TriNet PeopleForceX San Francisco Bay Area—HR Considerations in Global Expansion

David Haraburda: My name is David Haraburda. This is Kate Kozak. So I mentioned, if we take a quick poll of the room, I'd love to know: Who's looking seed series A for fund investment? Good. Venture capital firms looking for that investment now? Any other startups? Beautiful. Beautiful.

Our conversation this evening with Peter is going to go over global expansion. Right. So as you kind of build out your business in the United States, as you look to go internationally, what are some of the best practices you should have? So, Peter, I'll lead it off with you in the questioning. What is the current environment out there and what is the role of HR as we look out for an international expansion strategy?

Peter Kadison: Before I give all the answers, let me also ask the, audience, how many have current international employees, if at all? Okay. So few. How many are thinking about having or expanding abroad or accessing global markets? Okay. Few more. All right. I think in my 14 years here at Vistra, what I've seen is an evolution. And that is, if some of you remember, the seminal book by Thomas Friedman, “The World Is Flat.”

So, you know, with technology, it's so much easier to access global markets and access a global workforce. So what we find, we're a global accounting firm. We're in 50 countries. We work with clients across the spectrum and we have found an evolution over the past few years, day of clients accessing global markets sooner. And nobody's developing their products any more for, you know, for a domestic market.

And then surely, as we saw right up through Covid, accessing a global workforce, you know, where there's vast pools of labor, you know, Eastern Europe with programmers and certainly support functions, in India and other low-cost places. so that evolution is happening sooner and sooner.

David: Can we talk about some of the nuances that you run into as you think to, you know, from a cultural aspect, entering into certain countries and how HR is really going to affect that, you know, as you kind of begin to set up your entity from a cultural.

Peter: Yeah, I mean, I'll, I'll share some of the challenges we had at Vistra. So we're 9,000 employees and we now have fully a thousand employees in India. We struggled initially because what we found in local market in India was that employees were very prone to leaving for slight increases in pay. They were very sensitive to things like titles and very similar to Silicon Valley here, work environment. So if you come to our, facility in Mumbai, you'll see things that are very familiar to a San Francisco worker. Ping pong tables, you know, fully equipped, you know, kitchens, real sense of, sensitivity to holidays, and variable work.

And that was another big evolution with Covid. I found that our colleagues in Mumbai didn't enjoy their commute, you know, going to hours across town any more than we do here in the Bay Area.

Peter: So the whole process of enabling remote laptops, you know, and being compliant with data security. So just being, you know, very sensitive to local norms for us has created a facility that now has, you know, really state of the art, service metrics and very low turnover.

David: Well, I think we, you know, that begs the question, if we were to zoom out a little bit, right, what is a good criteria for country selection?

Peter: So, it's interesting that this is going through a big evolution, because one of the big trends we've seen in my tenure has been somewhat of a decoupling of U.S. and China. So probably in the first, you know, half dozen years, we were doing, you know, a wholly, full-foreign-owned entity, a WFOE, a month now, we probably did one last year, but we're seeing a huge amount of activity throughout the rest of Asia.

So while the U.S. and China is, subject to some trade tensions, intra-Asia trade remains robust and China is obviously established as a major economy now. So, you know, we're seeing a lot of, of U.S. companies looking to source labor and, and support functions in countries adjacent to China. And primary, beneficiaries are places like Vietnam. To put it crudely, it’s a little bit like Mexico to Asia, you know, it's low-cost assembly. India obviously is known for its support functions in Singapore, with, with modern, infrastructure and, you know, employment laws and so on is a real source of capital. And you know, headquarters staff.

David: I guess when we come from a tactical perspective, as you begin to look out across the global economy, right, what are the best assets that are out there currently from a country perspective? Or who is the most, I should say, forgiving?

Peter: Yeah. Well, let's, let's sort options there first, because the elephant in the room for everybody here is usually starting with the independent contractor relationship. And a lot of that, it's very low cost. It's very, very quick. And there's a perception of lower risk because you're not entered into a direct employment relationship. However, many of the dynamics that you know, any of the HR folks here, you know, experience in the states are going to be very similar.

Has it gone on more than six months? Are they under your direction and control? And they walking around with a laptop and a business card? Do they have the authority to bind the firm? Are they engaged in commercial matters? Do they have other clients? And have you captured this relationship in a formal written document? If not, then there could be potential liabilities there because all they have to do is go to the local authorities.

And you could be subject as an employer to all kinds of national health care and pension and, back pay and so on and so forth. in various regions, this option has become very popular in Latin America and Eastern Europe. Employees want to be paid in dollars and also there's some tax advantages. So the problem also that that accrues whether you're engaged in independent contractor or we'll talk about formal employment, payroll options shortly is what we call permanent establishment risk.

So the friction you've got is accessing the global employer on the one hand, and then local tax authorities on the warpath looking for revenue and happy to pursue a U.S. tech company that might have attributed profits to the operations that are, you know, giving rise in their country.

David: I guess, you know, double click on that as we go further, if you transition from, you know, a contractor, right. And you're going to go from a need like say for an EU solution.

Peter: Yep. Right.

David: And then you go ahead and then we're talking about global payroll as well as creating an entity.

Peter: Right.

David: What is I guess from a very high level, what is some of the nuance that we should be thinking about?

Peter: So this is a positive development for everyone here that's looking to explore local labor markets. There's been the rise of a very similar, I'm a veteran of the PEO industry in the U.S. and an alumni of TriNet. So in the United States, the industry is known as PEO or professional employer organization. When I started, there were there were nuances under law. It wasn't clear in the U.S. how this would work for one case under ERISA, you know, for employer match or stock options under FASBE. And that's all been resolved law in the U.S. when you leave the U.S. borders, it is become, a very popular solution because you have a compliant payroll, you're running a payroll similar to an arrangement domestically with TriNet through a third-party entity.

And so that increases the substance, in terms of the ability to run a proper payroll. And it's attractive to local governments because they want foreign capital, they want good, you know, knowledge base jobs. And they also want the employee to enjoy the benefits of national health care, etc. Where you run into problems is if that relationship, similar to the independent contractor relationship, evolves into a more material operation.

So typically, and the problem here is that these are all gray areas. So it becomes a risk judgment on your part. Three to five employees and beyond, you know, do you constitute having a permanent establishment. Have you taken office space? Have you opened up a bank account? Most of all, do you have commercial relationships where you're generating revenue?

I've been on the phone with clients and they say, you know, not much; $5 million a month—$5 million a month is going to get a local tax authority excited about whether or not you've registered to do business. So the key there is, in terms of evolution, the economics of the employer of record model don't scale in the sense that once you establish an entity order of magnitude, you know, you're talking about, say, to be generous, $300 to $500 per employee per month to run an employer of record payroll.

You're talking about $25 per employee per month to run a payroll. So the cost to have compliance, to establish the entity and to manage your affairs in a truly compliant manner become outweighed. And the pendulum swings to you may as well go ahead and register to have the entity, because then what you're going to get is legal immunity. If you are sued in that country, the lawsuit stops at that local entity. It doesn't transfer back to the U.S. parent. So that's a huge advantage.

David:
Yeah, that makes sense. Makes sense I guess understanding, you know, as we're kind of moving here towards the end, when we think about, you know, and our initial strategy for outreach, country selection, obviously the contractor, EOR, right to entity creation, what else should we be thinking about from a construct as we kind of look at building our business right through Vistra?

Peter: So, I mean, I just go back to your original question. You know, the typical questions, clients coming, you know, so what are local tax rates? You know, there is also, we've seen this with the Inflation Reduction Act here in the U.S. where there are significant government subsidies associated with, you know, investment and various, you know, lines, you know, clean tech type investments.

And this is now, being adopted all over the world. So there are free trade zone type arrangements. So one thing you're going to definitely want to explore, if you're looking at a region you know, you're going to want to find, you know, modern infrastructure, low tax. But could you take advantage of shielding future profits by taking advantage of a government program. And these are being you know, this is an ever changing landscape. But it really can be material to use.

David: Where is that coming to the forefront now? Where should we be paying attention for?

Peter: Well, so some of this is going to be related to, you know, what is your line of business? And because, you know, like during Covid, we discovered that we imported, you know, 90% of our penicillin because it was the cheapest way to manufacture penicillin. Nowadays, that's over. So what you want is access to markets. So typically, what clients are going to do is they're going to try to find a way to become adjacent to a potential market. So that means you're going to probably set up in Europe. You're going to place set up in Latin America. You probably set up in Asia so that you have access to local markets without this long, you know, distribution network.

David: No. Understood. I guess as we kind of close, I mean, what else should we be thinking about as, as we enter in, you know, for those out here thinking about a strategy of developing an international workforce?

Peter: Okay, so now, I was lectured by our HR team. There's one thing I can't leave this podium without telling you guys. And that is, you know, we so often see U.S. companies use offer letters. You have to have a locally compliant employment contract in the U.S. Some of you may be familiar with the concept called at will employment. It means as an employer, you can decide that you want to fire somebody because you know, you don't want to continue that role, that does not exist outside of the U.S. if you do not have a locally compliant, employment contract, it means that your offer letter will be subject to employment law, which is highly favorable to local employees, most of whom have access to free legal resources.

So first, have a locally compliant employment contract. And then second, treat all terminations with tremendous care because you could end up with really serious severance implications as a result of that, many times a multiple year salary might be, you know, assessed.

David: Interesting. That's very interesting. I'll open it up to, to the group here. If there any other questions that we have for myself or Peter? You kind of think about it. You know, we're happy to take a question and see if there's one out there. otherwise, we can kind of leave, you know, your closing remarks, and kind of send us a send us home.

Peter: No quick question over here. Is there any effort internationally to kind of merge all of these requirements and, yes. So if you, if you want to, get smoke coming out of the back of your browser type in “BEPS base erosion profit shifting.” So under the OECD, there's a movement to have a, and some of you may have heard of this, a global alternative minimum tax.

So the idea is that, you know, whether you, you have substance in a country or not, if you have customers in a country that there would be a local tax would be available. So that's on the tax side. you know, harmonizing air, rules and regulations is, is also regional as well. So in the EU, for example, a couple of years ago, there's a data protection act. So and that that fundamentally and permanently changed the way U.S. companies operate, you know, in Europe. And there's just a multitude of, regulations like that.

All right. Well, don't be dissuaded, because, you know, what you'll find is, there's customers everywhere, and there's highly productive employees available for you as well.

David: Terrific. I, I know it was quick and brief, but really appreciate your partnership. Everything we're kind of doing together, I think there's a lot more that we think about here from a TriNet perspective, as we as we look internationally to grow our business. And really proud to have this role on board.

Peter: Thank you David. Thanks, everyone.