game plan for capitalizing on the expat's experience.
And of course, an expatriate assignment must anticipate the worst—that the assignment will not work out and the employee will need to return to the home country, or even that the individual's employment will need to be terminated. Many U.S. multinationals try to maintain an employment at will relationship with the expatriate, or to require that any dispute be governed by U.S. law and subject to a mandatory U.S. forum. But overseas courts or labor tribunals may regard the expatriate as protected by the law of that host country. Thus, it is often necessary to consult with local counsel overseas prior to terminating employment (and it is advisable to consult with such counsel before the overseas arrangements are finalized).
The best practice is almost always to return the individual to their home country prior to terminating employment, in order to minimize the risk of the application of foreign law.
Finally, there are a host of employee benefits considerations that normally accompany an overseas assignment, ranging from retirement plan considerations, tax equalization, Social Security totalization agreements, and other tax considerations.
Global mobility policies are company-specific. Each international assignment requires careful planning and takes time to execute; and each host country will present new challenges. It is critical that companies anticipate and plan for these unique requirements and challenges, particularly as the scope of these assignments continues to evolve.
Philip M. Berkowitz is a partner and U.S. co-chair of Littler Mendelson's international law practice; he is based in the New York office. Trent Sutton, an international employment law associate with the firm, assisted in the preparation of this column.
1. "Managing tomorrow's people; Talent Mobility 2020," published by PricewaterhouseCoopers (2010), http://www.pwc.com/gx/en/managing-tomorrows-people/future-of-work/download.jhtml.
2. See "Cost Remains Primary Challenge in Expatriate Assignments," cited in CFO Innovation Asia, 27 April 2012, http://www.cfoinnovation.com/content/cost-remains-primary-challenge-expatriate-assignments (citing the Towers Watson and Worldwide ERC study).
3. J. Siegel, L. Pyun, B.Y. Cheon, "Multinational Firms, Labor Market Discrimination, and the Capture of Competitive Advantage by Exploiting the Social Divide," cited in C. Nobel, "It Pays to Hire Women in Countries That Won't," http://hbswk.hbs.edu/item/6498.html.
Philip M. Berkowitz is a shareholder and U.S. co-chair of Littler’s International Law Practice Group. He is based in the firm’s New York City office. This article is reprinted with permission from the May 10, 2012 issue of the New York Law Journal. © ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.