The future of workforce management structures

The future of workforce management structures for internationally-mobile employees

(Francis Collin, lawyer at the Paris Bar, Villemot, Barthès & Associés)
The negative representation of off-shore structures, the tightening up of the legal rules and controls on employee secondments (review of the EU Directive and anti-fraud measures) and the rising number of related labor court cases are once again drawing attention to the opportunities, limitations and risks involved in using workforce management structures in the context of international mobility.

The setting up of these structures does indeed raise some difficult issues under French law (see following comments) and, of course, the same scrutiny should be applied from a local legislation perspective.

A brief description of the structures

Dedicated workforce management structures are often used by international groups in the field of international mobility.
This involves forming a company in a particular country whose purpose is to manage the secondments and mobility of employees across the various international entities within the group.

There are two possible scenarios: either the company employs “career expatriates” or it acts as a “buffer zone” between the company in the home country and its counterpart in the host country.

Depending on the legislative constraints in the employee’s host country, an employment contract is drawn up with the local company which pays the employee’s salary. In this case, the workforce management company is responsible only for the administrative management of the internationally-mobile employees (including payroll, pensions and benefits).  Sometimes, it issues a contract which provides expatriate employees with an additional salary. The management company then charges back certain costs to the host entity (primarily salaries, social security contributions and administrative expenses).

In practice, these workforce management companies are often based in Switzerland, the United Kingdom or the Channel Islands.

Advantages and opportunities

The creation of a company to manage internationally-mobile employees can provide solutions to numerous and varied problems.  Indeed, over and above the simple prospect of better cost- management (which is not in itself illegal), the company can offer interesting opportunities, including:

Keeping payroll taxes to a minimum and a social protection scheme more suited to the internationally-mobile employee. Workforce management companies are often based in countries where the mandatory social security system is inexpensive or relatively flexible, which means that customized voluntary benefits schemes can be set up to complement the ones in place within the host companies.

Harmonizing the applicable pension scheme. This is essential for “career” expatriates.  It is advisable to restrict the number of retirement schemes in which an employee is enrolled as this will make calculating and paying out future pensions much easier. What’s more, the local schemes in some countries can be disadvantageous to employees.

Limiting the effects of the host country’s labor laws.  According to the principles adopted by the Rome Convention, an employment contract which includes so-called “extraneous” elements is normally governed by autonomous law, meaning the law chosen by the parties.  It is therefore possible, subject to certain restrictions, to choose the law to be applied to an international employment contract based on the results you want to achieve.

Finding the right tax system for the employees and the company. For employees who are sent on frequent assignments abroad which are short enough not to involve the transfer of tax residency, it may be advantageous for them to be based in a country whose tax system offers substantial exemption opportunities in respect of stays abroad. Special schemes are sometimes available for service industry companies, particularly if they are part of a group, or for companies which conduct their activities outside the country where they are located.

Managing expatriate employees as a group or separately. This might be done for reasons of social protection, equal conditions, career management or to ensure the confidentiality of earnings with respect to the host company.

Constraints and risks

Nevertheless, the use of this type of structure is complex and there are many potential pitfalls.

Social security legislation. One of the advantages of locating an expatriate company in a particular country is the ability to keep employees registered in that country’s social security system when they are transferred abroad to provide them with coverage.
Not all social security schemes allow transferred employees to remain registered.

Locating the company in a country outside the European Union can be a disadvantage unless that country has an extensive network of social security agreements, particularly with Member States of the European Union.

International social security instruments (bilateral social security agreements and EU regulations) often apply only to nationals of countries which have signed up to the agreement.

The transfer of an employee to a country which is not party to the agreement, combined with the loss of cover from the home country scheme, is likely to generate a shortfall.

Similarly, third country nationals cannot in principle take advantage of international social security agreements and, consequently, cannot benefit from the principle of aggregation of insurance periods.

Experience shows that social security schemes present marked differences from one country to another, as much in terms of the scope of the social coverage as the quality of the benefits provided or their legal characteristics.  

It is therefore difficult to fully honor a commitment to an employee to provide them with social coverage entirely equivalent to what they had before their transfer.

In labor law. Even if the parties have made a choice regarding the law applicable to their employment contract, there are mechanisms in place to protect the expatriate employee. Therefore, according to European regulation “Rome I”, the choice by the parties of the applicable law cannot result in the employee being deprived of the protection afforded by the mandatory provisions of the law which would apply in the absence of choice.

Even if the workforce management company does not actually act as the employer, the employer may be reclassified under local law.

If the workforce management company is deemed to be the employer, the host company, or even the parent company of the group, could be recognized as a co-employer (if no contract has been signed with the host company) which would result in joint and several liability between the companies.

Moreover, even if the employee had passed through the workforce management structure prior to their secondment in the host company, Article 1231-5 of the French Labor Code could be applied if a link can be traced back to the French parent company. This provision states that employees who are seconded to a foreign subsidiary must be repatriated and redeployed.

In criminal law. Staffing operations are likely to fall within the scope of French legislation to combat the illegal supply or trafficking of workers. Prevention of this key risk is therefore essential.

Immigration law. The positioning of a company between the home structure and the host structure may lead to an increase in the number of work permits required.

In conclusion, from the perspective of French law, the use of this type of structure remains legal but the opportunities and risks must be examined in the light of real-life situations. The risks will be more manageable if they involve career expatriates and if no link exists between the expatriate and the French parent company.