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6 Compliance Mistakes to Avoid When Hiring International Workers

Category: EMPLOYMENT, IMMIGRATION & WORK PERMITS, PAYROLL & TAX

Venturing into the international talent marketplace can give your company access to skilled employees anywhere in the world. While it is not as simple as employing at home, the process is manageable as long as you have the right information and in-country resources to assist you.

Surveys of multinational companies that hire international employees show that their number one concern is compliance with local laws and regulations. The reasons are evident, as non-compliance can mean employee complaints, legal claims and fines or penalties. In extreme cases, a company can be prohibited from hiring and doing business in the future.

If you are wondering how authorities can realistically monitor foreign employers, most non-compliance actions probably arise from either employee complaints or unexpected government audits of the local entity.

To help you avoid this outcome, we have put together a list of the six most common compliance mistakes when hiring internationally.

1. Misclassifying your worker’s employment status

It is tempting when first hiring abroad to simply engage the worker as an independent contractor, and thus avoid the entire burden of meeting employment regulations. That is possible, especially for short-term work projects, but you have to be aware of the risk of misclassification, where your contractor is actually a formal employee under local criteria.

For example, if you pay the worker a fixed amount at regular intervals, provide work equipment, and control their time and work methods, they will likely be deemed an employee (or they could claim to be). What this would mean is that your company would owe past due contributions, unpaid benefits, and potential fines.

2. Violating the host country’s employment and contract laws

Every country has distinct employment and labor laws, that may be more or less stringent than in your home country. Examples include notice periods for termination, a compliant employment contract (in the local language), over-restrictive non-competition clauses, and other rules designed to protect employee rights.

As a foreign employer, you will want to know the specific regulations as the local employee would be favored in any dispute or claim.

3. Not offering statutory entitlements and benefits

Statutory entitlements and benefits can vary greatly among countries, and at times can add up to 50% to overall compensation costs. However, these costs cannot be avoided where the social structure of a country relies on employer-provided entitlements and benefits to support employees.

You may be familiar with benefits like health insurance and vacation leave, but you might be surprised by mandatory pension contributions or multi-month, fully paid maternity leave. Until you know how entitlements and benefits are calculated, you can’t really make an accurate job offer, and you can be certain that the employee will know the customary entitlements in their own country.

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4. Running payroll incorrectly or failing to make required withholdings or contributions

To employ internationally, you will need to run a local payroll, because you can’t just put the employee on your home payroll. Trying to understand a foreign contribution list and payslip will illustrate just how complex and involved that can be. If you make the wrong calculation or omit a contribution it can affect the employee’s take home pay and social security benefits or pension funds.

Even if you can manage the recruitment and hiring stages with foreign employees, running a compliant payroll will prove to be difficult if you’re doing it on your own.

5. Not meeting immigration and visa requirements

If your employees are expats, then it is your responsibility to make sure they have the right work visa or resident permit. Even if it is their choice to reside abroad and work remotely, as the legal employer you have to comply with all local immigration rules. This includes sponsoring their visa with a legal entity inside the country, a task you will likely want to outsource to a third party.

An expat employee working on a tourist or standard business visa will be out of compliance immediately and could face deportation or fines if discovered. As the employer, you would also be at fault and subject to penalties.

6. Triggering permanent establishment

Permanent establishment (PE) is triggered when a foreign company has a business presence in the country that leads to corporate taxation. Criteria for PE will depend on the nature of the activity and duration, but in general is limited to cases where employees create direct, local revenue, or if you have set up a physical office space.

This may be less of a risk when hiring remote employees who are not interacting with the local economy, but you should be aware that countries are expanding their PE criteria to increase tax revenue from foreign corporations.

How to Stay Compliant When Hiring Overseas

There are concrete methods for avoiding compliance issues without having to do all the research and time that it entails. Here is an overview of the primary choices;

Incorporate a local entity

If your company has other business plans in a country other than just hiring remote workers, it can be worthwhile to set up your own corporate entity. You would have to hire legal and accounting specialists and perhaps outsource the payroll, but it’s a viable option when hiring multiple employees in a single location.

Use a third-party business partner

Companies that are already doing business overseas may have vendors/suppliers who would be willing to put your local employee on their own payroll. This is probably best for an interim solution as you are relying on another business to administer compliant employment for your employees.

GEO employer of record solution (EOR)

Another solution is to use a GEO local ‘employer of record’ in the host country, that is already set up and ready to run payroll for any number of employees. The advantages of an employer of record over other methods are numerous:

Runs a locally compliant payroll and is familiar with all employment and labor regulations
Can draft an employment contract that meets host country labor standards
Employees can be hired quickly, often within a week or two after recruitment
Stays current on legislative developments that affect employment, tax, and immigration
Can sponsor work visas for expat employees
Saves the HR department the task of employment administration, so you can focus on employee management and productivity

Do you have more questions about hiring employees internationally?

Whether it is your first time to consider hiring abroad, or if you already have remote employees working in foreign countries, you might have more questions such as:

How flexible is the GEO solution if an employee has to be terminated? Is there a minimum duration for employing with an EOR?

Is it possible to secure intellectual property rights through an EOR, or do we need a direct NDA with the employee?

When does the EOR give our company the monthly calculations for payroll, so we can remit it in time?

Our clients never have to worry about compliance when hiring internationally, as we use the best in-country experts and EORs available, with constant oversight by our regional account managers. We make international employment simple.

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