An Introduction to Global Employment – What is a GEC?

The ultimate approach to Global Employment is to create a Global Employment Company (GEC) or payroll service company as they are sometimes known. As far as we can tell GEC’s have been around since the early seventies when US companies opening up the Middle East oil fields were trying to limit payroll taxes for transferring employees.

A company is created in a jurisdiction with minimal compliance requirements that suits the sponsoring company’s operations geography. These might include favorable labor laws, tax treaties with the countries with which it does business and/or reciprocal social security agreements with those same countries. There is never usually a perfect choice and usually some compromises are required. Traditional “tax havens” for example are seldom seen as the preferred locations.

All mobile employees are transferred or recruited into this new company and their terms and conditions are administered centrally, usually on a common platform and often including a common pay structure. This approach is ideally suited to rotating staff or those with relatively short assignments, perhaps project related. Perfect in fact, for amongst others (that we look at below) temporary workers in oilfields.

Such an arrangement enables centralization of specialized activities that were previously dispersed throughout the company (e.g. payroll, social security entitlement management, benefits coverage, home leave administration, etc.) Increasingly organizations have identified how a GE might improve other aspects of their management model. For example, global consumer goods companies that use international experience to grow internal talent by moving them to ever bigger markets, companies that consistently use a particular group of individuals to open new markets or introduce proprietary processes or techniques or organizations that require a pool of specific skills in a given location for a specified period of time. In fact any circumstance where employees move repeatedly between countries.

A GEC offers minimal disruption with employment terms, benefit coverage, payroll and other services which continue without interruption when an employee moves between assignment countries. Further, employees are provided with a common sense of employer (as opposed to being constantly referred back to their home country employment).  Employee engagement improves; there are few features that remain linked to home country that could be construed as discriminatory. In the competitive market for mobile talent an employer using such a structure will appear more attractive and better equipped to offer a rewarding experience.

The primary attraction of a GEC however, often proves to be the ability to reduce tax exposure and the costs and coordination of social security participation. Locating the company in a jurisdiction with favorable reciprocity and treaty arrangements with the countries to which employees are transferred can avoid potential unnecessary social security and tax in the home and perhaps the host country, and often more importantly the unwitting loss of state pensions upon retirement.

Local governments are expending more time and effort to maximize taxes from international companies and a GEC enables an employer to optimize agreements between governments and further, provide a catalyst through which future liabilities both corporate and individual can be monitored and settled to ensure the corporation’s  reputational standing is maintained.

A GEC however, may not be the right solution for every company with mobile employees. Risks that need to be considered include:

• Implementation: while the benefits are primarily people related, a GEC will require close cooperation between Finance, HR and Tax with each able to argue the benefits for their respective portfolios. If one is stronger than the other then implementation may be less effective and the full benefits not realized. A strong champion in the corporate office is required to navigate these obstacles
• Change and Engagement: most new mobile employees want what they have at home replaced while they are on assignment. Asking them to transfer employment to a new company offering a different set of terms and conditions can therefore be perceived negatively. A company that implements a GEC will need a thoughtful communication plan that demonstrates protection and where possible improvement of employees’ existing rights and obligations. These are often a company’s most valuable employees and engagement levels must not suffer as a result of this initiative
• Country Template: trying to apply a standard model to each country while very appealing, is likely to be impossible. Modifications to accommodate local work permit, social security or tax rules may need to be made. This can be frustrating and requires a determined and creative approach to working with advisers to find ways to work around these barriers. This is where projects often fail with sponsors becoming frustrated and internal project leads not having the tenacity or knowledge
• Population Profile: a GEC produces the best results when there are multiple expatriates located in a common group of countries or where expatriates are repeatedly re-assigned to different countries. Single transfers or home-host-home scenarios tend not to return an investment on the set up costs.

Notwithstanding a GEC can produce significant cost savings and improve engagement amongst an international workforce as well as enabling the seamless implementation of an international talent management program. It is the most extreme adaptation of a global employment strategy and most implementers will have already assumed a global mindset.