By Juliane Gruethner, Mercer
Local approaches are often perceived as a way to streamline and to simplify the administration of international assignments. Furthermore, the perception is that the approach can reduce costs of international assignments – directly or indirectly.
The number of local plus contracts has increased over the last few years, and nearly all (96%) have employees on local plus conditions, more than a third (35%) of the non-local employees are on local plus packages, and the majority of companies (57%) expect this number to raise further.
However, local contracts come in different shapes and sizes. A common understanding in the continuous discussion around local contracts is therefore not guaranteed. What does a local contract actually mean?
The Local Contract
A local contract means employment under local terms in the host location. This usually involves cutting all employment-related links to the home country. The employee is provided with a local employment contract (if applicable) in the host country. This would usually also entail a local salary. The concept has been used for some years in various industries, e.g. financial or legal services. In these industries assignments often take place to locations such as New York, London, or Singapore. The host locations are attractive also from a salary point of view. Local salaries are high and international employees can integrate into the local, usually very international, community, relatively easily. Due to the company structure and organization, permanent employment in the host country or a consecutive assignment to another location may be desired. A return to the home country is often not planned.
The Local Salary
However, when a local contract is provided to an employee moving internationally, the employee often is not consequently fully integrated into the local salary and benefits structure in the host location. As a starting point, the base salary is typically established according to the local pay structure only (41%), and a fifth of companies would add a premium/adjustment to the local salary (21%). Some companies might even grant the better of the local net and a home-based net compensation calculated following a traditional balance sheet approach (‘better of’ approach). And depending on assignment type, host location and home country or the assignee’s individual situation, it often is necessary to supplement the host base compensation with all kinds of allowances and benefits in order to remain competitive and facilitate mobility.
The Local Plus Contract
Therefore, employees moving abroad on local contracts are actually moved on local plus contracts rather than pure local contracts. They receive a local employment (contract), local salaries, but various benefits and allowances on top, which are usually not granted to employees in the respective host location or at least not to employees employed on a comparable level in the host location. Those additional allowances and benefits are often similar to expatriate benefits and allowances, as indicated in Mercer’s 2018 Local Plus Survey (though amounts may vary):
Those additional allowances and benefits granted to local plus employees are hard to remove or decrease, and therefore hardly ever are removed. For example, to discontinue the reimbursement of schooling fees would be a huge disadvantage for the employees’ financials and well-being in the host location and are therefore often granted for an unlimited period.
But does the concept to employ internationally mobile employees on local contracts work for every company and every scenario? Are local and local plus contracts the answer to all Global Mobility challenges? The main driver according to Mercer’s recent local plus survey is cost reduction, followed by market competitiveness and the desire to create local equity.
Financial Impact on the Global Mobility Program
The fact that localized employees or employees on local and local plus contracts in many scenarios will receive a higher or at least comparable compensation as an international assignee illustrates that the conviction that international employees on local contracts are cheaper may be a misconception. In addition to a higher compensation (compared to the local market), relocation support is also granted. Companies are more willing to invest in one-off services in the beginning of an international employment on local terms in order to secure a successful international assignment and to secure compliance. Therefore, immigration, taxation, and cultural adaptation support may be granted in addition to other logistical relocation specific services (e.g. removal, temporary housing, home search, settling in, etc.).
Indubitably, the administration of an employee on a local contract will become easier than for international assignees retaining their home-country-based contracts. Indirectly, this set-up can therefore save administration costs, such as running two payrolls, double benefit payments, less tax work, and so forth, while eliminating some ongoing cost and administrative effort. However, international assignments are usually limited in time, whereas local contracts are often unlimited. Thus, higher local salaries and additional allowances and benefits are as unlimited as well. So, from a mid-to long-term perspective, real cost savings cannot always be expected from introducing local contracts for internationally mobile employees.
Talent Management Aspects
The employee’s individual and current employment situation and the company’s target with an employment abroad can be very different. In certain scenarios local employment will be the only option, whereas for others different options are more appropriate.
Internationally Hired Foreigners
If the candidate for a role is an international hire (i.e. a non-local employee who is hired internationally/outside the country of future employment), a local contract in the assignment country usually is the only option, at least from a legal perspective. If the candidate currently is an international assignee in the host country or has been internationally mobile for a few years performing international roles, their expectation may however be that not only a local salary is offered but a competitive salary, allowances, and benefits comparable and competitive to their current remuneration. In order to attract the talent, offering a local plus contract and remuneration package will also be in the company’s interest.
Permanent Transfers
If a current employee moves internationally, usually various options exist for managing it as an international assignment. However, if the move should be permanent because the employee wants to move to the host location for personal reasons (self-initiated move) or the role is moved permanently to the host location (company-initiated), again a local contract is the most appropriate choice. If such a move is self-initiated, a pure local contract should be offered with no or only one-off relocation support offered. If, however, the company wants to move the employee permanently, offering additional allowances and benefits should be considered. Distinguishing both scenarios can be tricky. If no job was available, how could the employee apply for a job abroad? And if the employee was not offered the job and had left the company in order to move to the desired location, would it not be in the company’s interest to offer the role to the employee who applied from abroad rather than losing the employee? These considerations often result in local plus contracts, allowing a win-win situation.
Other Cases
Local plus packages are also offered in certain locations or to certain position levels or after the maximum duration of an international assignment is reached. A local employment provides many and various challenges for the company and the employee. Those need to be balanced in the particular situation individually.
Challenges for the Company
The employee’s position in the host country needs to be evaluated appropriately. If the position level in the host country varies significantly from the home country, the employee’s positioning may be challenged by the employee and/or HR. A transfer, at least of statutory benefits, is usually not possible. Company plans may be transferred, depending on their set up. If any disadvantages for the employee have been identified, companies need to determine if and how such disadvantages should be compensated, potentially again adding additional costs.
Responsibilities have to be defined clearly and in a transparent manner. In order to secure internal compliance, the Global Mobility function may have a governance role also for local contracts in case they relate to cross-border employment. Furthermore, the function will be able to provide supporting data to HR and line management as well as to the transferring employee, e.g. cost of living, housing and education data, tax estimates etc. Global Mobility could also support with sourcing relevant providers.
If some pluses to the local contract are offered, for example, expat-like benefits such as housing and international schooling, a phase-out scheme should be defined, or such benefits could not easily be discontinued. The implementation and execution of such scheme will need to be governed thoroughly to avoid any unequal treatment and retention issues. Further challenges have been reported in Mercer’s 2018 Local Plus survey:
Challenges for the Employee
The employee obviously does not have a guarantee to return to the home country, if they are locally employed. Disadvantages in their benefits may be generated and if a phase-out scheme is applied, any salary increases may be consumed by the decrease in the ‘plus’ benefits as long as the scheme is in effect.
Conclusion
Once the company changes its focus from temporary assignments to global career mobility and permanent transfers, and one-way moves become the norm, a clear career planning perspective will need to be added to the Global Mobility Policy and its execution. If such clear perspective is available and fully implemented in an organization, local contracts for cross-border employment can be a smart though not necessarily cheap solution. Local contracts often come with a plus for the employee and thus with higher cost as a true local employment. Local (plus) contracts for internationally mobile employees should be used wisely, considering the employee’s and the company’s interests, home-host combination, career planning, and overall direct and indirect costs.