Whether expanding to new global markets, seeking to improve workforce
efficiencies or casting a wider net in the talent pool, companies today are
increasingly faced with the question of how to pay international employees.
It’s a good problem to have, but the solution isn’t as simple as submitting a
money transfer.
That’s because depending on where in the world workers are located, and what
kind of work they do, they’d likely fall under government regulations and
employment laws that wouldn’t necessarily be covered in an international money
transfer.
How does international employment affect payroll?
In a word: compliance. Having workers in different countries requires
knowledge of local employment laws. Every country has its own regulations for
things like wages, pay schedules, taxes and withholdings, and employee
classification—both for local citizens and expats working remotely in the
country. If an organization fails to comply with local regulations, there
could be repercussions for the company and the employee, including:
- Back payment on taxes, salary, insurance or retirement plan contributions
- Penalties and fees
- Jail time
Even if an organization has every intention of being compliant when paying
international employees, if it’s not versed in the nuances of a particular
country’s labor laws, there is risk. The key is to make sure pay is in
accordance with the employment model being used—the most common being
independent contractors, direct hire through entity establishment, and an employer of record like Global Employment Outsourcing.
Let’s take a closer look at how compliance affects each model of paying international employees.
Independent contractors—a common slippery slope
Many organizations often think the easiest way for paying employees abroad is
to engage them as independent contractors. And in many cases, particularly for
short-term, project-based assignments, it is. However, the ease of engaging
and paying independent contractors is often what leads many organizations down
the slippery slope of noncompliance.
How so? As companies start relying more on independent contractors, the nature
and scope of contractors’ work can start looking more and more like that of
employees’. And if the local government views them as employees, the
organization is at risk of misclassification and noncompliance of local laws
governing taxes, salary and benefits.
Additionally, it’s important to think about the effect that direct payments to
independent contractors through foreign exchanges can have on an
organization’s payroll operations. For example, how much will off-cycle
payments to contractors cost the payroll staff in time and the company in
exchange fees?
A good rule of thumb is: If independent contractors are treated as if they’re
part of an employer-employee relationship, a company is flirting with
noncompliance. Here are some criteria to be aware of that could potentially
turn an independent contractor into a full-fledged employee in the eyes of the
local government:
- Contractor is paid for time worked rather than per project
- Company tools or resources are used to complete a job
- Contractor only provides services to one company and does so for an extended period
- Company manages the day-to-day work of contractor
If any of these criteria are met, it’s a good idea to reassess whether paying
workers as independent contractors is still the best course of action for the
organization.
Paying international employees as direct hires
When learning how to pay international employees, the opposite end of the
spectrum from independent contractors is direct hires. For an organization to
hire international employees directly, it must first have a legal entity
established in the country where the employees are located. Once the entity is
up and running, and employment/employee ready, paying employees abroad becomes
part of the company’s normal payroll operations.
Establishing an entity in a country and becoming employment/employee is a
substantial investment in time and money. Depending on the country, there are
rules and requirements for functions like banking, insurance, taxes, HR
expertise, facilities and contracts, and each has its own timeline that’s
often out of the organization’s control. And after the initial costs of
setting up the entity, there are, of course, costs associated with maintaining
the entity.
Because of the commitment involved with establishing an entity, it’s important
to evaluate how the costs and time stack up against a business’ strategic
goals: Does the need for an entity to directly pay employees in the country
outweigh the costs and time required to establish the entity?
It’s also important to remember that although establishing an entity in a
country gives a company a way to legally pay international workers, it is not
without risk. Obtaining local legal expertise helps ensure compliance for
things like salary, pay cycle, benefits, taxes and withholdings.
Another way to gain local expertise when operating your own entities is to
outsource payroll to a global managed provider. This type of service not only helps ensure payroll compliance, it can also benefit the company as a whole by providing valuable comprehensive data on workforce spend.
Global Employment Outsourcing is often the right balance
A third approach for paying international employees, a middle ground of sorts,
is an employer of record like Global Employment Outsourcing (GEO), sometimes
referred to as the international PEO or global PEO model.
With this approach, companies can outsource employees internationally without
having to set up a legal entity in the country where the workers located. The
employer of record handles payroll for the in-country employees, and company
only has to worry about managing employees’ day-to-day work.
GEO is less risky than using independent contractors because legal
responsibility for complying with all the payroll and employment laws in the
country shifts to the employer of record. The company no longer has to worry
that it is misclassifying independent contractors because the employer of
record assumes the risk—no more slippery slope.
GEO is also less costly—in both money and time—than establishing an entity in
a country.
- The only monetary cost to the company is the fee associated with the employer of record service, a fraction of the expense required for setting up a legal entity in a country.
- The time cost is cut extensively with GEO, because, depending on the country, employees can be onboarded and on payroll in as little as two weeks.
With a decrease in the risks and costs associated with hiring and paying
international employees, organizations gain flexibility for strategic planning
and growth. A company can scale, growing its presence in some international
markets and testing other markets, without worrying about the complexities
associated with entity establishment and independent contractors.
So, how to pay international employees? Compliantly, of course
When weighing which direction to take for paying your international employees,
the most important thing is to make sure all bases are covered when it comes
to complying with local employment laws.
If you choose to pay workers through the independent contractor route, keep
misclassification in mind and keep close tabs on how contractors’ work is
treated in comparison to employees’ work. Payment via money transfer over a
prolonged period for a misclassified employee is asking for trouble.
If you choose to pay international employees directly through an entity,
obtain the guidance of a local expert on payroll laws. Or, consider enlisting
the services of a Global Managed Payroll
provider for in-country expertise.
If you choose to outsource payment to international employees through an
employer of record, make sure the provider can ensure compliance of all local
payroll and employment laws in all the countries you’re eyeing for strategic
growth.
Want to learn more about how GEO can help ensure payroll compliance in over
179 countries? Contact us today.
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