Tip Of The Month: Common Pitfalls To Avoid When Drafting Global Compensation Plans (February 2010)

Paying employees on a commission basis is commonly accepted as a good way to increase sales of a product or service – in the United States. Outside the U.S., commission plans are far more problematic. What is perfectly legal in the U.S. simply won't pass muster under the invasive labor laws of many other countries. A company that decides to simply roll out a compensation plan across borders in other countries without first ensuring that it complies with local labor laws may find out too late that key aspects of the plan are void or unenforceable.

One Plan Or Many?

It is often tempting for a multinational company to try to harmonize the laws of several different jurisdictions and arrive at a uniform companywide commission plan that can be utilized across the globe. However, while clearly an admirable goal, the idea rarely works in practice. Too often, the changes required to make a key provision acceptable under one country's laws make it unlawful in another country, or imposing those changes in other countries is simply too burdensome.

Mandatory Home Country Provisions

Despite a U.S. multinational's preference to have the law that it is most comfortable with apply (for instance, the State where it is headquartered) and despite the fact that U.S. law, with its relatively laissez faire approach, is generally more employer-friendly than most other countries' labor and employment laws, a U.S. choice of law clause will generally be considered void. Under the Rome Convention of 1980, which governs the choice of law of a European employment relationship, the choice of law will generally be deemed to be the country in which the employee habitually performs his or her work— irrespective of the choice of law specified in the commission plan. The same result will obtain in almost all countries outside Europe.

Many U.S. employers also use compensation plans as an opportunity to insert a provision whereby employees agree to submit any claim to binding arbitration. However, arbitration is a totally foreign concept in many jurisdictions, especially in the labor context. In all but a handful of jurisdictions, a multinational organization will find that an arbitration agreement to govern employment disputes will be unenforceable. In Italy, for example, where 99% of employees are subject to one of several industry-wide collective bargaining agreements, an arbitration agreement will only be permissible if it is provided for in the applicable collective...