As the popularity and demand for remote work rise, so does the opportunity for globally expanding companies to seek out and find a diverse and qualified team of remote workers dispersed worldwide. Employers are open to more than their local geographic areas when recruiting. They can benefit from casting a wide net in the search for candidates, especially if there is a local talent crunch.
With the opportunity to hire international employees globally, creating a diverse team comes the employer’s responsibility to abide by all employment laws carefully. This compliance requirement is applicable not only within their own country’s borders but in each country where they are recruiting employees. Compliance with complex and ever-changing laws can be difficult without legal experts in each of the countries where employees are located.
There are global employment options for employers to help with local employment law compliance. An Employer of Record (EOR) platform is an option, and it efficiently handles the liabilities of international employment and lowers your risk of non-compliance. Skuad's legal experts in each country can ensure the compliance of your global teams.
Independent contractor compliance is primarily about classifying your workers correctly. Contracting with contractors and paying their invoices for hours worked may be simple enough. Still, problems arise when local government authorities consider those workers to be payroll employees entitled to statutory benefits and the protections of the local labor laws.
Depending on the local laws, the penalties for misclassification may include the following:
- Liabilities for unpaid minimum wages
- Liabilities for overtime
- Compensation for unprovided benefits such as leave entitlements
- Being barred from doing business in the country
- Criminal prosecution for fraud
The potential for criminal prosecution for fraud increases if the government finds evidence to support the company deliberately misclassified employees as contractors to avoid the payment of minimum wage and other benefits or to get around the various labor law protections which often do not apply to contractors.
Differences Between Contractors and Employees
Independent contractors are business owners who own a service business providing labor to clients who pay invoices for the hours worked. Contractors pay their income taxes and have no taxes withheld or deductions made for programs such as social security, unemployment insurance, health insurance, and pensions.
It is often the case that employers pay into those programs with employer contributions and withhold income taxes for employees, depending on the specific local payroll tax laws. That is why independent contractors are not entitled to the same statutory benefits as employees.
Some countries' laws may explicitly define employee and employment arrangements and detail how the labor laws govern employees in employment arrangements. Other countries may need to be more precise, and the word employee may not be as explicitly defined. Case law, or judicial opinions resulting from legal challenges, may spell out the differences between employee and contractor.
In general, an independent contractor, as opposed to an employee:
- Provides a service for a client rather than performs work as part of an employment contract
- Chooses the price of the labor, where they will work, and when they will work
- Supplies their tools for the job, unlike an employee
- Is not supervised and is not penalized by anyone
- Can work for multiple clients concurrently
Suppose any of the above are not valid. In that case, a local government may find that an employment relationship exists and the employee is entitled to protections such as a minimum wage and should be given benefits such as leave entitlements, social security, and unemployment insurance.
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Violating Employment Laws
In most countries, some statutes govern how employers can hire workers. These employment laws, often called labor laws or labor codes, spell out the requirements employers must meet and how they can treat employees. The laws specify employees' rights and punishments for entities that violate those rights.
Among other specifications, labor rights may include:
- Statutory benefits such as leave entitlements
- A minimum wage
- Prohibitions of child labor
- Regular work hours and overtime compensation
- A list of national holidays and extra payment for working on holidays
- Termination protections, including dismissal prohibition for certain classes of employees, minimum notice, and severance pay
- The consequences of unfair dismissal or dismissal without cause
Employment Laws Around the World
Countries around the world have different laws governing employment within their borders. The laws extend to the remote employment of individuals by foreign companies. Some new laws even specifically govern remote work in the changing employment landscape of the post-pandemic world.
Employment laws may also differ by state, province, region, city, or territory. Territorial differences may be described using other terms. For example, in the United Arab Emirates, there may be legal differences between emirates on how employment matters are governed, such as employer-provided healthcare in some emirates but not others. To hire employees throughout the UAE, you must follow territorial laws in each area where employees reside. For instance, a nation in Europe will have its laws and may also abide by the regulations of the European Union on some matters.
Permanent Establishment Mismanagement
One of the issues you’ll face when employing internationally is a permanent establishment risk. A local government may consider your company a permanent establishment hiring employees in that country. A permanent establishment is liable for taxation, such as corporate taxes.
With tax treaties, an entity can hire employees across borders and evade double taxation, where a company pays taxes twice: once in the foreign country and again in the company’s home country. The company may also be subject to penalties and interest on the back taxes if a government considers the company a permanent establishment.
Partnering with an international employment solution such as an employer of record reduces the risk of a permanent establishment, as the Employer of Record is the legal employer of your employees on paper. Because you hire through the employer of record, your company does not have a legal presence in the country. The employer of record uses its local legal entity to hire.
Using an EOR to hire local employees only partially eliminates permanent establishment risk. It is imperative to seek tax guidance from local tax experts who can guide you on matters such as tax treaties and local laws involving permanent establishment risks.
Best Practices For International Hiring
Employment Law Compliance
Employment laws vary by nation, so if you are hiring workers internationally, you will need to understand the laws wherever you are hiring to stay compliant with those laws. The consequences of non-compliance may be expensive. Organizations can mitigate the risks by partnering with an employer of record to ensure compliance.
Hiring foreign independent contractors is possible with a contractor payment system offered by employers of record such as Skuad. Be sure not to classify and treat the contractors as if they were your employees and that there is no employment relationship. Otherwise, you may have misclassified the workers.
Partner With an Employer of Record
Partnering with an employer of record will alleviate some of the risks and liabilities of international hiring. An EOR takes on the risks and liabilities of hiring foreign employees and contractors by ensuring all labor laws are followed, compliant contracts are used, and all employees are appropriately classified based on local laws. Partnering with an employer of record is the best way to ensure international employment compliance.
Skuad – Your EOR For Global HR Compliance
Global HR compliance is an integral part of global employment. The consequences of non-compliance and the legal issues that may arise from not following local laws, rules, and regulations involved with hiring, employing, paying, and firing employees are too considerable and costly to ignore.
Compliance can be handled when you partner with an employer of record, such as Skuad. With the help of a global HR, you can be assured of compliance with labor laws, tax laws, employee classification, and payroll laws while avoiding permanent establishment risks.
Skuad can offer companies the following:
- Global HR compliance in each of the countries of your employees
- Employer of record for independent contractors with invoice payment
- Payroll software that accurately tracks hours and pays employees on time
Your company has enough to worry about when expanding globally. Leave the legal issues and global payroll compliance to a reputable Employer of Record, such as Skuad. To recruit the best and most talented employees worldwide, pay them on time, take care of taxes, administer benefits properly, and partner with an EOR. Get a demo to see how it works.