PLAYROLL BLOG

Insights into global expansion & employee retention

Published: March 25, 2022

Common Compliance Mistakes You Don’t Wanna Be Making

Navigating foreign HR compliance can be tricky, and one mistake can result in a hefty fine, reputational damage, or time behind bars. Common compliance mistakes can result from not being prepared, such as incorrectly classifying employees or making errors regarding taxes.
Common HR Compliance Mistake

Everyone is guilty of making mistakes now and again, but when an error can cost you a six-figure fine and sometimes behind bars, it errs kind of a big problem. 

The prospect of hiring internationally can be fun and games until foreign compliance comes into play. When a company expands internationally, there are loads of room for mistakes, especially with ever-changing international laws.

One of the areas that can be a pain in you know what is compliance which requires HR gurus and CEOs to stay on their toes about the latest knowledge and legal know-how needed to expand internally successfully. Aside from the hefty fine and trip downtown, non-compliance can significantly damage a company’s reputation and send major red flags to stakeholders, investors, and clients. 

Common Compliance Mistakes:

Overlooking the Effort

Expanding internationally sure does have its benefits, but it is not for the faint-hearted. Companies must be prepared for slow processes, in-person trips, specific standards, and the overall time frame, which in some cases can be more than a year.

In addition, each country has its laws and regulations, and as a company looking to find a home, it is your job to keep up to date with this. Here, having local insight from accountants and lawyers comes in handy and has a hefty price tag. Awareness of cultural norms and business practices is also vital. 

Taxes 

Again, tax regulations differ from country to country, which can be a tricky path to navigate, especially on foreign grounds. For example, some companies may be double taxed, meaning you will be made to pay tax in your residing country and the country you are expanding into. In addition, income tax employee benefits have to be in order before you begin onboarding new talent.

But, again, it is challenging to keep your finger on the tax pulse as regulations differ significantly from country to country, and there is no such thing as a one-size-fits-all solution. 

Understanding all these varying requirements is essential not to break any rules or risk hefty penalties.

Employee misclassification

Many global companies make the mistake of classifying their foreign talent as independent contractors instead of permanent employees. As a result, their contracts are drafted to be pretty general, leave out employee benefits, and are commonly not in accordance with their country-specific employment laws.

While many companies’ independent contractor classification is a cheaper alternative to hiring permanent employees,  the compliance risks of worker misclassification far outweigh any potential savings.

Here are a few examples of penalties that could be incurred by employee misclassification:

  • In Canada, if and when a contractor eventually becomes an employee, the company may need to fork out income tax and health care contributions from when the employee was first hired until they were re-classified.  
  • In Germany, unpaid employee benefits and company taxes can result in penalties of up to 40% of gross salary for up to four years.
  • In Australia, a fine of over $25,000 (USD) can be incurred per incident of misclassification, plus backdated pay and benefits.
  • In Brazil, unpaid employer costs can be from 26.8% to 28.8%, depending on the company’s core business.

A simple way to avoid non-compliance

We mentioned earlier that expanding internationally is not for the faint-hearted, and it sure is a good thing that our hearts are not faint! In all the above scenarios, it would have been highly possible for companies to have avoided the hassle and expense resulting from non-compliance. How? Duh, hire an Employer of Record Partner (EOR).

Companies can leave the legal and compliance issues to experts rather than risk floating employees, tax backlash, or engaging misclassified independent contractors. Our game plan ensures that you expand legally, successfully, and ethically without too many added expenses and responsibilities.

We partner with growing companies by providing HR and payroll management of local employees through established legal entities. As your partner, it will be up to us to ensure that all employment, tax, and benefits laws are followed.

Did you breathe a sigh of relief? Good! Book a demo today to find out more. 

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