LAYOFFS IN ASIA DON'T HIKE BENEFIT COSTS, BUT COUNTRIES IN REGION GENERALLY REQUIRE GENEROUS SEVERANCE PAYPosted On: Oct. 4, 1998 12:00 AM CST
For U.S. companies with operations in Asia, the economic crises will mean generous severance benefits to workers those companies lay off.
Asian countries generally require employers to provide generous severance payments to laid-off workers.
Trimming a workforce will not lead to major increases in benefits costs, though.
Continuation of health benefits is the one area where companies face some benefit costs with layoffs, according to Asian benefit experts.
A growing trend for companies laying off workers is to keep the former worker enrolled in the company's health plan. Although the Asian countries have state-run health plans, many employers buy their employees supplemental health coverage. But Asian countries lack laws, such as COBRA in the United States, that require keeping a former worker in the plan. To prevent losing their extra coverage, employees sometimes ask their former employers to voluntarily keep them on health plans.
An employer that agrees generally keeps the employee on for three months and pays the premium, said Robert Wesselkamper, principal and senior vp at Sedgwick Noble Lowndes in Chicago. After that time, the employee can pay the premium for another three months but no longer, as the policies themselves generally prohibit an employee from remaining on the plan any longer. But an individual can generally purchase his or her own policy at a competitive rate, so "the need for continuation of coverage isn't there," he said.
Although providing the benefit is voluntary, it "has increasingly become a common practice to provide a better safety net in the current environment" and to improve employee relations, Krishen Mehta, partner with PwC Global HR Solutions in Tokyo, said in a written statement on this issue.
The real concern with businesses facing staff reductions is the severance payments laws. Except for Singapore, every major country in East Asia has laws mandating employers pay a lump-sum severance payment. The amount varies depending on the salary level of the employee and time of service. For example, in South Korea and Taiwan the law requires one month of salary for every year of service.
Severance payments are an added issue for U.S. companies looking to acquire local companies, as the selling company may not have set aside money for these payments. So, if a company needs to lay off workers, it may discover a large severance payment liability.
"That could be a significant financial problem for them," said John Edelman, area vp-international benefits group for Gallagher Benefit Services Division in Itasca, Ill.
Although the laws are well known to local attorneys and experts, some foreign companies do get hit with the unseen liability. "The people who come in and don't ask the experts can certainly get burned," said Roger Atkins, international consultant for Watson Wyatt Worldwide in Washington.
When the liability was discovered before the purchase, that has scuttled some purchases, consultants said.
In South Korea and Taiwan, where severance is required even when employees voluntarily leave, most companies have set aside reserves for payments, Mr. Atkins said. But in the other countries, such reserves are rare, and who will make the payments can be an issue in purchase negotiations. One solution is to make the seller lay off the people, make the severance payments, and then sell to the buyer.
Companies with operations in Asia, or those looking to buy a company in the region, must become familiar with the laws and understand their impact or else "shouldn't be in Asia doing business," Sedgwick's Mr. Wesselkamper said.
Beyond the issue of financial costs, companies in Asia are reluctant to lay off workers; it is contrary to the region's customs and may result in a black mark against the company in the minds of remaining workers, customers and the business community, Mr. Wesselkamper said.
"It's a gut-wrenching experience for that employer," he said.
So, despite the financial costs of severance payments, a "far greater issue is the cultural and human resource issues that remain," he said.
Another area of financial peril lies in employee contracts. In most Asian countries, employees generally work under a written employment agreement, which is sometimes embodied in a collective bargaining agreement. Because the agreements cover such areas as severance payments above the legally required levels or additional pension benefits, the potential acquiring company must read and understand such agressments, consultants said.
For a U.S. company seeking to buy an Asian firm, it's important to note that employment agreements are often not listed as liabilities on a company's books, so the purchaser must inquire about their existence and read and become familiar with them, Mr. Edelman said. If discovered, the buyer can request a lower purchase price or make the purchase only after the seller has settled the agreements, he said.
Mr. Edelman noted that in some countries, including South Korea, the law requires specific points included in any employment agreement, which, if missing, can trigger additional payments to the former worker.
Mr. Edelman advises that before beginning any layoffs, U.S. companies should consult with their financial, legal and human resource experts to determine the financial impact of the layoffs. That way, he said, they will know "what the total downside expense will be."