Global HR Hot Topic—March 2014: Global Compensation, Bonus and Benefits Plan Checklist

by White & Case LLP
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Business imperatives push multinationals to expand at least some of their pay, bonus and benefits offerings internationally. This is why in recent years we have seen multinationals globalize many compensation and benefits 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 benefits 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. David Bryan, a consultant at Norfolk Mobility Benefits, has observed that as "[t]oday's multinational employer [evolves] into the transnational of tomorrow…[t]here appears to be more centralization of core corporate functions"—including particularly "benefits professionals implementing global benefits strategies." (D. Bryan, "Creating a Global Benefits Strategy," available at www.internationalhrforum.com (Nov. 25, 2009))

Multinationals now serve up a smorgasbord of regionally and globally aligned compensation, bonus and benefits offerings. Examples include: regional sales commission plans, global profit-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 benefits offering it makes available to its local headquarters staff and asks: Shouldn't we expand this and offer it to our teams worldwide? After all, our "business case"—the reason we launched this program in the first place—is just as pressing across our operations abroad.

While the business case for globally expanding a bonus or benefit 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 benefits. Every time a multinational headquarters launches, expands or improves some border-crossing bonus or benefits "scheme"—and certainly every time headquarters internationally amends, reduces or discontinues one—the employer needs to flush out and then overcome all the legal obstacles in each affected jurisdiction. To do that, use a thorough cross-jurisdictional compensation/ bonus/benefits plan checklist:

  • Payor entity: The first question when launching any cross-border compensation or benefits offering 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 benefits to employee participants in each jurisdiction?

    Headquarters funding—and particularly headquarters paymenttendering— of an international pay/benefits 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 affiliates, headquarters risks becoming a co-/dual-/joint employer jointly liable, along with the local in-country employer affiliate, for local employment claims. A local employee only need argue to a local labor court something to the effect 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 affiliates tender the bonus or benefit to its own staff, even if behind the scenes headquarters funds the grant and reimburses its local affiliates. 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 offers certain advantages regarding enforceability of clawbacks and choice-of-headquarters-country-law clauses. Think this "payor entity" issue through carefully.
      
  • Ripple effects: "Total compensation" includes base pay, bonuses and often the value of some fringe benefits. Accordingly, many countries roll bonuses and even benefits into their definition 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/benefits 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 (e.g., the two Kabul Autotech Korean Supreme Court decisions of 18 Dec. 2013). When granting pay or benefits in a foreign country, be sure to account for ripple effects.
     
  • Definitions: Any global pay, bonus or benefits plan should clearly define 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 cause" during a plan year. These terms mean different things abroad. Be sure to define 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 downpayments 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-off employee as severance/notice pay because neither the employment contract nor the plan terms characterized the payments as severance. (IBM v. Waterman, 2013 SCC 70)
       
  • Cross-border alignment: We mentioned that a multinational's headquarters human resources team sometimes looks at its headquarters compensation and benefits offerings and decides that fairness, good HR and a strong business case militate for extending some offerings 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 profit-sharing plan and company cars. Headquarters will inevitably wonder: Isn't it only fair to extend these offerings to our teams across our overseas offices?

    Maybe, but maybe not. When considering whether to internationalize some local compensation term or benefit, first verify that the underlying business case really does reach abroad. For example, American bosses offer medical insurance and employee assistance programs because the United States has no broad-based "socialized" ("single payer") government medical care system—Obamacare notwithstanding. And some US employers offer severance pay plans because US employment-at-will does not require severance pay. The environment is very different abroad, making the need, overseas, for these particular offerings 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 staff everywhere appreciates a free car, in markets like the United States, benchmarking and tax analysis usually militate against a benefit so expensive. In short, when expanding a benefit 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/benefits 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 benefit to one class of workers to offer that same benefit to all equivalent-or-higher employee groups. Further, laws in Europe bar the common stateside practice of limiting a benefit (medical insurance, for example) to full-time staff. 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 effectively impose an "objectively reasonable" rule for selecting bonus and benefits plan participants. (See our Global HR Hot Topic of Oct. 2012)

    In addition, bonus and compensation plans that pay a significant percentage of employee compensation can trigger quirky local pay laws. Always check whether each affected jurisdiction imposes any local pay regulations that reach the proposed global offering. The "poster boy" example is the financial services industry bonus cap across Europe. (See White & Case, Shooting in the Dark: A Review of the Implications of the Bonus Cap, 12/13) Another example is Argentina's specific regulations on compensating "traveling salesmen" that reach a multinational's Latin America sales commission structure.
     
  • Consultation: In many countries, to propose a new bonus or benefits 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 benefit. That said, there are some exceptions. Austria, for example, empowers works councils with broad consultation rights but excludes "competence" over pay and benefits offerings.

    Employees and their representatives usually welcome new compensation and benefits 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 different benefits. And again, collective consultation becomes a huge issue when a multinational wants to amend, cut or discontinue some element of compensation or benefits. (See our Global HR Hot Topic of Dec. 2013)
       
  • Vested/acquired rights: We have been discussing formally installed, ongoing compensation and benefits plans. But sometimes a multinational offers a special or ad hoc one-off cross-border bonus or benefit—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 offerings forever. (See our Global HR Hot Topic of Dec. 2013) So any international one-time-only grant or fixed-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-off award knowing they may never get another. That said, as time goes by, this acknowledgement may not prove enforceable. Consider the ramifications of vested rights.
      
  • Consents: As mentioned, cross-border compensation and benefits grants often include participant acknowledgments consenting to plan terms for each beneficiary 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. For two examples, see Duarte v. Black & Decker, 2007 EWCH 2720 (UK QB 1/07) and Samengo-Turner v. Marsh, 2007 EWCA Cir. 723 (UK 7/07).

    While employee consents can prove vital, a consent is worth little when the law will not enforce it. Employee consents outside the pay and benefits 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 boss 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 benefit the employee was free to reject. That is, most all 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 plan: Often an updated version of a pay/ bonus/benefits 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 benefit 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 staff 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 benefits plans because they disincentivize undesired employee behaviors. Think, for example, of retention bonuses that require employees who quit early or get fired 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 flunks 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/dispute resolution: In most countries, choice-of-foreign-law clauses in employment agreements tend not to be enforceable. (See our Global HR Hot Topic of Sept. 2012) 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 (meditation/arbitration/choice-offorum) provisions in compensation and benefits 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 benefits disputes. In the compensation and benefits context, an employer will usually be able to enforce a choice-of-foreignforum 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 benefits plans.
      
  • Language: Laws in Chile, Belgium, France, Quebec, Poland, Portugal, Turkey and elsewhere require that most all employee communications—including written compensation and benefits plans—be communicated locally in the local language. For a multinational to have declared "English is our official company language" is no excuse to flout those laws. Be sure to translate cross-border plan documents and communications at least in those jurisdictions that require translations. (See our Global HR Hot Topic of Nov. 2011)
      
  • 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.
       
  • Equity plans: This checklist addresses cross-border pay, bonus and benefits plans generally, including (but not focused specifically on) employee equity plans—stock options, restricted stock, phantom stock, stock purchase plans and the like. Cross-border employee equity plans raise their own additional list of equityspecific 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 effect 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-specific topics.

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