While a global contingent workforce may be an extension of a company’s internal workforce for all practical purposes, legally, it is a separate and distinct group of nonemployees. That can create a number of obstacles for employers, particularly when the contingent workers are located outside the United States. One of those obstacles concerns how to address equity compensation.
Cross-border equity grants—meaning equity grants that are issued to those outside of the United States —are often complicated because the kinds of equity that exist in the United States may not exist under another country’s tax and securities laws. Local laws may require:
- a prospectus;
- registration of an equity plan;
- annual reporting on equity grants; or
- tax withholding at a different cadence than would be done in the United States.
To complicate things further, U.S. employers typically engage their international contingent workers through a local employer of record (EOR). There is no legal basis for an EOR to act on employer’s behalf for the purpose of providing equity compensation (e.g., make equity grants from a client’s equity plan) or accept an equity grant in order to transfer it to one of its employees.
Employers seeking to incentivize their global contingent workforces may want to take into account these obstacles in their planning and find alternative solutions. One potential option involves the issuance of phantom equity awards, which are cash awards designed to mimic equity awards in the absence of stock ownership. Like equity awards, they can include vesting conditions. But unlike equity awards, once the conditions are satisfied, the recipient receives cash rather than equity. The cash value may be tied to the company’s stock price or a predetermined amount. The potential downside of such an arrangement is that the issuance of the cash award generally creates a taxable event. Therefore, the recipient must be employed at the time the phantom equity award becomes payable so that the employer of record can withhold taxes and other social contributions.
Ogletree Deakins’ Cross-Border Practice Group will continue to monitor and report on developments with respect to compensation, incentives, and other issues that may impact employers with contingent employees working outside the United States and will post updates to the firm’s Cross-Border blog as additional information becomes available. Important information for employers is also available via the firm’s webinar and podcast programs.