What these terms mean and their tax consequences as you are terminating an employee for cause, downsizing a foreign location, or terminating an employee during their probationary period are part of the day-to-day responsibilities of the Global Payroll Manager.
Severance in these foreign jurisdictions may include different types of payments and be described by many different terms in English and other languages. Severance may include leaving allowances, seniority pay, termination benefits, redundancy payments, and dismissal compensation. Contrary to international standards, at-will employment is a foreign concept in most other countries while it is the norm in the United States. In many foreign jurisdictions, there is an assumption that once you have an employee they are your partner for life. It is presumed they will keep their job indefinitely.
Historically, three major occurrences resulted in severance mandates throughout the world:
1. The creation of labor codes
2. High levels of unemployment
3. The expansion of the welfare state after World War II
In 1802, Sir Robert Peel introduced the English Factory Act, which did not pass until 1833. It was a largely ineffective piece of legislation to place restrictions on the maximum number of working hours of apprentices, in an attempt to improve working conditions for children.
By 1875, the United States and the United Kingdom recognized the employee as equal to the employer with each party:
• Free to accept or reject offers
• Free to terminate contracts
• Expected to pay damages if the termination amounted to a breach of contract
The issue of job security first took root in the railroad industry. In France, a large number of railroad dismissal cases were heard and became the starting point for the establishment of severance pay.
Employee Termination–Questions and Considerations
Many companies have instituted requirements around how a worker can be terminated and what they must be paid. “At-will” employment, recognized in the United States, is the exception and not the rule around the world. When employing a global workforce, it is a necessity to know each country’s termination requirements, either voluntary or involuntary.
Some countries have a mandatory payment upon termination for any type of severance. Others may disqualify an employee depending on what type of separation has occurred. Conditions include knowing if the employee had been separated due to misconduct or if a termination occurred due to redundancy.
Other questions include whether a bankruptcy, disability, retirement, or end of contract had occurred. Each of these factors will affect how a termination will be handled in a foreign jurisdiction. Most countries have either mandatory or quasi-mandatory severance pay systems. Low-income African and Pacific Islands are the exceptions.
Termination and Severance in China
Under Chinese employment law, it is fairly easy to terminate an employee without paying severance if the employee is terminated during the probationary period and the employee is not qualified for the position.
However, if the employer and employee mutually agree to terminate a contract and this is initiated by the employer, the employee is entitled to receive severance. To avoid a costly dispute, many employers may offer an additional payment to obtain consent from the employee.
If the employee in China is entitled to the payment of severance, the statutory minimum payment is calculated as average monthly wages during the previous 12 months x years of service for the company. If the employee’s regular salary is five times the local average wages, his or her monthly wage multiplier will be three times the local average wage, rather than the employee’s average monthly wage.
Severance payments also result in a lower individual income tax burden as well. If the payment is lower than three times the local annual average salary, the severance is tax-exempt.
Termination in the Philippines
Be prepared for some paperwork if you are terminating an employee in the Philippines. An employer must give an employee two written notices and a hearing once grounds for just cause have been given for a termination. Once an employee is dismissed, the employer must provide separation pay.
Termination in Thailand
In Thailand, permission from a Thai court must be granted before an employee can be terminated if the employee is part of an employee committee, which is similar to a union in the United States. Employees who are not part of an employee committee can be fired without just cause. The employer, however, must pay full compensation to the terminated employee.
Termination in Germany
In Germany, the Termination Protection Act requires that termination can only occur after all other options have been exhausted, including transferring the employee to another open position.
Termination in Japan
Japan’s lifetime rule of employment restricts employers from firing employees except in cases of serious misconduct. Lifetime employment is the expectation.
Termination in Indonesia
Before terminating an employee in Indonesia, you are required to exhaust all efforts to avoid terminating an employee. The Industrial Relations Court must agree prior to terminating an employee who is outside of their probationary period.
Workplace Due Process Around the World
European, Asian, and Latin American countries provide some type of workplace due process when a termination is to occur. In foreign countries, the majority of employees participate in work councils and unions. The union worker in the United States is in the minority as most employees are non-union. In the United States, severance payments to a non-union workforce are optional. Termination payments are the rule in many foreign jurisdictions.
Arm yourself with information around termination and severance pay issues for any country in which you have employees. Many employers do not realize that the at-will concept in the United States is unique and most countries don’t function similarly. Your foreign workforce may have more protections than those given to your U.S. workforce. Ending an assignment or position abruptly can result in many labor violations regarding your foreign employees as well as legal implications and costs.
Mindy Mayo, CPP, is Principal in Ryan’s San Jose office. She specializes in leading and advising organizations in the areas of human capital taxation, including financial and operational risk management, process improvement, and strategic management. She is skilled at representing clients before state and federal agencies during employment tax audits or controversy. Mayo is an accomplished public speaker and has achieved broad industry recognition for strategic thought leadership on various human capital taxation matters. In the past, she has been Director, Human Capital Tax, Ryan; Director, Employment Tax Practice for a national accounting firm; owner of a consulting firm; and Senior Tax Manager, State and Local Tax, with a national accounting firm. In the public sector, Mayo was Tax Auditor IV, State of California, Employment Development Department, where she was responsible for performing services as a Hearing Specialist before the California Unemployment Insurance Appeals Board.