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How to Pay Your Foreign Employees: A Guide for US Employers

US employers that are either expanding abroad or hiring remote employees will be entering an entirely new context of foreign employment regulations.  Even the most experienced HR department will be challenged to prepare for the potentially vast differences from US labor laws. 

This guide will address the basic questions a US employer will have before hiring a foreign employee, and the types of obligations that must be met in a foreign location.

What is the difference between employees on assignment vs foreign employees?

There is a long history of US companies assigning their employees overseas to fill technical, management, and project roles.  That practice is still common but is now complemented by a trend in hiring local resident employees in foreign countries.  These foreign employees may be part of a remote team or will be filling an active role locally to expand and support business activity. 

Foreign employment laws apply equally to local residents and expats, but the foreign country will have a greater interest in ensuring their own citizens are receiving all employment entitlements and benefits.  There may even be special tax rates or lower social contributions for expats, but resident employees will need to be treated on par with other employed citizens in the country. It will depend on the company’s specific needs and location of hire when evaluating the pros and cons of placing an employee on assignment vs hiring foreign employees.

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Can foreign employees be put on US payroll?

A US employer could try to put a foreign employee on the US payroll, otherwise known as running a ‘remote payroll’.  At first, this looks like an easy solution, but the problem is that the foreign employee does not have any connection to the US such as an ID card, social security number or W-4 form, which creates a US tax compliance issue.  A remote payroll might work for a US expat, but it presents a real dilemma with a foreign employee.

The other hurdle with remote payrolls is that some countries prohibit them all together for their citizens, as there is no way for the foreign country to withhold their own taxes or social contributions.  However, there are some countries that have special laws allowing remote payrolls where the foreign employer has to make local social contributions just as if they were running payroll in the country.

What are the employer’s obligations in the foreign employee’s country?

To be completely in compliance, a US employer will have to find a way to run payroll in the foreign country, so that the employee will be on an equal footing with other domestic employees.  In other words, the US employer has to fulfill the exact same obligations as any employer in the foreign country, and usually, it must be done without any real presence or local HR staff to assist.  Those obligations include:

  • Calculating and withholding employee income tax
  • Withholding/paying both employee and employer shares of social contributions (just like payroll tax in the US)
  • Providing workplace pension contributions where required
  • Offering health and medical coverage
  • Meeting workplace health and safety guidelines
  • Adhering to notice periods for termination and making severance payments

For example, an Australian employee receives a mandatory quarterly pension (superannuation) contribution from the employer equal to 10% of salary, and in the UK, employers and employees must contribute 3% and 5% respectively to a workplace pension

In India, allowances and reimbursements for transportation, medical and house rental are all at least partially tax exempt, which must be reflected in payroll, so the employee is not taxed unnecessarily.

How do US employers pay overseas employees?

There are two primary ways to legally pay foreign employees overseas: 1) set up and incorporate a legal entity or 2) use a GEO service with a local employer of record. (Some companies choose to hire foreign workers as contractors, but that strategy is more suited for shorter, project-based roles).

Set up a legal entity

If a US company has a commitment to a country for business reasons and is staffing operations with multiple employees, they can justify incorporating their own entity.  However, the cost and time involved make this less practical for local hiring purposes alone.

Use a GEO employer of record service

When hiring foreign employees, a GEO service provides a local employer of record (EOR), that is already set up and prepared to run a legal payroll and meet all employment obligations.  This relieves the HR department of trying to manage the process from overseas and offers a quick and cost-effective solution for hiring one or more foreign employees in their own country.

Client Case: Paying employees in the Philippines using an employer of record

We have a US client with foreign employees in the Philippines, and recently we notified them of a change in employer contributions to the Philippine Health Insurance Corporation.  There were two staggered rate increases over a twelve-month period that changed the monthly employer contribution by over 20%, and we advised them of the effective dates and exact rates applied.

This is one good example of how a GEO service assists US employers in staying compliant with changes in employment regulations in foreign countries.  The local EOR is constantly monitoring all payroll rules and rate changes, and then forwarding that information to ensure timely and accurate payment.

Do you need more information about paying your foreign employees?

If you are new to hiring abroad you might have more questions about paying foreign employees, such as:

Can a foreign employee be compensated with an award of company stock options, just like a US employee? 

Does a US company use their own employment contract when hiring foreign employees, or is there another template that meets foreign requirements? 

How does a US employer arrive at a salary amount for foreign employees, and which currency is used?

These are the types of issues encountered by US employers that hire foreign employees, and we assist our clients in finding the best solutions possible, to remain 100% in compliance abroad.  We make international employment simple.

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The information in this article is subject to changes in local legislation.

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