Merging, Acquiring, or Opening a Facility in a Foreign Country

The following excerpt provided by Daryl A. Weiss* from his article, Merging, Acquiring, or Opening a Facility in a Foreign Country, provides an overview of the human resource topics that it is essential to address in the process of planning to do business on a global level.

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The Human Resource function is one often overlooked until late in the process, yet it is one of the areas fraught with pitfalls for the unwary company. The issues of labor, employment, terminations, unions, benefits, social insurance, pension, and compensation are heavily regulated. One of the best bits of advice to follow is to "stop thinking like a (fill in your country here)." A simple example of this is the offer letter. In the United States most offer letters are one to two pages in length. They lay out the salient points of the offer, remind you that it is employment at will, and then close.

However, in many other countries employment at will is not a reality, and there are statutory guidelines as to what has to be in the offer. There may be a requirement to provide each employee with a terms and conditions (T and C) letter that covers the entire employment relationship in some detail. The T and C's may run as few as three to four pages for rank and file employees to more than 20 pages for Senior Management.

I am reminded of the manager from the United States who was interviewing a candidate for a position in their German subsidiary. The manager extolled the virtues of the company's benefits plan, the generous matching to the 401(k) retirement plan, the "generous" holiday plan, etc. At the end of the day the individual was given the standard offer letter for managers in the company. He followed up with the Human Resources Department asking what his benefits were, would he be paid monthly, from where would he be paid, did they know that German Statutory leave was greater than what they offered, and finally, where was his "real" offer letter.

Recruitment

After the question about the availability of labor has been reviewed, the next step is to recruit them. Recruiting methods will differ by country. Some areas of the globe do not have as ready access to the Internet as others.

When advertising in a foreign country there are several considerations; the day of the week to advertise, in what format should it be, and does it have to be in the local language.

In the US, the best day to advertise is Sunday. However, in different countries, there may be a different day for specific disciplines. For example, ads for computer professionals might run on Thursday, health care on Tuesday, and administrative professionals on Saturday. Working with your advertising agency should provide the correct days on which to advertise.

The next issue is in what language the ad should run. If you are trying to hire for local sites, it should run in the local language. When having ads translated, you need to ensure that the message printed is the message you want, as some things do not translate well.

How and where will the responses be sent? Will you have a local repository or will they be sent to your home country. Remember, the resumes may arrive in the local language.

When and where will the interviews be held? Language may be an issue once again. Additionally, be aware of what questions you may and may not ask in that country. In the US, we are governed by strict guidelines as to the questions that may be asked. In various foreign countries, photos may be taken and any question is fair game, job related or not.

Notice periods also vary by country. In the US we are accustomed to having our new hire begin their employment within three to four weeks. Other countries have very stringent requirements as to the amount of notice required prior to leave taking. The notice period may be as little as 4 weeks to as much as a year or more depending on statute and employment contract. In statutory cases, the employee may face civil fines for not providing the correct notice period. The waiting time for your new employee may have a direct impact on your new operation commencing operation.

Benefits

Benefits cover a wide scope of areas, from time off, to maternity leave to health, life insurance, and pensions. As illustrated in the example above, what is a good plan for one country either may not apply at all, or be well below the statutory minimum requirements.

While a country may have a socialized medical system, many progressive companies are offering additional coverage to attract and retain employees. The practice used to be limited to management and above. However, in the increasingly tight market for technical talent, companies are offering extended benefits to the general employee population.

Health benefits will vary from country to country. A buy up program allows an employee to be placed in a semi private or private room over a ward. It may also offer the employee the choice of a treating physician rather than who is on call that particular day. In addition, in some places they will receive a preferential treatment, as the provider knows they will receive payment faster from a private insurer than the public plan.

Prior to making a foray into a new country, it is strongly advised that employers review the statutory benefits plans to assure the company will be in compliance with any contributions they are to make. It will also allow you to accrue the necessary expenses to cover various leaves of absence, illness, and disability.

If the company is operating in more than one country, then global pooling might be attractive. Simply put, pooling allows a pooling of lives in more than one country to an aggregate number to receive a better pricing arrangement while providing the individual coverage required in each country.

Executives may also have an increased benefit package. Their fringes may include club memberships, drivers, cars, phones, computers, and topped up life, health, and pension contributions that are more tax advantageous than other forms of remuneration.

Compensation

One of the biggest mistakes a company can make is converting their local wages into the currency of the foreign location. Generally, it will translate very high or very low for the local market. Calculating salaries in a foreign country needs to be done in the same manner as at home; rank the job and analyze it in the local market based on requirements, education, and years of experience.

Another pitfall is the number of months paid to an individual in a foreign country. Depending on the country, employees may receive between 13-17 months salary for 12 months work. The differences may be adjustments, bonuses, or just tradition. Many an American Human Resources professional has been caught short in salary negotiations because they did not realize until too late the number of months salary that were being negotiated.

Local surveys may be purchased from Human Resources organizations, or international consulting groups.

In addition to base compensation, there may be other sums of money or in kind options that are more tax advantageous for the company to offer. For example, meal allowances, company cars, clothing allowances, or mobile phones might be included in the salary package. When you negotiate the base compensation, it is critical to know the full extent of the package.

One final note for multi-national companies is the location of payment. It has been a practice of some companies to spread the allocation of salaries for certain levels of management over a number of locations. For example, the executive is paid in US Dollars, French Francs, and Japanese Yen. However, an initial review of the person may only reveal the pay in one of the countries. During salary negotiations with the new company, only the one country is discussed, the employee laments over how low paid they are, and the new company increases their pay commensurate with local ranges, while the employee still draws salary from the other sites. The moral of the story is to review all levels and locations of pay.

Stock plans, as part of compensation, will also vary from country to country. In some countries the grant of options or stock may be taxable at grant, at exercise, at sale, or as a combination of all three.

When developing a global stock plan the decision needs to be made regarding from which operating unit the stock will be granted. For example, the company is headquartered in the US and opens a subsidiary in the UK. Will the employees of the UK entity receive US stock or will the UK entity issue its own stock?

Foreign stock may be granted in other countries; however, there may be issues with vesting (some countries do not allow for timed vesting). In a case where vesting in options is immediate, the US based company may want to modify the agreement to issue only the amount of options that would vest annually until the original grant number is reached.

Taxation may also be an issue to the issuing body. Prior to developing an entirely new plan, a full review of the parent plan should be done. In many cases there is a provision to issue stock options to a foreign location. In such a case all that is required is a modification of the parent plan exercising the clause to issue foreign stock.

The plan enrollment and grant documents will then need to be modified to include local rules and notifications. Local counsel should review the plan to ensure the proper format is followed and the tax implications are the most favorable for all parties.

Immigration

Immigration is an issue from many standpoints. It can delay the transfer of an individual by weeks or months, depending on the country and visa required. Immigration can also be an issue when moving a family where the spouse works. In some countries a spouse may not work while accompanying the employee you have hired. The inability to work in some cases will lead to discontent and boredom at home, as well as financial hardships due to the reduction in their dual earning status.

The immigration timeline should be a major consideration in the overall business planning timeline.

Another consideration of immigration relates to third country nationals. You hire a national from Country A to work in Country B. However, part of their job duties requires them to enter Country C. Country C and Country B have treaties that allow free transit between borders, but Country A and Country C does not. Therefore your employee may either not be able to enter Country C, or they may have to apply for a visa, delaying the project.

Unions and Works Councils

The term Union has a very different connotation in the US and other countries. In most European countries the employer will be working with either Works Councils or Trade Unions. The Unions, unlike in the US, are mandated by statute in most cases and play a major role in work determination, training, wage rates, and redundancies.

I cannot emphasize enough the importance of working with the local Unions or Councils when opening an office. Failure to do so can result in fines, a lack of cooperation, and potential costly time delays until you begin to work through the proper channels.

Companies tend to underestimate the power of the councils. A good example is in the case of data transfer of employee information. In Germany, even if the employee has signed a release to transfer the information, the local Works Council may override it and block the transfer of the data.

Data Privacy

Data privacy really came to the fore with the Directive 95/46/EC Of The European Parliament And Of The Council on the protection of individuals with regard to the processing of personal data and on the free movement of such data.

The Directive applies to the processing of personal data wholly or partly by automatic means, and to the processing otherwise than by automatic means of personal data which form part of a filing system or are intended to form part of a filing system.

The Directive has been ratified in local forms for most of the member states. For example, the UK enacted the Data Protection Act 1998 that required full compliance by October 23, 2001.

There are a number of safe harbor practices that will allow the transfer of data between the EU and other countries.

This rule in particular affects US based companies where the Human Resources department normally may keep copies of the international files, salary data, and other personal information for benefits purposes. Transfer of the data without the correct allowances and safe harbor conditions are a violation of law.

In some countries, the data a US company may seek (dependents, etc) may not even be kept on file by the company. For example, in Sweden, with its socialized approach to pay, benefits, pension etc, the data normally collected in the US is not kept on file and the requestor from the US may get a terse response from the Swedish location on why such information is being requested. As mentioned above, a bit of cultural training can go a long way to establish positive relationships with the foreign office.

Conclusion

Proper planning, training, and the right team will make the acquisition, merging, or opening of a foreign site much smoother. If the proper amount of time is placed into planning, research, and execution the number of unforeseen and unexpected issues will be minimal. They will still occur, but many will be non-issues, leaving time and the ability to deal with actual larger issues as they occur.

*Darryl A. Weiss is the Vice President of Human Resources and Legal Affairs for ORINCON Corporation International. He can be contacted at dweiss@orincon.com