Employment compliance is crucial for any organization, from SMBs to large enterprises. When hiring employees in different jurisdictions, however, ensuring that all employment-related compliance requirements are met becomes increasingly difficult.
There are numerous pitfalls businesses need to avoid when hiring employees internationally. Employment law compliance might be the first challenge to come to mind, but there are many other factors organizations should take into account.
Multinationals with globally distributed teams face the same compliance challenges as small businesses with a local workforce. The only difference is that the complexities grow bigger with every new geography and that global employment brings about additional hurdles and legal risks.
When hiring employees abroad, employment compliance entails:
Employment law compliance
Compliant employment contracts
Compliance with payroll laws and compensation rules
Tax compliance (regarding both payroll taxes and corporate taxes)
Compliance with data protection regulations
Work visas and permits
Complying with labor laws is crucial for any business that hires employees—otherwise, the organization risks costly lawsuits and issues with the labor authorities. When hiring employees in different countries, employment law compliance reaches a new level of complexity.
Labor laws and regulations differ from one country to the next, which means that HR practices and terms of employment like standard working hours, leave entitlements, and other statutory benefits must be adjusted to the specific rules of each jurisdiction. What’s more, employment legislation changes all the time, which means that the HR and legal teams need to stay up to date with legal changes in all of the organization's geographies.
A written employment contract outlines the key terms of employment and forms the legal basis for the employment relationship. When it comes to global employment, however, drafting a legally valid employment agreement can be a real challenge.
Every country has different rules as to which elements need to be included in the document, what language the contract needs to be in, and what additional clauses it should contain. Last but not least, the organization needs to decide if it wants to opt for a “choice of law”-clause, under which the applicable law can be different to the law of the country where the employee resides.
From compensation requirements for overtime to how often and in which currency employees must be paid, payroll and everything related to employee compensation is highly regulated. Making sure that the rules and regulations regarding payroll are met is therefore an essential part of global employment compliance.
Furthermore, businesses have to make sure that their payroll set-up is compliant on all levels. Different options for running and managing payroll for international employees are global payroll solutions, a non-residential payroll set-up as a foreign employer, or even a shadow payroll for employees on international assignments.
Tax compliance in global employment first and foremost refers to managing payroll taxes correctly, i. e. ensuring that the right amount of income tax and social security contributions are paid to the authorities on time. It also entails classifying workers correctly to avoid employee misclassification, which can result in back taxes and other financial penalties.
But hiring employees abroad also creates new tax-related compliance challenges for organizations. Unless employees are hired under a local legal entity, cross-border employment always poses permanent establishment risks, which means that the organization risks becoming liable for paying corporate income tax in the employee’s country of residence—among other financial and legal consequences.
Employers have a legal responsibility to safeguard employee information, especially highly sensitive information like payroll data. Data protection is regulated by international frameworks such as GDPR as well as by the rules imposed by each country.
Since businesses with an international workforce collect, store and transfer employee information across different geographies, they have to comply with all the different rules and requirements. And fines for non-compliance can be high.
Remote employee relocation, international assignments, business trips… Whenever employees work from a different country, they need to obtain the required visas and permits. For short-term stays abroad, getting the necessary permits can be as easy as obtaining a remote work visa.
For longer stays, however, they usually require not only a visa which allows them to stay in the country for the required amount of time, but also an additional permit with which they are allowed to work during their stay. And it is the employer’s responsibility to make sure all the visas and permits are obtained before the employee travels abroad. Otherwise, the organization risks fines and immigration penalties.
The Lano Academy is for informational purposes only and should not be construed as legal advice. Lano Software GmbH disclaims any liability for any actions you take or refrain from taking based on the content contained in this article.
BECOME A PARTNER
© Lano Software GmbH 2023