Cross-Border Employment and Global Mobility Issues in Latin America: A Closer Look at International Assignments

1. Cross-Border Employment and Global Mobility Issues in Latin America: A Closer Look at International Assignments By: Manuel Cuevas-Trisán, Esq. Senior Labor Counsel Motorola, Inc. ABA 2006 Spring Meeting/April 4-8, Waldorf Astoria NY, NY

2. Why are Cross-Border Mobility Issues Important for Our Clients? • » Multinational employers invest millions of dollars annually to expatriate, repatriate, and maintain its population of long-term international assignees. • » In some companies, the average annual carrying cost of deploying and maintaining expatriates exceeds US$250K per expatriate, excluding base salary. • » This is a significant investment in human assets…are your clients maximizing return on investment? Are they properly addressing the potential liabilities associated with deploying, maintaining, and terminating long-term international assignments? TM

3. Preliminary Legal Considerations • » In spite of the differences in the substantive labor laws of Latin American countries, there are fundamental Labor Law principles applicable in virtually all the jurisdictions of the region. These vary in application and/or specific content, but their spirit is fundamentally the same. • » These principles have ---under certain conditions--- significant implications for expatriate arrangements and international assignments. • » Understanding these principles is the first step toward entering into sound, enforceable, and cost-effective arrangements with expatriates and long-term transferees. TM

4. Labor Law Principles Common throughout Latin America • » Civil Law systems/Labor Codes are highly protective of employment relationships, especially of the individual employment contract; • » The constitutions of virtually all Latin American nations expressly consecrate the notion that labor laws (including those pertaining social security and pensions) are deemed to be of the highest social interest, hence workers cannot lawfully waive or contract out minimum standards prescribed in the Labor codes and related regulations; • » Work constitutes a social right and, as such, is subject to significant state intervention/regulation (employment contract ≠ other civil/commercial contracts); • » Employment “at-will” doctrine not recognized. Employment relationships are contractual in nature and presumed to be of indefinite duration;

5. Labor Law Principles Common throughout Latin America (continued...) • » Virtually all Latin American labor codes/laws require that the employer prove just cause to terminate an individual employment contract (otherwise employee will be entitled to statutory severance) • » As a general rule, all employment periods that an employee has worked for companies of the “same economic group” are added to determine the employee’s total service period; • » Changes in the legal or corporate structure of the employer do not affect the vested rights of employees, including seniority; and • » The existence of an individual employment contract depends on the reality of the relationship (“contrato-realidad”) and not on the label the parties give the relationship. Elements of an employment relationship include: rendering a service/of a non-contingent nature (i.e., continuous) /in subordination to another/in exchange for remuneration.

6. Therefore, When Expatriating Talent into any Latin American Jurisdiction... • » You and your clientshould make decisions based on the premise that the host country’s labor laws and regulations may prevail over the will of the parties (Principle of Territoriality);» You should be aware that the host country’s labor laws and regulations may afford the expatriate higher degree of protection than those of the home country (e.g., statutory severance, vacation premium, other rights).

7. »Long-term expatriate assignments (generally between 2-4 years; director & senior management levels; beyond developmental purposes) » Short-term expatriate assignments (generally between 6-18 months; technical experts, project leads; field engineers; developmental assignments) »International transfer (generally of indefinite duration; no expectation of repatriation upon termination of employment) » “Idiosyncratic” arrangements (e.g. border crossings/Mexico-U.S. border; “hybrid” arrangements with elements from both expatriate and international transfer arrangements). Typical Forms of Cross-Border Assignments

8. Specific Legal Requirements and Considerations • » As in virtually all jurisdictions, including the United States, work by foreign nationals is permitted in all Latin American countries, so long as the employer and the expatriate (or assignee) satisfy Immigration Law requirements, and the employer complies with minimum standards set forth in labor, tax and social security laws and regulations. • » For purposes of this presentation, our analysis of legal issues is organized according to three broad “phases”: pre-assignment; assignment period; and termination.

9. Pre-Assignment Issues • »Prior to deploying employees to any Latin American jurisdiction, the employer must bear in mind that: • » Labor laws in most of the countries of the region set forth a minimum ratio of nationals vis-à-vis foreign workers (e.g., Mexico- 90:10; Brazil-2/3; Chile- 85:15). Certain exceptions apply for high ranking officers and technical experts when there is evidence of lack of expertise in the particular jurisdiction. This is very important for smaller companies expanding abroad. • » Immigration : The types of visas required to render services in the host country will depend on the nature and duration of the assignment. For instance, if a company deploys an expatriate to Brazil to carry out duties as an “administrator”, “officer” or “representative” of a Brazilian corporation, the employer must secure a permanent employment permit (“visto permanente do trabalho”) as opposed to a temporary employment visa (“visto temporário do trabalho”). Assignments of less than 6 months are typically handled through business visas.

10. Pre-Assignment Issues (cont...) • »Some jurisdictions require documentation and formalities for foreign workers beyond work/entry permits or visas. For instance, in Chile, if an expatriate’s employment agreement is executed outside Chilean territory, the parties must sign it before an authorized Chilean diplomatic agent or consulate. If it is executed in Chile, the contract must be signed before a Notary Public. • » Chile and Brazil condition the grant of temporary work visas to the execution of an individual employment contract between the local legal entity and the expatriate/assignee . • » In some instances, expatriates and all accompanying family members must undergo physical examinations before departing from the home country. These requirements are generally specified by the host country and may include immunizations.

11. Key Questions Relative to the Assignment Period • »What law regulates employer and employee rights and obligations during the expatriate assignment? • Given the broad and liberal definitions of key concepts like “employment contract”, “employee”, “employer”, as well as the territorial application of Labor Law, employers should operate on the premise that host country laws will apply in the event of a dispute between the parties. • » Can “choice-of-forum” or “choice of laws” provisions in expatriate LOUs, secondment agreements and other documents effectively preempt the host country’s social protection and severance pay statutes? • No, especially in regard to legally mandated benefits, definition of “just cause” for dismissal, minimum wage, 13th salary/Christmas bonuses, hours of work, days of rest, overtime pay, and profit sharing (when legally mandated). However, special contractual provisions, including choice of law, will be enforceable with respect to non-mandatory and discretionary employer benefits. These encompass most of the voluntary benefits provided by employer expatriation policies (e.g., hardship allowance, home disposition assistance, rental benefits, repatriation allowances, completion bonuses, etc.)

12. Key Questions Relative to the Assignment Period (continued...) • »Are “split-payroll” arrangements permissible for expatriates throughout Latin American countries? • Generally yes. These arrangements allow multi-national corporations to reconcile their internal expatriate compensation practices with the need for compliance with local legal requirements (labor, tax and social security). In these arrangements, employers designate a nominal portion of pay and benefits as host country source income, while managing the bulk of financial and payroll obligations through their ordinary expatriate payroll system. • » Can employers leverage agreements to prevent or minimize the prospects of an expatriate’s attempts to “double-dip” or selectively invoke the better protections of two legal systems? • Yes, so long as those contractual provisions and “offsets” do not infringe the host country’s minimum labor standards.

13. Key Questions Related to the Expatriate’s Termination of Assignment • » Termination of expatriate assignments can occur due to: • (a) expiration or completion of the expatriate assignment • (i.e., expiration by its own terms); • (b) early termination by the employer due for economic reasons • and/or factors unrelated to the expatriate’s conduct or performance; • (c) early termination by the employer due to misconduct, poor • performance or other causes attributable to the expatriate or assignee; • (d) early termination by the expatriate (via voluntary resignation); • (e) early termination by the expatriate (via invocation of a just cause • for rescission of the employment relationship, or an allegation of • constructive/indirect dismissal). Inevitably, the termination of an expatriate’s assignment raises the question of severance liability under the host country’s labor law.

14. Severance Liability In the Host Country? An Expensive Proposition... • » Virtually all Latin American labor codes require that the employer prove just cause to terminate an individual employment contract, otherwise the employee will be entitled to statutory severance. • » Severance liability is typically calculated using a statutory formula based on the employee’s seniority (“antigüedad”), an advance notice period (or pay in lieu thereof), the employee’s most recent salary, and liquidation of accrued benefits. • » In using the individual’s salary as one of the bases for severance calculation, the concept of salary encompasses not just the base compensation, but in many countries it may also include the value of fringe benefits and other “in kind” forms of remuneration. This is in some countries referred to as “integrated salary” (“salario integrado”) or salary “in kind” (“salario en especie”). • » As a general rule, all employment periods that an employee has worked for companies of the “same economic group” are added to determine the employee’s total service period. In light of the factors used to calculate severance, and the generous elements that make up expatriate compensation packages, the potential liability for an employer in early termination scenarios can be significant .

15. Recommendations for Enforceable and Cost-Effective Expatriate Arrangements in Latin American Countries • »Due diligence in the pre-assignment phase should include a “worse case scenario” economic calculation (i.e. cost of early termination without cause premised on application of host country labor law); • » Draft assignment-related agreements with a view to prevent the prospects of an expatriate’s “double-dipping” or selectively invoking the best of two legal systems. Contractual provisions should in no event offer less protection than that afforded by the host country’s minimum labor standards. • »If your client considers expatriating an employee from one Latin American country to another within the region, compare statutory protections to determine whether a transfer makes more economic sense than a standard expatriate arrangement. • » Under no circumstance should the employee begin rendering services in the host country until the appropriate work visa or permit has been obtained.

16. Appendix 1Approximate Costs and Time for Issuance of Work Visas in Select Latin American Countries