I’ve found that many companies only really start to fully understand local employment laws and customs long after they’ve set up an operation, and even then only when they hit problems.
But this is an essential part of forward business planning, because your people are your company — and usually, their salaries and taxes are your single highest cost. So this is something that can’t simply be delegated to the HR department — I believe it’s essential that all executives with responsibility for commissioning, setting up or running an overseas operation should gain an early and deep understanding.
Why not outsource overseas employment?
The apparent complexities and apparent risks make it a temptation to outsource employment.
There’s little need to understand the law, and there’s no complicated payroll to manage. There are plenty of companies who’ll do it for you, including multinational ones that have heavy promotions.
However, it’s a real danger — and, if used at all, should only be a short term or temporary solution.
Sadly, a lot of outsourcing companies — including employment agencies — don’t treat staff well.
They often pay the minimum (or at least below market levels) and skimp on benefits. Why? Because they’re competing to offer you the lowest cost and make the highest possible profit for themselves. That’s only natural.
That approach risks ending up with lower quality, demotivated employees. And, whatever they may say, they’ll never be yours, promoting your business, because they’re employed by another.
That assumes they stay. If staff are unhappy, they’re more likely to leave. If they don’t work directly for you, you’re not in a position to fix that, even if you want to. Additionally, there’s always the risk that the agency just might decide to redeploy its best people to another customer.
It’s almost always better to employ staff directly.
Given that, what do you need to know before you prepare your Business Plan?
The biggest issues, and the ones that vary so much from country to country, are contractual terms, employee rights, taxes and wage inflation.
We shouldn’t really start by thinking about letting people go, but it really is essential as the variations are so great, and such scenarios do sometimes happen.
Very few countries are like the USA, that, with a few exceptions, has what’s called “hire at will” (or, from the employee standpoint, “fire at will”). Nor are they like the UK, where the situation is relatively easy to understand. In other countries, you could find that termination of employment could entail a payoff of a year’s salary or more, even if the employee has only been with you for a short time, and the bureaucracy could make it a time-consuming process.
Many countries have several separate taxes that have to be paid by the employer, all with different bases — in the UK and US they’re about 10%, but for in Brazil, for example, they could total as much as 95% of salary for lower paid employees.
Western businesses are used to planning and negotiating relatively small across-the-board pay rises, and coupling those with merit increases. However, in some countries wage inflation is really high and can be government mandated, typically ranging from 6% — 15%. Merit increases go on top. Outsourcing doesn’t help; you just find that the costs increase every year and you have even less control of the situation.
Did I say it was always better to employ directly?
Yes, I did. I believe that, whatever the complexities, everything can be handled with proper forward planning, and the advantages far outweigh the disadvantages.
There are great people who’ll be enthusiastic to work for you in any country of the world — and, in my experience, they can be the most effective, productive and loyal employees. Just the people can make international expansion worthwhile.
You just need to understand local employment laws and customs first, so you understand and accept them; like most things, it’s all manageable when you’re prepared.
International Expansion is easier than you may think!
If you’d like to discuss this or any other aspect of international expansion, Oliver Dowson and his team offer growinternational.com subscribers free introductory consultancy sessions – just get in touch via our contact page
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