According to a major study, the international mobility of labour continues to increase. Yet as Colin Cottell discovered, this can bring with it new risk and compliance problems

Globalisation, and with it the willingness of workers to move around the world in search of opportunity, has provided a huge boon to the recruitment industry.

The ‘2011 Global Talent Mobility Survey’ of more than 162,000 jobseekers in 66 countries, by online recruitment firm The Network and Intelligence Group, concluded that “workers were keener than ever before to move internationally for a new job. On a global scale, more than two-thirds of the people surveyed wanted to work abroad. Overall, people are more eager to move abroad for a short period of time, looking to return home if a better career opportunity arises”.

On the face of it, this is great news for recruiters, who can use their expertise to match supply and demand around the world.

However, wherever there is opportunity in business, risk is never far away, and according to Brian Daly, managing director of international risk and compliance management consultancy Crescenzi Consulting, there are significant biggest risks to recruiters in moving workers across international borders. 

The repercussions of not complying with local rules and regulations when supplying contractors can be severe, says Daly. These can include “a total prohibition on carrying on a recruitment business for a defined period — up to five years in France, for example — and lump sum fines for clients”. There is also the possibility of backdated liabilities on the client from the tax or social security authorities, where contractors’ tax and social security remains unpaid. “It is typical for such an amount to come to between 50% and 100% of the contract income,” says Daly. 

James Allen, managing director EMEA at oil & gas recruiter Swift Worldwide Resources, says that keeping on top of compliance is a major issue. “Most of our contracts are in developing nations, where legislative systems are a little bit out of date, and they are still getting up to speed with best international practice.

“Every year legislation and administrative processes and taxation change, and you have to keep up with it,” he adds. Allen has no shortage of examples to illustrate his point, citing Angola “where immigration rules change every year”, and Azerbaijan “where expats must have a degree”. In Nigeria, the Oil and Gas Industry Content Act, introduced to protect the interests of local people, might stipulate that, for example, in a £1m contract to supply labour, 60% of the work must be carried out by local people. 

Amit Somaiya, chief executive of cross border hiring services provider Interactive Manpower Solutions, points out how a wave of nationalism is complicating life for recruiters trying to bring international talent into the Arabian peninsula. For example, countries in the region are now applying separate quotas for people from different regions of the world, he says. And in an effort to reduce exploitation of workers, recruitment agencies in India must have a licence when supplying blue-collar workers abroad, though this does not apply to white-collar workers.

For Allen, as for other recruiters, a key question is how to best organise your firm to keep on top of the constantly changing rules in different markets. In each country in which it operates, Allen says Swift runs a local payroll, which pays its contractors, as well as their taxes across to the local tax authorities. It also employs local accountancy firms “to keep up to speed with any changes in legislation”, he says. As he explains, there is one big advantage in having your own office from a compliance point of view: “We are much more in control from a compliance and ethics perspective.”

While other recruiters prefer to work with a local partner, Allen says that for Swift this is too risky. “They might not be aligned with our processes and procedures,” he says. “Are we happy that they are not bribing people or corrupt?” With tougher UK bribery laws applying to UK companies operating abroad from 2010, he is only too aware that the wrong foreign business partner “could come back to [haunt] us”.

Will Atkinson, director of international oil & gas recruiter TEC Group, a company that supplies contractors to Africa, the Middle East and the North Sea, says the specific arrangements the company puts in place depend on local circumstances. So in Libya, for example, TEC uses a local partner that employs the contractors. “The local partner is much better placed to deal with work and resident’s permits, tax and social security, and all the other legal side.” That said, he says that finding the right partner in countries such as Russia, Azerbaijan and Kazakhstan is more difficult. One option is to work with companies that have had a long relationship with clients, such as Shell. “We would probably trust them a lot more,” says Atkinson.

Michael Moretti, senior manager, IT contract division at IT recruiter Greythorn, says that one of the key risks when placing contractors across international borders is that of being “severally and jointly liable with the client” for the unpaid taxes of contractors.

With typically 20 to 40 highly paid contractors in a country, and especially in high tax countries such as Norway, the risk of non-compliance can be significant, he says. And according to Moretti, it is a risk that clients, particularly procurement departments, are increasingly aware of too. Not only do they ask Greythorn to indemnify them against the unpaid tax of contractors, they also, at the time of engagement, ask Greythorn to prove its suitability to place people in that country.

Not having its own offices in the overseas countries such as Norway in which it operates, Greythorn partners with local umbrella companies. “We find it better to mitigate the risk by working with a local company that can do the payroll,” says Moretti. He says that because Greythorn is not regulated to provide financial advice, it offers contractors a choice from its preferred supplier list (PSL) of compliant umbrellas, which “quite often” have offices in the UK. 

Michelle Reilly, MD of international contractor management and payroll company CXC Global Europe, says that authorities, particularly in Continental Europe, are increasingly aware of expat contractors exploiting the regulations. In addition to split payments, where a proportion of a contractor’s salary is diverted offshore to reduce tax, there is also the practice of contractors paying into what is supposed to be a pension fund. However, these are often not bona fide, Reilly explains, because contractors have access to the money sooner than a proper pension fund, and are actually a form of ‘disguised income’ on which taxes should be paid. “They [the authorities] are really starting to crack down on it,” she says.

Luc Jones, technology partner at Antal Russia, notes that compliance is very market specific. In Russia, this means taking into account the history of the country, where the old sense of entitlement to a permanent job under Communism still lingers. “A lot of Russians don’t want to contract because they don’t want the uncertainty of anything temporary,” says Jones. While Jones is aware of “unscrupulous operators” who promise a lot to workers but then deduct large amounts for travel and consultancy fees, Antal itself effectively employs workers on one-year contracts.

And because of the high level of bureaucracy in hiring foreigners, Jones says that unless a particular skill set is required, Antal will normally supply native Russians to its multinational clients. 

Frances Lewis, a partner at law firm Osborne Clarke, says that getting compliance right is more than simply not falling foul of local legislation, important though that undoubtedly is. Getting international contractor compliance wrong can also adversely affect company valuations, she says. She cites one example involving a recruiter’s Germany operation, where complications over the renewal of an AUG licence — a licence which is at the heart of employment agency laws in Germany — led to the purchaser cutting that part of the business out of the deal, reducing its value by about 10%.

While recruiters must certainly be on their guard to mitigate the risks of non-compliance, Lewis says that even with the best will in the world, it is unrealistic to expect 100% compliance, and particularly in overseas markets. “It’s about taking a view on a risk … but with the understanding that you can answer questions from investors and national authorities.”

However, only the most foolhardy recruiter would take this as a green light not to take the issue of compliance seriously.