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Considering the Ethics of Hiring in Lower-Cost Locations

Setting compensation is something every employer has to consider and the decisions they make ultimately affect everyone they will go on to hire. This makes deciding how to approach compensation complicated no matter the makeup of your team, but with more companies embracing remote-friendly policies and expanding their hiring pool internationally, the layers of complexity naturally increase. In an effort to unpack all the competing arguments and intersecting elements, our Journalist, Bree Caggiati, is sharing a seven-part article series on Compensation for Global Teams.

Now that we’ve covered the main tenets of compensating overseas employees, including unpacking the major compensation philosophies, I wanted to give some more space to some of the surrounding issues too. Things like the community impact of foreign employment, bias and discrimination, and navigating international jurisdiction and compliance.

There are countless benefits of employing a global team, but that doesn’t mean there aren’t also potential issues, particularly when hiring in lower-cost locations. In this article, I’ll be talking through some of the impacts globalization has had on smaller economies worldwide and attempt to add my thoughts on the ethics of multinational corporations hiring in lower-cost countries. 

Hiring international employees to save costs

As I’ve covered elsewhere in this series, there are a host of benefits for hiring overseas employees. Many employers are looking for on the ground experts as they enter new markets, others are wanting to create local teams for their international entities or fill in timezone blocks so that they can service clients worldwide. International teams foster diverse cultures with unique perspectives, thinking, and skills.

Hiring internationally also grants access to different markets, which for Western companies can mean lower cost employment.

Now, it’s not news that for-profit companies are interested in cost-saving and I don’t think this is fundamentally unethical in and of itself. But I am interested in dissecting how the choice to hire from lower-cost labor markets could allow for unethical practices. Particularly in how it so closely connects to ideas around globalization, power dynamics, discrimination, or bias in the workplace.

While I don’t think cost is always the reason employers choose to hire internationally, I’m curious whether this can be discounted entirely, particularly in instances where Western companies hire exclusively from emerging markets or outsource entire departments. And wonder whether the impact on local communities, industries, and the inbuilt power disparity in these circumstances should be more significant in discussions around compensation at large. 

How varying cost of living creates a disparity in employee experience  

Often companies who pay a global rate to all employees regardless of their location do so with the intention of equality. This desire to pay all employees equally definitely showcases that there are more than just cost considerations when hiring internationally. But what is the social impact of paying US salaries in lower-cost markets?

“The question is if you pay people much better than the local rates available for other work in that area, are you being a bad citizen? A bad corporate citizen?” ponders bethanye McKinney Blount, the Founder, and CEO of Compaas, a compensation software, and consultancy firm.  

“I actually think that there’s a lot of complexity that comes with flooding wealth into an area. When you think about having a global rate no matter what, you have somebody who is making a lot more than they could get paid anywhere else locally.” 

While having a high-paying job is generally argued to be a good thing in most communities, bethanye suggests that it can also come with some challenges. 

“You have a couple of things going on. You have a team of people where one person has a very disproportionate life experience from everybody else who has the same role. They have the same performance, the same tenure, but because this person makes a lot of money compared to the local rate and they live in an inexpensive area. They’ve got four horses and six cars while somebody else lives in a little apartment,” she says. 

“That creates a weird tension that we need to think about. Because we need to focus on how to build companies or groups of people, and how to help groups of people be better together.” 

While this argument certainly has merit, I feel it holds more weight when comparing towns or cities within the same country—for example, comparing NYC to Atlanta or Houston. Mostly because I think there is potentially a greater expectation (warranted or not) that your lived experiences will be more similar than if your colleagues reside all over the world, for example, in Sydney, Calgary, Singapore, and Mexico City. In this instance, there is already some expectation that lived experiences will differ.  

“But the other thing is that [person] can never quit. Even if [they’re] miserable, even if [they] hate [their] job, even if [they don’t] like what [they’re] doing. [They] can’t leave,” bethanye says. “That also creates a bad dynamic because if we feel trapped in any way, we just don’t do our best work. [They’re] unhappy, and the company’s not happy. That golden handcuffs thing can be a problem.”

Shield GEO co-founder and Director Tim Burgess argues that the tension can extend beyond the organization into their local community as well.

“I think if we go into a community where there’s a big income disparity and say, ‘I’m going to pay somebody $75,000 US dollars a year to do customer support in this community. And that’s three times as much as you get to be a brain surgeon. And it’s five times as much as you get to be a doctor or a lawyer, and it’s 20 times as much as you get to be a teacher. Then what does it mean for that society?” he says.

“What’s the impact that you have on it? You make one person really rich, and maybe that money trickles down, maybe it filters through, and they spend it in the community, and it lifts up the community, but you don’t really know.”

This example calls to mind failed foreign aid interventions where non-profits, government bodies or aid organizations attempt to improve communities by funding development projects but often fail to gain community buy-in or spend enough time researching. Subsequently, the project often fails to meet a genuine need. 

For example, there have been projects that focus on educating women and providing them with work opportunities that then lead to increases in domestic abuse rates. By concentrating on one aspect of the issue (educating women) and failing to realize or understand local power dynamics that would put women in danger, these projects lack sustainability and the power to incite real change. 

How foreign companies can affect local markets

Perhaps the most pervasive is the impact on the local industry. When larger companies move into newer markets and choose to maintain US practices like benefits, health care, and US salaries, this can fundamentally change how that market operates. 

“An easy example to understand is dental and vision insurance,” says Ed Cha, the Senior Vice President and Global Benefits and Property & Casualty Practice Leader at ABD Insurance and Financial Services. “[These are] extremely common in the US, and not so common in most other countries. But now because US multinationals have moved in, they’re saying, ‘Well, we offer dental and vision in the US we want to offer in the UK and in Singapore and other countries too.'”

This desire for a global standard often comes from a good place. Companies want to make all things equal but can end up accidentally setting the precedence for unwanted change. 

“Just from my viewpoint, the US pushed dental and vision in the UK and Singapore, where it wasn’t as prevalent. But now, insurers and markets are catching up and saying, ‘You know what, you have to add this if you want to be competitive,'” Ed says. “So it’s very interesting to see those changes that are driven by globalization.”

The consequences of this are two-fold. On the one hand, employees are now more likely to receive a greater span of benefits which is obviously a positive for them. But on the other, local businesses are now required to add more to their offering if they want to compete with the larger foreign companies entering their market. 

Lawyer and Founder of All Remotely, a remote work consulting firm, Bhagyashree Pancholy, adds that these pressures can mean local companies struggle to keep up, often unsuccessfully, with many going out of business. 

“In certain large cities of India, many people are working for these [multinational companies], and the local companies are dying down. They’re being forced to shift into smaller cities and ultimately into rural areas where they don’t have access to skilled people, especially in technology,” she says. “And the government’s pumping in a lot of money to revive those economies. But you can have all the money in the world, but unless you have the skilled labor to work, there’s no point. This is happening in India.”

These examples are particularly problematic as remote work advocates have continued to state access to worldwide talent as one of the significant benefits of remote work. In some cases, we can see that this access only extends to those already in privileged positions and not those in communities that are already disadvantaged.

It’s here that I see a lot of merit in localizing compensation. By offering salaries and benefits at a similar rate to small businesses in the area, foreign companies compete on a more even playing field. They, therefore, have a lower impact on the communities they’re entering for their own profit. 

The emergence of government regulation for remote work

While I’ve clearly argued that understanding a company’s impact on international markets is essential, I’m not entirely convinced the responsibility should lay solely on employers. This is mostly because I don’t know that all employers have the skillset to determine their impact, particularly when it moves into more social and development areas rather than solely economic. 

But what other options are there? Bhagyashree makes a case for global regulation. 

“The remote industry is such an unregulated industry,” she says.  

“But some changes are coming. I know Sweden is drafting to control this industry where they are looking to build up to something like what Australia has done, where unless you [can show] that you don’t have enough skilled people in the local market, you can’t outsource those jobs. I think governments should regulate this because there is a lot of noncompliance at this point.”

More regulation could mean stricter guidelines on what is acceptable when running international organizations. However, it’s unlikely to address all the grey areas of ethical debates. 

Misclassification risks when hiring employees as contractors

There are, of course, already regulatory guidelines for many areas of employment. One crucial area that relates here is the classification of employees. 

For the most part, in this series, I’ve been speaking about full-time employment. Still, in many cases, to avoid international hiring complexities, organizations will opt to bring on their overseas team as independent contractors. 

There are some genuine reasons to bring on contractors. It allows for flexibility, low commitment, and, of course, a lower cost. It’s perfect for short-term projects or when you are looking for a specific skill that you may not have time to build up in an employee. However, in instances where the contractors function as employees, organizations are at risk of misclassification, often leading to fines and back pay (including insurance, tax, and social contributions) depending on the local requirements. 

“If you hire people on your team, who are from your country as remote employees and people who are outside your country as independent contractors, you could be attracting penalties,” Bhagyashree says.

At Shield, we frequently help companies transition from hiring their international team as independent contractors to full-time employees. For the most part, hiring contractors isn’t sinister, or intentionally discriminatory — it’s simply a product of ease. We know establishing local entities everywhere you want to hire a new employee is impractical, time-consuming, and cost-intensive. However, the alternative, as we’ve seen, comes with its own risks. This is why we recommend utilizing an Employer of Record Service when hiring overseas so you can employ your team compliantly without the hassle.   

To illustrate this point, Bhagyashee shared an instance where a company contracted a man in India who was under the impression he was a fully-fledged employee. 

“He was working for a certain remote company for the last seven years, and he got the  [COVID-19] virus,” she says. “So then his wife, who was a lawyer, reached out to the company and said that, ‘My husband has got the virus, here are his medical bills. Can you provide us with compensation or whatever your plan is for medical insurance?’ And that’s when the company replied, saying, ‘Hey, your husband’s an independent contractor. He’s not our employee.'”

She fought the case, and the court ruled that the company was misclassifying their employee as a contractor. 

“On the contract, fine, it’s certain that you are onboarded as an independent contractor,” Bhagyashree says. “But the court did say that this is misclassifying. For the last seven years, you were calling them a team member. You paid for his computers and hardware. If he was an independent contractor, why would you do that? The person was working eight hours a day for you, you were giving him performance reviews, promotional ruling — you don’t do that to an independent contractor. And you were bringing him to all these conferences, team retreats, and everything. Which contractor goes on a team retreat?”

Misclassification cases often lead to considerable payouts in fines, fees, and back pay from the employer. 

“So it’s just a matter of a few dollars now to employ them properly or a lot of dollars later with the potential bad name attached too,” Bhagyashree says.

Bhagyashree sees employing contractors overseas as an unethical loophole that allows employers to hire talent for much less than their in-country colleagues. 

“In the Philippines, I know there is a certain Australian company that’s hiring for three dollars an hour, which is insanely inhumane. They would never find somebody who would work for three dollars an hour in Australia. They have the Philippines for that. They have Vietnam for that. And the same thing for India,” she says. “India was the hub of development roles because they would hire skilled English speaking developers, at less than half the cost of what they would hire in their native country.”

While she admits individuals in India seem mostly happy with the arrangements as they benefit from the exchange rate, she does see this beginning to change. 

“Some people are very happy with no perks, no benefits. They are happy with their salaries. They say that we are still earning enough, we can buy our own insurance plans. We still want to work with an American company and get paid in dollars,'” she says.  

“Now there’s another class that is emerging, and I think over time will become the larger proportion of remote workers. They are starting to demand benefits and less discrimination. So even though it may not be discrimination for color, race or sex or ethnicity, salary discrimination is truly prevalent in remote teams.”

Bhagyashree says it’s not always a matter of bringing this to your employers’ attention. 

“There’s this case from South Africa where a lady tried to do that, and she was just let off. So, the company is still more powerful than independent contractors,” she says. 

“The funny thing about remote companies is that you are always replaceable. When they’re hiring globally, there are 50 clones of you with your skill set, experience, and fluency in English. Everything could be replicated 50 times. I think that’s one of the downsides that people don’t discuss.”

Staying mindful of our global impact

In this article, I’ve laid out some of the potential ways hiring overseas could include unethical practices. By no means is this an exhaustive list, nor are these practices exclusive to international hires. It’s simply meant to help us think more thoroughly about our collective actions when we enter new countries for employment. 

I do believe globalization has, for the most part, been a force of good. It’s led to incredibly diverse, multinational teams and immense learning opportunities. I think we’re better when we’re exposed to different ways of thinking and operating and can only hope this exchange of knowledge, wealth, and opportunity only becomes more equitable as we move into our shared future.

We all have a responsibility to be mindful of the potential impact we can have on the individuals we hire as well as their larger community, and it’s this mindfulness I wanted to highlight through this article series. 

 

— Bree Caggiati

 

Looking for more information on paying remote employees? Catch up with the rest of the compensation series!

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