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, 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 Global Employment Outsourcing.
Let’s take a closer look at the role each model plays in approaching payroll for international employees.
Independent contractors—a common slippery slope
Many organizations often think the easiest way to pay talent in new markets 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.
Making an investment in 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 international employees 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 Global Employment Outsourcing (GEO), also referred to as the employer of record 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.