Here, we’re unpacking the most important compliance topics for global employers, and some best practices for keeping their compliance efforts on track while they expand:
- Worker classification
- International labor law
- Permanent establishment
- Relocation, visas and work permits
- Accurate, timely payment of international workers
Employee or independent contractor? Why worker classification is critical for global employers
The first step in building a compliant global business starts at home, long before you post your first remote job ad, and it’s all about the type of workers you’re looking for. Employing and contracting come with very different sets of compliance priorities. For example, are some of the obligations that businesses bear when they employ foreigners, but not when they hire independent contractors:
- Tax contributions
- Benefits (both statutory and in-kind)
- Sick pay
- Material and resources for carrying out the work
Understandably, many global businesses prefer to work on an independent or B2B basis with foreign talent, in order to avoid these costs. Independent contractors can also be highly effective for businesses who need to expand quickly, or test whether a market is viable before they go all in. But because of the potential for fraud and mistreatment, regulators pay close attention to how global businesses classify workers in their countries – and punish any employer who doesn’t work within the rules. To make matters more complex, those rules vary widely from country to country. So, companies hiring in multiple jurisdictions cannot rely on a one-size-fits-all policy, which we’ll get to in a little bit.
Looking ahead: expect more regulation, not less
The US Department of Labor and IRS have ramped up their collaborative efforts on this front, and advised businesses to implement internal assessments of worker classifications to avoid scrutiny. For more detailed advice on global employee classification, check out our guide for payroll officers.
Navigating the shifting sands of international labor law
Classification is just the beginning. Each country has its own labor laws and regulations governing issues like tax, leave and termination. Global employers cannot afford to leave any stone unturned when it comes to assessing their obligations, risks and costs in each country where they want to hire.
Labor law is a vast, messy subject – a can of worms too big to open fully here. Suffice it to say that when it comes to hiring internationally, what you don’t know can certainly hurt you. Here are just a few examples of legal provisions that global employers should be aware of:
Special employee protections
For example, several countries have followed France in establishing a “right to disconnect” in their labor codes. This gives employees the right to unplug and not handle communications or tasks outside of work hours.
Paid parental leave
Countries vary a great deal when it comes to statutory leave provisions. Leave for parents exemplifies this perhaps better than any other form of leave. Bulgaria leads the world at 58.6 weeks of paid maternity leave, with Sweden allowing 34.2 weeks for both parents.
Mandatory payroll costs: salaries may be just the tip of the iceberg
One of the benefits of global hiring – for businesses and workers alike – is the potential for both to “win” on salary arbitrage. Companies in developed economies can hire skilled teleworkers in developing markets with a lower cost of living, and, all things being equal, a lower cost to company. But when all things are not equal, this gets much more complex.
For example, the average salary of a software developer in Brazil is much lower than the average salary of an equally qualified professional in the United States. But hiring in Brazil comes with hefty additional costs in the form of payroll taxes and other contributions that can evaporate the costs saved on salaries.
There’s much more to be said on this topic, and the landscape is evolving continually. Open up a Playroll Country Playbook to get the rundown on a wide range of countries and how to compliantly hire their remote-ready workforce.
Establishing a legal, taxable presence: is it always necessary to put down roots?
Most countries require foreign businesses to establish legal entities on the ground before they can start hiring citizens as employees. This can take various forms:
- Subsidiaries are the most expensive type of entity to set up, but they’re also the most appropriate for companies who plan to have a long-term presence in a foreign territory. As a legal entity, this is separate to its parent company. This means that a global business is not automatically liable for the actions of its overseas subsidiary.
- Branches are easier and less expensive to set up than subsidiaries, but their parent companies are fully liable for their conduct in the host country, which carries some risk. Profits that a branch generates are also taxable in the host country, and some countries limit the scope of a branch to sales and marketing only. Still, a branch may be a better option than a subsidiary for more short-term operations.
- Representative offices take the lowest level of commitment to set up, but they also offer the narrowest scope – typically only marketing activities. Nevertheless, they can be useful in promoting brand awareness through trade shows and networking events.
The question of whether to set up a local entity of any kind in a foreign country comes down to risk. Even a company with enough resources to deploy on a permanent establishment may be reticent about committing to a long-term presence in a new market they haven’t explored yet. This is where third-party organizations like Employers of Record and Professional Employment Organizations play a critical role. We’ll discuss those towards the end of this article.
Relocation: visas, permits, digital nomads
Relocation, temporary or permanent, presents another complex challenge for global employers. If an employee chooses to permanently relocate, and retain their job while working remotely, they will need a new employment contract subject to the tax regime where they intend to live. Thankfully, that doesn’t have to mean good-bye, but it does involve some compliance hurdles.
For short term visits, a tourist visa may be enough. Some countries allow foreigners to work remotely for up to 6 months without a work permit. A growing number of countries now offer digital nomad visas to attract remote workers. Longer term or indefinite stays require residency permits or work permits, which may require sponsorship from an employer.
For companies who wish to bring foreign workers into their own country to work for them, it may be necessary to first demonstrate that a suitable local candidate could not be found.
Global teams, global payroll: the challenges of paying an international team
Last, but certainly not least, global employment relies on having a global payroll solution to keep teams paid, on time, and in the right currencies. Late or inaccurate payments can attract fines and significant reputational damage. An international payroll needs to take account of the various contributions and obligations for each worker. This includes health insurance, social security, retirement contributions, bonuses and tax contributions (and more, depending on regulations in any given country).
Running an international payroll also exposes businesses to elevated risks with respect to data security and privacy. Employer records contain confidential personal data that is protected by legislation like the European Union’s General Data Protection Regulation (GDPR), and violating these protections – even unknowingly – can be costly. Hiring expensive in-house legal expertise is one option, but thankfully not the only one. As more and more global businesses have discovered, partnering with an Employer of Record provides the quickest and most cost effective way to maneuver around these and many other obstacles.
Explore the global talent pool with an international Employer of Record solution
Employers of Record (EOR) are purpose-built platforms that handle compliance legwork for globally expanding businesses. As a global EOR, Playroll enables its clients to hire and pay talent in over 170 countries, without the need for a permanent establishment, and with full legal compliance from day one.
Whether your goal is to stop losing great employees when they relocate, test the waters in a new market, or launch an ambitious global expansion plan, we’re ready to help you bring your vision to life. Set up an account and start exploring. It’s free, and the journey only starts when you’re ready.