by Aurel Albrecht, Co-founder and Managing Director of Lano
In today’s increasingly global world, international expansion has turned into an imperative for successful companies. The prospect of new markets, foreign talent pools and unlimited growth opportunities makes expanding internationally an exciting venture. What many organisations forget is that, with every new market launched and every foreign employee hired, the complexity of managing expansion in a compliant way increases.
While accounting and finance departments as well as the executive management are usually mainly concerned with the question of how to navigate local tax systems, HR departments are left to handle much broader compliance challenges, from dealing with foreign employment laws to managing local payroll obligations. Failure to master these challenges may result in hefty fines or even put an end to a business’s expansion plans.
In many cases, however, being aware of global compliance risks is the first step to mitigate them. In this article, we will therefore highlight the main global compliance and employment challenges HR managers are facing and outline possible ways to solve them.
Mitigating employee misclassification risks when hiring international freelancers
Employee misclassification or false self-employment (i.e. the wrongful classification of workers as independent contractors although, from a legal point of view, they should have employee status) is often pointed out to be one of the major pitfalls when hiring overseas. Given that penalties for contractor misclassification range from having to pay back social security contributions and employee benefits for up to several years (see for example European Court of Justice ruling on holiday pay for falsely self-employed workers) to financial penalties and even prison sentences, employee misclassification is not to be dealt with carelessly.
In order to mitigate their risks, companies should make sure to use country-specific checklists to assess the freelancer’s self-employment status and have compliant contractor agreements in place when building a team of international freelancers. Checks should be carried out on a recurring basis to quickly detect any change in the contractor’s situation which may result in employee misclassification.
As hiring freelancers in different jurisdictions means having to research local laws on a case-by-case basis, many companies decide to save time and resources by using compliance and payments platforms like Lano which offer country-specific freelancer agreements and onboarding checklists, and also include automated payment systems and digital wallets which facilitate payments in different currencies.
Hiring full-time employees in different countries: Handling employment laws, employee benefits and payments across borders
Once a company decides to take one step further into international expansion and hire full-time employees in their new market, the pressure on HR teams increases exponentially. Not only because of the growing number of employees who need to be recruited, onboarded and paid, but also because navigating foreign employment laws and finding a way to pay remote employees in different countries is a massive hurdle.
Checking local regulations on working hours, overtime, annual leave etc. might not seem like a big challenge, but there are many more aspects linked to hiring new employees overseas. First of all, it is necessary to come up with a benefit package that will attract possible recruits. Then, there is the employment contract which has to fulfill local requirements (necessary information, form, language) and, last but not least, the destination country might have specific health and safety regulations in place which could make foreign employers responsible for assessing their new remote employee’s workplace (e.g. Ireland’s Health & Safety Authority’s Guidance on Working from Home). What’s more, employment laws are constantly changing, obligating international employers to keep track of every minor change in any one of the countries where they have staff.
Similar challenges arise when it comes to paying globally distributed teams. The first one is to develop a strategy on how to set remote work salaries, followed by checking local currency requirements (in India, for example, it is mandatory to pay employees in Rupees) and payroll cycles (weekly, bi-weekly, bi-monthly or monthly). Finally, there is the question of how to issue payments to foreign employees without paying significant transaction fees and losing money on exchange rates.
All these employment challenges can, of course, be solved with the necessary effort and dedication. However, without local expertise, the risk of committing costly errors is very high. Also, establishing a legal entity in each hiring destination – which is necessary in some cases to make employment even possible – is a very long, complex and expensive process.
An alternative solution which is often overlooked by HR teams and other executives is the use of a so-called Employer of Record (EOR). An Employer of Record takes on the role of the legal employer (thus taking over all the responsibilities including contracts, benefits, termination and so on) while the hiring company remains in charge of the employee’s day-to-day activities. In this case, creating a foreign branch or subsidiary is not necessary.
Managing payroll in different countries – A challenge both in terms of compliance and organisation
Handling payroll in one single country is already a big task but having employees in several different jurisdictions will take payroll compliance to a whole new level. That is because in most cases, it is not possible to include employees located in foreign countries in your home-country payroll. Instead, companies with globally distributed teams are obligated to set up payroll in each country which adds additional layers of complexity to the payroll process – unless they hire via an EOR who also takes care of payroll.
Ensuring payroll compliance across various jurisdictions means having to be familiar with the different social security and income tax systems as well as with the legal framework around it. Practices that are allowed in one country might be forbidden in another one. In Germany or France, for instance, it is possible to pay employee salaries from foreign bank accounts, whereas in the US, foreign companies need a local bank account to pay employees who are hired under their legal entity.
Even for experienced HR teams, handling this task is quite a challenge which can quickly absorb a substantial amount of time. Especially for businesses looking to scale fast in a new market, it pays off to partner with local payroll providers who bring in the necessary expertise and have the structures in place to issue payments to social security and tax authorities. In some jurisdictions, they are even allowed to pay employees directly in the employer’s name.
While working with local specialists solves the problem of payroll compliance, it also creates a new challenge. Having multiple local payroll partners who all use their different systems and processes makes it hard for HR and finance departments to keep track of payroll data which has to be manually extracted from different sources and transferred to the company’s own payroll system. This is where technology solutions come into play which consolidate data from every single provider to make it accessible in one place.
About the author
Aurel Albrecht is Co-founder and Managing Director of Global Employment & Payroll Platform Lano, which offers businesses everything they need to expand globally.