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5 Risks of Hiring International Talent Without a Local Employment Framework

Companies can risk severe consequences when employing workers internationally without a proper legal framework.

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In an increasingly interconnected world, the global talent pool is more accessible than ever.  For organisations looking to quickly employ workers internationally, they may be tempted to employ the overseas staff member without a legal employment framework in place.

However, companies can risk severe consequences including hefty fines, penalties and/or legal repercussions when functioning this way – and therefore employing via a proper legal framework is essential. An attractive option is Employer of Record – whereby the employee is engaged by a local employer who ensures absolute compliance with local laws and obligations.

Companies’ intent on quickly expanding abroad without setting up their own legal entity need to understand the laws and regulations around hiring foreign workers globally, and plan carefully to ensure compliance with the local laws.

We explore five possible pitfalls companies should be aware of when hiring workers internationally, and how an Employer of Record can make the process more compliant.

1. Improper Worker Classification

It is essential for employers to correctly classify and distinguish the differences between an independent contractor and a full or part-time employee, so that the interests of both the company and its workers are protected.

Independent Contractors are employed for short-term assignments and are self-employed.  An Independent Contractor is responsible for their own taxes, social security, health insurance, etc, and controls their job duties, rates, and hours.  However, an employee is a full or part-time worker with certain rights under the host country’s legal employment and labour laws, such as compensation, overtime pay, sick and vacation time.

Misclassification of workers is a serious and topical issue, and can result in organisations being taken to tribunal and fined if they are seen to be denying workers their rightful statutory benefits, such as holiday and sick pay. The practice also reflects poorly on the organisation from a fair employment rights perspective, and can be viewed as a way of getting around legal protections and saving costs.

2. Local Compliance

In a landscape of ever-changing and complex rules, hiring workers internationally can seem a daunting task. Companies need to comply with the different countries’ domestic employment and labour laws and regulations such as employment wage and tax laws, anti-discrimination laws, statutory benefits, and recruitment processes of the country in which they are hiring.  Non-compliance can cause complications, fines, penalties, and potential legal issues for the company.

For example, it’s necessary to establish whether any tax implications arise from the employment of the overseas staff member, both in terms of corporate and employment income taxes. If the employee is moving from country to country, their tax residency should be defined and whether dual tax treaties exist between countries.

In many countries, the organisation can register as a foreign employer to employ workers there without a legal in-country entity. However, this comes with its own set of qualifying criteria and requirements – you may still need local employment contracts and local payroll capabilities, and you could put your organisation at risk of permanent establishment in that location.

Another option is to partner with an Employer of Record to employ the company’s overseas workers which has full understanding of and compliance with all legal, tax and payroll requirements in the host country.

3. Employment Agreements

Most countries require a written employment agreement prepared in either a mutually understood language between the parties, or in the official country language(s) with a translation included.  In court, the official country language agreement will always take precedence over the translated version.

Employers need to ensure that the terms of their contracts align with the local legal requirements. Issues that could arise are for example:

Probation or ‘Trial periods’ – In certain countries, probation periods may not be permitted -for example, Belgium and Chile.  In other countries, probation or dismissal notices may be implemented according to the seniority of the position.

Termination – Termination notice systems can be intricate and dependent on the country’s jurisdiction and the legal context.  These may include notice periods, severance payments, and protection of certain employees from dismissal.

Paid Leave – In many countries, employees are entitled to annual paid and sick leave.  Public holidays and benefits may vary and need examination according to each country. If not properly provided, organisations are exposing themselves to tribunals and fines.

Also, without a legal entity in a host country, difficulties may arise in enforcing employment agreements.

4. Employer/Employee Liability and Insurances

Injuries suffered by foreign employees on the job or from work-related causes can range from incidental to serious and may cost the business money in expensive lawsuits and damages.  Employees travelling for work and/or are employed in another country’s jurisdiction must be covered by legal compliance and safety rules. Insurances should be held to protect both the business and the worker – some countries insist upon certain levels of coverage.

When using an Employer of Record, an organisation should ensure their chosen Employer of Record has a comprehensive global corporate insurance programme with adequate levels of cover that reach minimum requirements in each country.

5. Intellectual Property Protection

Different countries have varied intellectual property laws, making it challenging for a company to safeguard its intellectual property rights and assets without a legal entity. If exporting to a country, registering your intellectual property is a must.

Hiring foreign workers abroad without establishing a legal entity can pose significant risks to a company, especially when doing business under two legal systems.  A proper legal structure helps to address potential compliance risks to protect and safeguard the hiring party.

An experienced and professional Employer of Record can offer a compliant legal structure for employment in your chosen country – allowing your company to focus on running its business.

If you are looking to hire employee workers internationally, Mauve Group has services in place to help you navigate the complexities, legal and compliance requirements in the country of your choice.  To enquire about Mauve’s services, contact our team of experts here.

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