Myths and Truths About Expatriate Compensation/Benefits

I don’t know about you but I used to think that expat pay packages were fairly straightforward.   Salary, bonus and benefits were governed in accordance with U.S. (or home country) plans.

Allowances were paid competitively based on information from AIRINC or other sources. Pretty cut and dried except for taxation, and I’m not covering that in this post.  The only exception was when an expat assignment was extended for a longer than “normal” period of time.  If so, they would gradually be integrated onto the host country plans.  “Normal” was company specific but commonly defined as three to five years.

Then I happened to read about an American expat in France who became pregnant.  Long story short, she discovered that pregnancy leave for local French employees was better than U.S. pregnancy leave.  She asked for and received her leave according to French labor law.  That was an eye opener.  After looking further into this subject, I realized  that expat pay and benefits is not as cut and dried as I thought.

The issue I’m referring to is called “choice of law”.

Question:  Which country’s labor laws protect an expat?

Answer:  It’s the local mandatory labor laws of the host country that apply.*  They apply to all employees, even foreigners.  The mandatory laws that apply to compensation and benefits include among others: pay rate, overtime, payroll, mandatory benefits, hours, rest periods, vacation/holidays and severance pay.

There are a few exceptions where a home country’s laws apply. These include some supplemental or discretionary plans. However, only a small number of plans are considered discretionary.  Examples include executive compensation and equity plans.

No problem you say:  “We have our expats sign an agreement that they choose to be governed by U.S. labor laws.  Our expats can’t choose to opt out or break the agreement.”  

Wrong.  Home country choice of law agreements are non-binding and an expat cannot opt out of host country mandatory labor rules.

Some companies are advised to insert these clauses in expat agreements anyway.  Why?  They may think that the majority of American expats either 1) don’t trust the laws of other countries or 2) believe a U.S. choice-of-law clause is truly legal and expats have no rights under host country law.

But some expats may know that choice of law agreements cannot be enforced. Unfortunately for home country companies, expats posted to rich countries are particularly likely to figure out that host-country law guarantees them more generous benefits --- example, the pregnant expat in France.

Regardless, a company may insert the clause anyway, believing that it will act as an acknowledgment between the expat and the company, even if non-binding, to resolve labor law disagreements. Some expats accept that—even if the law does not force them to.

Question:  Is a home-country choice-of-law clause in an expat agreement really a bad Idea?

Answer:  Yes --- usually

It can backfire because both sets of laws – host and home --- may end up protecting an expat. S/he gets to "cherry pick" whichever rules offer better protections. The company now has to comply with two sets of labor laws instead of just one. The expat gets the best of both worlds while the company suffers the worst of both worlds.

Therefore lawyers may advise companies to either not include a clause at all or to include a clause that states only the law of the host country will apply.

Moral of the story?

Never overestimate the power of a choice-of-law clause.  Assume that the host country laws apply.  If you insert a clause in your expat agreements anyway --- be aware that in some situations both home and host country laws may apply.  Use of them is tricky.  Be sure you get expert legal advice.

*There are different rules that apply in these situations:  long business trips, the ”Communist and Arab” exception and extraterritorial reach. There is no space to discuss them here.

Jacque Vilet, President of Vilet International, has over 20 years’ experience in Global Human Resources with major multinationals such as Intel, National Semiconductor and Seagate Technology. She has managed both local/ in-country national and expatriate programs and has been an expatriate twice during her career.  Jacque has the following certifications:  CCP, GPHR, HCS and SWP as well as a B.S. and M.S in Psychology and an MBA.  Jacque has been a speaker in the U.S., Asia and Europe and is a regular contributor to various HR and talent management publications. 

Comments

[E. James (Jim) Brennan]

Thanks, Jacque, for such a concise set of examples illustrating the complexity of handling reward programs around the world. Everyplace is not exactly like the US, or Canada, or UK or even the EU. They have their customs and rules, too, and their laws govern those operating there just as our laws govern those operating here.

No one single uniform set of policies is universally appropriate or even legally permitted everywhere. Maybe THAT is the only rule that always applies in all countries!