With the rise of remote work and increased interconnectivity across borders, more and more companies are looking to tap into the global talent pool to build a diverse workforce by hiring international employees. But when hiring internationally, you risk running into pitfalls — legal, financial, and otherwise — with serious consequences.
By investing time and effort into researching employment law or hiring a global HR or payroll platform to do so on your behalf, your company and its HR department can sidestep the most common obstacles to international hiring, including issues with global compliance, misclassification, and payroll.
1. Misclassifying employees as contractors, or vice versa
When it comes to hiring contractors and full-time employees, many businesses misclassify workers as one or the other, whether knowingly or not. Misclassification is especially relevant to organizations that hire internationally; companies often can’t hire foreign workers as employees, as it can be very costly for U.S. businesses to sponsor visas for international employees.
One reason both parties might prefer to hire as a contractor is that there can be a huge discrepancy regarding the wages a worker would receive as an international employee after taxes and fees vs. those they’d receive as an international contractor instead. Additionally, due to complications with global compliance, companies without local entities in other foreign countries may find it much harder to hire workers as employees than as contractors.
Hiring and misclassifying employees and contractors can be a costly mistake. Some people may think that the chances of being audited are low, but that’s not necessarily true. Federal, state, and local governments have reason to go after businesses for misclassification: Research shows that audits are cost-effective and can return hundreds of millions of dollars in workers’ comp, income taxes, and unemployment insurance to the government.
Suppose the government finds that you’ve misclassified your employees or contractors. In that case, you’ll have to pay back taxes and wages, accounting for unpaid overtime and minimum-wage deficits, for each misclassified employee, and further demonstrate how you’re taking steps to classify workers correctly.
In addition, you could be held responsible for paying fines and penalties for labor and wage law violations and excluding contractors from benefits. These various costs add up; in one case, one employer paid over $358,000 in back wages to 50 workers misclassified as independent contractors.
Tip: Understand the differences between contractors and employees so you can classify your workers correctly.
When it comes to hiring, you should know whether you’re hiring employees or contractors from the start. To determine how to classify employees vs. contractors, check with federal tax authorities of both countries — the company’s and the worker’s — and verify any provincial or state laws. This way, you can more effectively manage expectations with workers about whether they’re considered employees or contractors, pay all applicable taxes on time, and clarify the language of any job descriptions and written contracts to define the scope of work and the employment relationship.
Proper classification protects both you and your workers. A global HR or payroll platform can help; they have the knowledge and tools to help you determine whether to hire contractors or employees and how to do so correctly.
2. Disregarding the labor laws of foreign countries
Maintaining compliance with the local employment and tax laws of each country you hire in is a significant obstacle to hiring international employees, as handling compliance issues requires an in-depth understanding of the laws of each country where your company is hiring.
One solution is to establish local entities in the country or countries where you’re hiring, but opening those branches can be too costly to justify, especially if you’re only hiring a small handful of employees per country. Either way, your company is on the hook for making sure it complies with all local employment and wage laws.
Here are some examples of common global compliance issues:
- Probation periods: When an employee is on trial to determine whether the contract will become permanent. In Belgium and Chile, probation periods are prohibited by law. By country, the maximum term of a probation period may vary by job level, e.g., two months for office workers and four months for executives in France.
- Termination: Whether employees are entitled to a notice period and to severance payments when involuntarily terminated. “At-will” is common in the U.S., but Deloitte has found that’s the exception, not the norm. Thirty-seven countries from Deloitte’s study require both reasonable notice and severance, while 15 countries require just severance, and six countries require just notice. Also, some countries may have their own guidelines for what you can and can’t do when it comes to collective dismissals vs. individual dismissals. Employment law can vary drastically from country to country, so budgeting for terminations as a global company can be tricky.
- Paid time off: How much paid leave, including PTO, vacation, and sick leave, an employee is legally entitled to receive. Though customary, it’s not legally mandatory for employers to provide paid time off in the U.S. The amount of legally mandated paid leave, including public holidays in some cases, varies by country — employees in the U.K. are entitled to 28 days of annual paid leave. This can also vary by length of employment: in the United Arab Emirates, after six months of service, employees can take two paid days off per month and then receive 30 days of annual leave after working with a company for a year.
Tip: Draft employment contracts that adhere to all protections in place for local workers.
A key component of global compliance is the written employment contract, which is often mandatory. When drafting contracts for international employees, make sure to thoroughly research the laws of each prospective new hire’s country and then tailor each of your written contracts to those respective laws.
One note, though: Make sure to write your contracts either in a mutually understandable language or one of the national languages of the employee’s country, depending on its laws. If not, you risk exposing your company to legal trouble. Deloitte notes, “In case there is no employment contract in the official language, the most common consequence is that the contract cannot be used as evidence in court, or is not enforceable until a translation has been provided.”
A global platform like Pilot can efficiently handle all aspects of international compliance for you. Our extensive resources include country-specific employee contracts, legal experts, and HR pros with in-depth knowledge of labor and tax laws in each country.
3. Not providing competitive compensation and benefits
Regardless of where you hire, it’s important to compensate your employees and contractors competitively. Wage laws differ by country, and for some companies with limited budgets, it can be more affordable to hire for certain roles in countries with lower salary ranges. However, exercise caution: It can be challenging to determine an equitable compensation structure if there’s a wide disparity in salaries between countries. Still, there’s no silver bullet for dealing with compensation.
Cost-of-living adjustments can impact competitive compensation due to the disparity in how much employees in different countries must contribute to social security and pay in taxes. For example, according to the OECD, the tax burden of a single worker without children earning an average wage for their country in 2020 in Belgium was seven times that of one working in Chile — 51.5% of their pay vs. 7%.
Some companies try to mitigate this by paying international employees proportionately to reflect differences in cost-of-living and taxation rate; these location-based salaries vary depending on the country in which they live. Others provide value-based salaries that are competitive for the same roles across countries, paying everyone equally regardless of location.
Location-based salaries allow employers to hire more competitively in different countries’ job markets, but they can result in salary disparities among employees in different countries. In contrast, value-based salaries consider experience alone; they can help prevent wide salary disparities between employees in different countries, but can also make it harder for employers to compete in more expensive job markets. A third, hybrid approach combines the best of both worlds: Offer everyone with the same role the same compensation, but also provide different salary ranges for some departments. These salary bands could be more competitive for specific geographic regions, e.g., Europe instead of the San Francisco Bay Area, for some departments, while salary bands for other departments could be more competitive for the Bay Area.
Tip: Research local wage expectations to determine what counts as competitive compensation.
Each country has different hourly wage and salary regulations as well as benefit requirements. As with other aspects of global compliance, research into local laws and labor markets is essential and will help you determine what highly competitive compensation might be worthwhile for international employees to consider. Some examples of aspects to research:
- Minimum wage laws: Make sure to offer wages that are at or well above the market rate for the country where you’re hiring. As of 2021, Australia’s minimum wage is approximately U.S. $14.41 per hour, while Mexico’s is around U.S. $7.08 per work day.
- Bonuses: Determine whether you should offer bonuses. For example, offering a “13th-month pay” bonus is customary in several countries, including Japan, France, and Germany, and mandatory in others, like Portugal, Brazil, and the Philippines.
- Benefits: Calculate the number of paid sick days, health care, retirement, and pension to provide, based on what’s required by law and what you need to offer on top of that to be competitive. Often, figuring out what benefits to offer and how to offer them involves the assistance of a local entity or a global HR platform.
4. Creating a workplace that isn’t inclusive of international hires
Diverse workforces benefit companies by driving innovation and creativity, with every employee’s unique background and experiences contributing value. Therefore, when hiring internationally, as your company diversifies, it’s important to make sure that your company culture remains inclusive of all your employees and their respective cultures so that they feel welcome and able to bring their best selves to work.
Tip: Take bold steps to accommodate and include your international employees.
According to a McKinsey & Company report, fostering belonging and promoting equal opportunity are crucial to inclusion. One way to do this for your international employees, in particular, is by actively making accommodations for them. Here are some ways how:
- Asynchronous communication: Don’t require immediate feedback to hold conversations. Strategize asynchronously via collaborative docs or project management tools like Asana. Schedule messages or emails to send when team members are online instead of instantaneously.
- Meetings: When synchronous meetings are necessary, try to schedule them at reasonable times (preferably not outside of anyone’s normal working hours) that everyone can make, and make sure to record meetings for those that can’t.
- Flexible schedules: Don’t force remote workers to work odd hours or drastically change their sleep schedules for their job. Instead, allow them the flexibility to log on at times that work best for them.
- Holidays: Every country celebrates different public holidays. Accommodate holidays that your international workers celebrate, or allow for floating holidays for all.
- Company culture: Include your remote workers in team-building exercises and opportunities to fully engage with others in the company.
5. Failing to correctly handle international payroll
When it comes to paying your international employees and contractors, many small moving parts can impact the payroll process. Some examples:
- Taxes: Calculating the amount of taxes due, withholding the correct amounts, and transmitting them to the proper tax authorities — for both your home country and the foreign country.
- Bonuses: Paying any bonuses due to your international employees.
- Benefits: Providing any employer-sponsored benefits, such as health care, and accounting for them on employees’ pay stubs.
- Payment: Managing international payment systems, e.g., wire transfer, check, PayPal, etc., and logistics involved in getting wages to your employees and contractors.
- Currency: Handling currency conversions and paying employees in their local currency.
Not only is international payroll more complicated, but it also can result in global compliance issues when mishandled.
Tip: Hire an international HR and payroll platform to pay your workers for you.
It’s possible to register employees with local entities or affiliates for each country and then file taxes and pay employees with a local taxpayer ID. However, it’s not a viable option for those who only hire one or two employees in a foreign country and have no long-term plans of expansion in that country. And unless your employees are in countries like Thailand or the U.K. that offer exemptions for hiring internationally, your only other option is to pay them as independent contractors — and only if they don’t perform work on the same level as employees (see Pitfall #1: misclassification).
That’s why we suggest hiring a global HR and payroll platform. We have the payment systems and logistics in place to pay your independent contractors and employees seamlessly in their local currency, helping you more efficiently manage costs and eliminating the headaches in getting your international employees their pay. We can also suggest and provide appropriate benefits to your international employees.
Conclusion: Why you should consider a global HR and payroll platform
With a global HR and payroll platform, you don’t have to dodge all these pitfalls — and more — that come with hiring international employees. Instead, we provide a one-stop-shop solution to maintain compliance, issue payments, provide benefits, and handle country-specific payroll requirements and all other administrative HR work for you. We also have customer success managers on deck to help answer all your questions and guide you through the complexities of hiring and paying your global workforce.
If you’re looking to hire and pay international employees without worrying about compliance issues or setting up a foreign subsidiary, let’s talk! Try out Pilot today.
⚖️ Legal Disclaimer: The information contained in this site is provided for informational purposes only, and should not be construed as legal advice on any subject matter.