Manage Your Global HR Compliance Risk

HR plays a pivotal, binary role in global HR risk management

Companies have embraced comprehensive, transparent, enterprise-wide compliance and ethics programs for several years now, emanating from regulatory requirements and the desire to reduce corporate litigation exposure. However, HR is still not always adequately represented in the corporate compliance structure.

Multinationals are increasingly centralizing the HR function globally. When HR is not at the table, it may be due to a lack of appreciation from senior management for the nuances of global HR compliance and the pitfalls of non-compliance (financial, reputational, or both). Global HR compliance can be challenging, so it’s important to educate the C-Suite on how to navigate international employment and benefits, employee classification, HR policies and handbooks, expatriate programs, payroll, collective bargaining agreements, compensation plans and global equity arrangements. Since people are fundamental to managing risk – and they are a source of risk – HR plays a dual role in global HR risk management.

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Set up a global HR compliance review (Fig 9)

Achieving clarity on the existing plans, programs, policies and procedures, as well as extraterritorial rules and regulations is helpful in aligning HR strategy to business strategy. It also facilitates due diligence for the next M&A deal. Establishing a regular practice of HR compliance reviews helps avoid the risks of expensive penalties, fees and costly lawsuits arising from alleged non-compliance.

A relevant finding from the 2018 American Benefits Council and Aon Study on Global Benefits Governance and Operations is that most companies aim to achieve best practice global governance by 2021.

Best practice in global governance broadly includes:

Defined strategies and policies to manage important risks.
Global and local responsibilities for executing strategies.
Ready access to information to identify misalignments with policies.
Insights into local costs, risks and opportunities to prioritize actions.
Regular monitoring of reports of risk and emerging risks to aid decision-making.

A global HR compliance review is a useful tool for ensuring proper training is in place for ethics, bribery and insider trading. Likewise, reviewing the organization’s cultural training, orientation, recruiting and performance management helps to ensure that organizational values and beliefs are shared globally to sustain the ongoing success of the business.

Not all global HR compliance reviews look the same

To determine the right scope for the organization, consider:

Geographical markets.
Departments and functions within HR, such as benefits, employment and employee classification, labor, HR policies and handbooks, payroll, compensation and training.
Objectives for the review.

For example, if the objectives for the review relate to a forthcoming spin-off of a multinational division to become a stand-alone company, the approach may entail identifying HR interdependencies, employment and employee transfer issues, existing total rewards programs by region. If the business is in each region of the globe, perhaps a comprehensive review every four to five years makes sense. The scope or timing may need to be adjusted if there is a significant change in the global HR program or a compelling business reason.

Conducting a comprehensive review initially helps to document all HR programs and potentially generates efficiencies for future reviews by focusing solely on changes to:

The plans and programs.
The local or extraterritorial laws and regulations affecting such plans and programs.
The processes for administering the plans and programs.
Talent who administer such plans and programs.

Case studies

Most employers initially think in terms of their total rewards plans when considering global operational compliance reviews. Below are a few examples of recent projects that represent the diverse scope of global HR compliance reviews. It should be noted that these reviews are generally conducted under confidentiality agreements and attorney-client privilege.

M&A integration

Aon was hired to support the integration of a multi-country, global pharmaceutical company that had been acquired by another multinational global pharmaceutical company. As part of the discovery phase of the project, Aon was tasked with creating an inventory of global HR and payroll policies, processes and delivery infrastructure. After analyzing the data, Aon developed a gap analysis of key processes, along with recommendations and prioritization of action steps to ensure compliance, risk management and business continuity. The analysis was then supported by the North American HR leader with project management and execution of these recommendations leading up to day one. Aon’s assistance aided in a seamless integration, by establishing a clear set of guiding principles and expectations for managing the integration across all HR functional areas. The process also established an effective day-one HR and payroll operating model as well as a centralized repository of the company’s policies and processes to facilitate ongoing compliance and adherence to the company’s code of conduct.

Gender pay equity compliance studies

Aon was engaged by several global companies to conduct reviews of compensation programs in the countries where they operated. The reviews were designed to assess compliance with country-specific discrimination laws, including “adverse treatment discrimination” – known as “direct discrimination” in Europe – and “disparate impact” discrimination – known as “indirect discrimination” in Europe. Since each jurisdiction imposes its own list of protected groups or traits, compliance can be a challenge. Aon was engaged to help a multinational, Asian technology company undertake an equal-pay compliance review in the company’s UK operations. The purpose of the review was to determine if there were any underlying equal-pay issues relative to gender and ethnicity. Following the review, strong governance policies were put in place to mitigate the equal-pay risks.

Aon’s approach to conducting equal- pay reviews in the UK is grounded in UK legislation that prohibits any less favorable treatment between men and women in terms of pay and conditions of employment, the approach recommended by the Equality and Human Rights Commission as presented in its Equal Pay Statutory Code of Practice. Aon added its proprietary risk-based methodology to the review, resulting in an analysis that enabled the client to be in a strong position to further interrogate the data if required.

Compliance studies focused on compliance with a specific issue or particular law

An industrial conglomerate based in Germany with manufacturing, service and sales operations around the globe had subsidiaries in more than two dozen countries with decentralized HR operations. Each such subsidiary sponsored one or more country- specific “retirement savings” plans. Aon was engaged to conduct a broad review of HR operations and over the course of discussions regarding such HR operations, client headquarters staff were surprised to learn of their exposure under a U.S. tax law, the Foreign Account Tax Compliance Act (FATCA). HR had assumed that FATCA might be a concern for the finance and risk operations but not for programs within the HR function. We were engaged to conduct a global compliance project that included aiding the client in understanding the rules, developing an inventory of all of the client’s plans organized by country, identifying the characteristics of each plan as relevant to the FATCA exemption(s) available in that country, and facilitating the documentation for exemption status of each. Our expertise enabled us to help communicate effectively with both local HR and local service providers to obtain the information essential to expeditiously and successfully meet the objectives of the compliance project.

Selecting external resources

Hiring a qualified, independent global firm, under attorney-client privilege, protects the findings, increases the review’s credibility, employs the right skillset for the review, helps ensure review independence and maximizes efficiencies by minimizing disruption to the global HR team. Further, since global companies may lack expertise in all countries or operate on a decentralized basis, using a firm with the appropriate global experience and local knowledge is critical. Vetting the organization that will conduct the review is crucial, considering what’s at stake.

The process is straightforward and includes:

Gathering data specific to countries covered by the scope and reward plan documents such as broad-based and executive compensation programs (including equity and non-equity incentives), HR policies and handbooks, employment agreements, codes of conduct, expatriate programs, collective agreements, and scripted and other HR communications.
Identifying the country-specific HRIS and other HR systems.
Reviewing all data to identify risks and gaps with applicable laws, international corporate policies and employment agreements.
Conducting interviews with all local HR talent to confirm understanding of the plans and programs as well as processes.

Identifying areas of non-compliance and inefficient processes.
Assessing impact of non-compliance and recommend possible resolution strategies.
Meeting with senior global leadership to identify and agree on resolution strategies.
Implementing resolution strategies.
Establishing a monitoring program for areas of concern.

Benefits of HR compliance reviews

Depending on the scope, the outcomes from global HR compliance reviews can be quite varied. In some cases, significant areas of non-compliance are identified that help the business make corrections and avoid fines prior to government investigations and lawsuits. Direct and indirect benefits of such reviews can also include significant financing and cost reductions through de- risking, harmonization of programs by country, other changes in plan design and – very importantly – reputational protection. In some cases, the results are quantifiable in the form of improved processes that eliminate duplication of efforts. Less quantifiable outcomes such as HR representatives who are better informed about the global business and their role in improving risk management may also result.

Summary

With more companies emphasizing the need for global governance, drafting and implementing a corporate-wide HR compliance review strategy is well timed. Proactive HR risk management solutions are typically far less costly than utilizing a “wait-and-see” approach and may even improve an organization’s public image, which is good for the company’s equity. Delaying until a compliance concern is discovered by an employee, former employee or a regulator will negatively impact the business. When management and HR mutually appreciate that global compliance reviews are designed to inform, educate and improve processes, rather than redundancy exercises or fault-finding missions, everyone wins. Employees are more engaged, and the company is better positioned to influence change, improve processes and positively address issue resolution.

Margaret M. Doyle
Associate Partner
Aon Strategic Advisory
[email protected]