Labor: Relocating Employees

Companies that do business in multiple countries can find themselves with a brand-new set of problems when they move employees from one nation to another--particularly when the employment relationship breaks down. With intelligent planning at the earliest stages of a move, however, employers can identify potential issues in advance and possibly even solve them.

Two true stories (told using fictitious names) highlight the importance of such planning.

A smart, personable and hugely profitable Managing Director named Ray Smith worked in New York at a financial institution. After a particularly successful year, he was asked to move to London to lead a new area of business for the company. He agreed on the condition that he would receive a $9 million guaranteed bonus at the end of his first year, and his company put this in writing. Smith left for London, where he would be based, though he was expected to also spend time working in Spain where his boss Jaime Ricardo was located. Before the move, the human resources department in New York gave Smith a "secondment" agreement that specified that he would at all times remain a New York employee and that he would return to a "comparable" job in New York at the end of three years.

As is standard practice in London, Smith received an "employment contract" that specified his job duties and provided that he would follow the employment policies of the company in London.

Smith moved to London. One day, at a meeting with Ricardo in Spain, Ricardo blamed Smith for a big mistake made by someone in another business group; when Smith refused to take responsibility, Ricardo fired him and said the discharge was for "cause." Smith commenced legal proceedings against the company in London, in Spain and in New York. He claimed the company had violated his rights in three locations--in London by not following proper procedures for firing him, in Spain by wrongfully terminating him and in New York (where he was still considered an employee under his secondment agreement and where he had a written right to return to an equivalent job when his secondment ended.

Another story: Franz Schmidt, an employee of a German company who had a German employment agreement, was transferred to New York to be the president of a subsidiary. He liked living in New York, and the German company seemed satisfied with his performance. After 11 years in New York, however, the company discovered that a young employee had been embezzling funds, and everyone in the line of supervision-- including Schmidt-- was fired for cause. Schmidt, who believed he should not have been fired, filed a lawsuit against the subsidiary in New York. He also filed a lawsuit in Germany against the company, because he still had an employment agreement with the German entity.

Facing multiple lawsuits in multiple jurisdictions as the result of termination of well-compensated executives, each of these companies asked its Human Resources personnel--a bit belatedly-- how could this have happened? And was there anything that could have brought a different, and better, result for the companies?

In each of these cases, a less costly and more manageable result might have been achieved by first consulting human resources before each of these employees was moved to another country. Human resources might have proposed the following:

  • Instead of "seconding" Smith from New York, the company might have transferred his employment, giving him a transfer document in which he and the company both agreed to terminate his employment in New York (and not providing any right to return to New York at the end of a period of time). This might have presented a retirement-benefits issue, which might be handled either by ensuring his ability to participate in the plan in the host country or by "grossing up" his total compensation to adequately compensate him for lost benefits (including tax consequences).
  • Instead of "seconding" Smith, the company might have investigated whether Smith could be a "local hire" in the country to which he was relocating.
  • With Schmidt, the German company could have terminated his German employment contract either upon Schmidt's relocation or after a short period of time (when it appeared he would stay in the U.S. indefinitely), and he could have been given an employment agreement with the U.S. company. Retirement benefits, again, might have been an issue, but these can usually be managed. (Note, however, that treaties among some countries may affect the ability of employers to leave expatriated employees in benefit plans indefinitely.) By doing this, when Schmidt was fired, he would have been left only with U.S. employment status and could not have sued in Germany. This is, of course, typically a great benefit to employers, as U.S. employment law-- with the concept of employment at will-- tends to be more favorable to employers than the laws in many other countries.

The moral of these stories is a simple one: It may not always be possible to prevent every lawsuit and top foresee every problem that can arise in an employment relationship. But when human resources--and, where needed, outside counsel -- is consulted at an early stage of relocation of an employee, careful planning and good advice can often remove at least some of the potential legal liabilities that employers face when employment relationships turn sour. And, equally importantly, by preventing lawsuits-- even assuming the company eventually wins--the company can avoid unnecessary expenditures of time and money on lawyers and legal proceedings.

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