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Trends in International Employment Hires

Large global companies with specialist HR business partners and a well-developed relocation scheme, are familiar with the issues surrounding legal, payroll and tax that need to be considered in an international context. However, many smaller companies looking to expand into the UK and perhaps from the UK into European countries, often find the multiplicity of issues to consider, rather confusing. The rise of the Employer of Record route raises new questions too.

Who should employ the first UK employees?

Once you have found the ideal employee and agreed outline terms, the most pressing issue is this. Traditionally, companies have had a binary choice between either using agency workers, supplied by a traditional UK employment agency, which becomes their employer, or, setting up a UK subsidiary or branch. In addition to cost  and compliance issues, the questions of culture and creating a sense of permanence and security feed into this choice. Many companies are proud of their brand and emerging sense of identity and culture and want the first UK employees to feel part of the “mother company”. As a result, they  are not attracted to the agency route, which despite its administrative convenience, feels “cold” and does not fit the need to integrate the UK employees into the existing business. Further, if the employer is going to enter into supply contracts or rent premises or co-working space, a subsidiary may be the best option.
However, where those considerations are not relevant, an Employer of Record may provide a sensible option to enable employers to start employing people and dealing with their tax and employment law requirements. The emergence of an Employer of Record solution has therefore become popular in the last few months.

Employer of Record (“EOR”)

The most common model we have seen to date, is whereby a UK EOR limited company hires UK employees on behalf of a client, which is also the employer of substance, based abroad. The employees are hired by a subsidiary, set up by the EOR organisation and enter into a UK compliant employment contract with that EOR and are then assigned or seconded to the substantive employer, which may be based in the US or elsewhere. The EOR is registered with HMRC and is able to deal with real time tax deductions, payroll, social security deductions (including national insurance which funds the NHS) and with a pension provider, so that the UK employees’ pension rights can be satisfied.
However, it seems that the EOR model is not universally understood and we have seen some strange examples; such as a situation where 2 contracts exist on differing terms, one with the EOR and one directly with a US LLC. Further, it is not at all certain that an EOR can apply for a sponsor licence, as it may not be able to provide a Level 1 user, in support of the sponsor application; so if the plan is to expand, by bringing in employees on third party visas, including from Europe, the EOR model may not be the right one.
Another issue is TUPE – the Transfer of Undertakings (Protection of Employment) Regulations 2006. If existing UK  employees are to be transferred to an EOR (perhaps as part of an acquisition by a foreign business) TUPE will apply to the UK employees, who will have their prior UK employment terms protected. This is not always well understood and can lead to significant claims.
Advice is therefore essential for both senior executives and founders, who are offered employment under an EOR arrangement and by foreign companies considering their UK employment model.

What terms are required/desirable?

Benefits and pensions
Some of the global technology companies have been publicly cutting some of their more generous employee perks in a wave of announcements which some have described as a “Perkcession”. So what benefits are required? The key compulsory benefit in the UK is a requirement for employer and employee to contribute to a pension and for the employer to set up access to a suitable pension scheme to receive those contributions. Whilst the minimum employer contribution is 3% of qualifying earnings and 5% contribution by the employee, research suggests that most employees negotiate heavily for higher employer contributions and prioritise these over and above private medical insurance, because they have access to the NHS. At the Executive level, whilst recent changes to the pensions caps have alleviated the problem, historically, executives have negotiated an additional cash payment having reached the annual or lifetime cap. The annual allowance for tax relief on pension contributions has risen to £60,000 from today and covers all private pensions both workplace and purely personal.
The key trend we have seen for non-compulsory benefits, is the return to a demand for individualised benefits. Gallagher have recently described this trend by naming 2023 as “the year of the employee.” It may be a key differentiator, when seeking to attract talented individuals, to be able to offer  benefits on an individualised basis, so that employees can select the ones which are important to them at specific periods of their lives.
A new entrant to the UK will perhaps not have premises and will require its first UK employees to work from home. Not only must home working environments be assessed for suitability and health and safety obligations (including work station set up) but there must be adequate internet connection! Some of these home working requirements are now finding their way into employment contracts and need to be considered carefully when drafting contracts and policies. Going further, there is still a need to consider how an employer will react to or maybe consider offering proactively, a “work from anywhere” allocation. We have seen some of the larger financial institutions offering up to 10 days in any one year. However, not only can the Wi-Fi issue be even more pressing (depending on the location of choice) but also, employers must take careful tax advice as well as employment and immigration advice, as there is a danger of creating a Permanent Establishment in a new jurisdiction with adverse tax, payroll and social security consequences.
The cost of living crisis is also impacting trends in this area. A recent survey by Emburse found 47% of younger workers demanding  a corporate credit card as a perk, to pay for out-of-pocket expenses.
All benefits agreed upon in the recruitment process need to be carefully documented in contracts and related policies, to avoid disputes, or even employment litigation, at a later date. In drafting global policies in particular, inclusive language and gender neutral terminology is becoming the norm and older documents that have not embraced these trends look outdated to new joiners and need to be updated and refreshed.
Equity incentives
Equity incentives will be vital to attract senior talent. The most common pattern will be for the UK employees to be offered participation in the plan set up by the holding company for local employees. Such plans are often governed by the law of a US state.  Senior executives will need to seek UK advice on the contract and local law advice on the equity schemes. Even where a  scheme, such as a co-invest or carry scheme is translated into English from the original language, UK advice will be essential to ensure that the translation has faithfully reflected the terms of the scheme. In all these cases the tax consequences of accepting such benefits can be enormous and specialised advice is vital.

Finally restrictive covenants globally are under scrutiny and subject to change. This is particularly the case with the non- competition covenants which have recently been under scrutiny by the FTC in the US, who have proposed a new rule to ban them. In some jurisdictions  such covenants, along with non- solicitation and non-poaching restraints  may be entirely void, in others unenforceable and in others, (the UK included) largely binding, provided they are appropriately drafted in the light of developing case law. Overwhelmingly, executives seek advice at the point of leaving, when the covenants are due to bite. But this is too late as under UK law a covenant’s enforceability is judged at the date the contract is entered into and that is the point in time, where overly restrictive covenants need to be negotiated and tailored to protect the legitimate business needs of the employer imposing them.
Next time, we will focus on termination issues for ex patriates working in the UK. If you have any comments on the issues raised in this article, we would love to hear them.

If you would like to discuss any of the topics covered in this alert update in more detail, please contact Partner Merrill April, who specialise in employment law issues for multinational employers, senior executives, partnerships, LLPs, partners and LLP members.