By having a strategic plan in place, companies can anticipate potential localization issues and make the process as efficient as possible.
6 Reasons Companies Consider Localization
Sandy Famodu, Senior Manager
GTN West Central- Global Tax Network +1 (763) 496-0942 • firstname.lastname@example.org
Many companies continue to experience an increase in “localizations” (i.e., the process in which mobile employees move off of a traditional expatriate package to be integrated into the host country company on local terms of employment). There are several challenges that may arise during the localization process. As a result, many companies are either adding localization elements into their existing global mobility program, or expanding on their existing policy and practices. As there are many factors to consider, the decision to localize should be a well thought-out process.
6 Reasons Companies Consider Localization
Reasons for localizing a mobile employee include:
> Reduce the costs of the organization’s mobility program.
> Minimize perceived inequities between mobile employees and local employees.
> Reduce the company’s mobile employee population size.
> Oblige the mobile employee’s personal interest to remain in the host country beyond the end of their planned assignment.
> Accommodate the need for talent to remain in a local area on a longer-term basis.
> Provide an opportunity to an employee where the company is unable to provide employment in the home location at the end of the assignment.
Localization is usually triggered by a pre-defined limit to assignment length, most commonly three to five years. Companies should proactively address this threshold either in a global assignment policy or in the mobile employee’s letter of assignment. By communicating localization policies early on in the assignment process, organizations can reduce unplanned localizations, reduce mobile employee demands and negotiations, and reduce the overall “shock” factor to the mobile employee.
3 Options for Localizing a Mobile Employee
The options available for employers dealing with localizations include: straight localization, phased localization, and lump sum.
The most common approach is a straight localization, during which all assignment benefits (e.g., housing, COLA, and home leave) are eliminated on the effective date of localization. When executing a straight localization, it is important the company has a clearly defined localization process. They should also communicate the process and policy to the mobile employee as early as possible. This is important because moving an employee from a full benefit package to a package with limited or no additional assistance can be a strain on the employee and, if applicable, their family.
A second approach is to phase out the assignment package in favor of a local package over a pre-determined duration of time, such as six months to two years. Many companies will continue to pay a reduced housing allowance for six to twelve months after the effective date of localization. Other provisions that tend to be phased out in exceptional cases include education assistance and home leave.
Another option is the “lump sum” approach. Under this approach, a mobile employee immediately transfers to local employment and receives a lump sum payment to alleviate some of the strain of “going local.” The lump sum can be used to cover education costs for children, assist with home-finding and purchase, or ship goods in storage from the home country. A lump sum is ideal for companies that prefer to give their mobile employees the freedom to decide how they want to utilize the localization assistance.
There are several compensation issues that companies should consider when localizing a mobile employee including: base salary, retirement benefits, income taxes, social security, housing, Goods & Services (G&S) differential/assignment incentives, education and health care.
Base Salary Considerations
Many organizations convert mobile employees to local salary levels. A phased-in approach is also common, especially in locations where extreme salary differences exist or for career mobile employees. In certain cases, a premium is paid (increase to base salary) to supplement the local package due to an employee’s international experience or an organization’s desire to retain highly skilled talent.
Retirement plans, pensions, and social security are governed by the laws and regulations of each respective country; accordingly, integration and transfer of plan benefits can be very difficult or impossible. Often employees have expectations to remain on their home country retirement program. Unfortunately there is no “one size fits all” solution to bridge the gap between country plans. Some common alternatives include retaining employees in a tax-qualified home country plan, transferring them to the local plan, or using an international pension scheme. If there is a Totalization agreement in place between the home country and the country of localization, it can help fill gaps in benefits for employees who have divided their careers between countries.
The employee is typically transferred into the local tax system. Companies may provide some phase-in tax reimbursement assistance if the difference in the tax rates between home and host locations is significant. The continuance of tax preparation assistance is also common, especially in the year of transition and in certain cases for several years thereafter.
Housing, Education, G&S Differential
Companies tend to be flexible in providing transitional assistance when it comes to housing and education, especially if employees are moved to a local salary package. For the G&S differential and other allowances, it is common practice to immediately stop the allowance. Other options include a phase-out or lump-sum buyout.
Typically, localizing employees will transfer into the local health care system. There are many variances in coverage, benefits, services, and costs across countries, but because of the time spent in the host country, localized employees will often be aware of the issues, and therefore in a position to make appropriate decisions.
Visa and Immigration issues are another area to consider. Although the mobile employee should have a current visa and/or work permit, it is important to ensure that they can obtain either extended or permanent resident status in the country of localization. Finally, localization may subject the mobile employee and the company to various employment laws and regulations that apply to employees hired by local companies. It is important to speak with qualified employment legal counsel to understand the legal effects and ramifications of localization, including subjecting the company to stringent employment laws in certain countries.
Localizing mobile employees can be a complicated process. It is not always as simple as transferring mobile employees to a local compensation package. By having a strategic plan in place, companies can anticipate potential localization issues and make the process as efficient as possible.
Please contact Sandy with any questions regarding localizing your mobile employees.
The information provided is for general guidance only, and should not be utilized in lieu of obtaining professional advice.