When hiring international remote team members, failure to follow compliance requirements is one of the most common hurdles businesses face. It makes sense; if you've never hired staff in a particular country, learning all the legal ins and outs is daunting.
However, making these types of errors when hiring remote workers can have serious consequences for your business, resulting in hefty penalties, reputational harm, and legal headaches.
By successfully navigating global employment's most common compliance mistakes you can position your business to unlock new markets, attract top talent, and drive a sustainable global expansion.
Key takeaways:
- Failing to comply with international employment laws can result in multiple legal issues.
- Permanent Establishment (PE) can trigger unexpected tax liabilities for businesses hiring internationally.
- Failure to comply with international data privacy laws like GDPR can result in penalties and reputational damage.
Tax & Payroll Errors
Running payroll and managing taxes for international employees can be tricky, especially if you're hiring in a new country for the first time.
There can be a steep learning curve for mastering the local laws governing tax and payroll regulations, and if you get it wrong, it can result in severe financial and legal penalties. Your company's reputation might also take a hit.
One of the most significant challenges of global payroll is paying employees in different currencies.
Say you're an EU company paying an employee in another EU country. It should be pretty straightforward since you both use the Euro.
But when paying a worker in a country that operates on a different currency, constantly shifting exchange rates can make it challenging to ensure you're paying them accurately.
It can get even murkier when it comes to taxes. Every country has different tax rates and mandatory withholdings you must make on behalf of your international employees for programs like social security and healthcare.
Taxes even come into play when paying contractors. While you don't have to worry about making tax withholdings — that's on them — you do need to provide international contractors with relevant tax documents, such as a W-9 form for contractors based in the U.S. so they can file their taxes.
If you get payroll and taxes wrong it can result in significant fines and other serious penalties for your business.
Failure to Follow Local Labor Laws
Each country has its own set of regulations that govern virtually every aspect of the employer-employee relationship. These laws dictate not only the basics like minimum wage and working hours, but also cover:
- Leave entitlements like vacation time, public holidays, sick leave, and parental leave
- Contractual obligations such as employment contracts and probationary periods
- Termination procedures that outline proper grounds for dismissal, notice periods, and severance pay
- Privacy regulations regarding the collection, storage, and processing of employee data
- Anti-discrimination laws that govern various factors such as gender, race, religion, age, sexual orientation, and disability
For example, in many countries — like France — there is no at-will employment, meaning you may only terminate employees under certain conditions, such as for serious misconduct.
Non-compliance with these local regulations can have serious repercussions for your company.
Worker Misclassification
Accurately classifying workers as employees or independent contractors is fundamental to maintaining compliance. However, since the criteria for classification vary widely across international borders, mistakes can lead to costly misclassification issues, including legal challenges and back taxes.
In the United States, worker classification is often determined by the IRS common law rule, which assesses whether an employer has control over both the tasks a worker performs and the manner in which they perform them.
In addition, many states, such as California, impose their own regulations on top of that, adding another layer of complexity to worker classification.
Similarly, the U.K. has its own framework for determining worker classification, guided by factors such as mutuality of obligation. This concept assesses whether an employer is required to provide wages or other forms of remuneration and whether the worker is obligated to personally perform their duties or provide their specific skills.
While specific criteria differ, the extent to which the company controls how work is performed, how the worker is paid, and contractual details all impact worker classification.
If a worker is misclassified as an independent contractor when they should legally be considered an employee, the employer may be liable for:
- Back taxes, including payroll taxes, social security contributions, and income tax withholding
- Penalties and interest for failing to comply with tax and labor laws
- Benefits owed, including payment for benefits like health insurance, retirement contributions, and paid time off
- Legal claims from workers seeking compensation for benefits and protections they didn't receive
- Reputational damage, as misclassification, can be viewed as an attempt to circumvent labor laws and exploit workers
Triggering Permanent Establishment
When expanding your business globally, it's crucial to be aware of the potential risk of creating what's known as a Permanent Establishment (PE).
Essentially, PE is a concept in international tax law that refers to a fixed place of business through which a company conducts significant commercial activities in a foreign country.
By hiring local employees, officials might determine that your business created a permanent establishment. In that case, your company may be subject to corporate income taxes and other legal obligations in that country.
PE can be triggered by various factors, such as:
- Having a fixed place of business, like an office
- Local employees with the authority to sign contracts on behalf of your company
- Providing services in a country on an ongoing basis, even without a physical office
The penalties for unknowingly creating PE can be substantial.
If a local tax authority determines that your company has PE in their country you may be obligated to pay taxes, including back taxes, on any local revenue generated. Your company might even face periodic compliance audits moving forward.
Violating Data & Privacy Laws
Data breaches pose a significant threat to businesses worldwide. Failure to protect sensitive employee and customer information can result in significant financial penalties, reputational damage, and legal repercussions.
For example, international data privacy laws like the General Data Protection Regulation (GDPR) apply to all companies processing the data of individuals in the European Union, regardless of the company's location.
Not only that, some countries within the EU have additional privacy laws. Germany, for instance, enforces its own Federal Data Protection Act (BDSG) along with the requirements of the GDPR.
It's asking a lot of your HR team to become instant experts on cybersecurity, including international data security and privacy laws. And without outside help, your company risks running afoul of violating these regulations.
EORs Help Mitigate Global Compliance Errors
As we've explained, differences in tax regulations, labor laws, and data privacy requirements can make it challenging to manage a global team.
One way to avoid the compliance risks of international hiring is by working with an Employer of Record (EOR) like RemoFirst.
We act as the legal employer of your remote workforce, assuming responsibility for risk management and maintaining compliance.
RemoFirst manages:
- Tax withholdings, social security contributions, and payroll
- Compliance with local labor laws governing minimum wage, working hours, employee benefits, and termination
- Correctly classifying workers as employees or independent contractors according to the specific requirements of each country
- Adherence to complex data protection laws like GDPR and CCPA
- Avoiding triggering permanent establishment status
Book a demo today to learn more about how RemoFirst can enable your company to compliantly employ workers in 180+ countries and manage and pay contractors in 150+ countries.
