Article
3 min read
Author
Anja Simic
Published
February 25, 2022
Last Update
July 23, 2024
Table of Contents
1. Employee misclassification: independent contractor or employee?
2. Violating local payroll, data privacy, and other labor laws
3. Permanent establishment (PE) mismanagement
Best practices for compliant international hiring
Use Deel to hire global employees without risk
Global hiring is on the rise: in 2021, companies (mostly from North America) hired more than double the number of employees from Latin America, Asia, Europe, and the Middle East than in previous years. When it comes to hiring talent, the world is your oyster (or your Smörgåsbord, if you’re hiring out of Scandinavia).
But global compliance issues are still a major barrier to a truly multinational talent marketplace. Risk management for labor and tax laws in multiple countries requires significant time and expertise. And if employers fail to comply, they risk jail time, bans, and hefty financial penalties.
But global compliance management shouldn’t stop you from going global–we’re here to help. Below, we describe four major global compliance mistakes employers make, and how to resolve them. Continue reading to never lose sleep over compliance issues again.
Misclassifying employees as independent contractors is among the most common mistakes in employment in general, let alone international employment. Employee misclassification is when workers perform the duties of employees and qualify for employee entitlements—but companies compensate them as independent contractors.
Misclassification is usually accidental but sometimes is a deliberate, unethical cost-saving strategy because employers don’t have to provide benefits to independent contractors.
Governments treat misclassification as a grave form of tax evasion because:
Intentional or not, employee misclassification is punishable by law. Each country has its own punishments. The IRS and the U.S. Department of Labor can and have dealt out severe penalties in the US, especially for intentional or large-scale misclassification.
Employers face lenient sanctions to undo employee damage if the misclassification was an oversight. Employers must:
If the IRS and DOL decide employee misclassification was intentional, consequences are more drastic.
Like with accidental misclassification, employers need to pay 100% of FICA contributions for themselves and the employees.
Other penalties add up to $1,000 per misclassified employee, and the employer needs to pay a 20% extra on top of the employee's wages. In some cases, breaking compliance rules may even cost jail time.
Each country has its criteria for worker classification. Generally, workers who work full-time according to strict schedules and expectations count as employees, while those with multiple clients and more autonomy are independent contractors.
In the US, two official tests help decide your workers' status:
Internal Revenue Service (IRS) Test: The extent of the company’s control over the worker, according to three categories, determines classification:
To help businesses take the guesswork out of worker classification, Deel provides all clients access to their own Compliance Hub. This feature includes a unique AI-powered classification tool, which uses local classification tests and case law across 150 countries to help you classify your workforce compliantly and correctly.
Compliance requirements vary from one place to another: countries have all sorts of distinct rules, many of them easy to break. Take Portugal, for example. Portugal recently introduced some important rules for employers:
Do you want to register as a sole proprietor in Portugal? Learn more here!
We couldn’t begin to cover every labor law for every country in one article. Two major categories of local labor laws stand out: global payroll laws and data privacy and protection laws.
Global payroll is one of the most complex parts of running an international business. Taxes, health insurance, currency exchange, pension and 401k contributions, days off, maternity leave: there’s plenty of room for mistakes.
The General Data Protection Regulation (GDPR) is an organization that sets data protection standards for member states of the EU and the UK. Their flagship assessment, the Data Processing Agreement, is a document all employers hiring in the region must adhere to and sign to ensure they protect employee data according to the GDPR’s standards.
Other countries have their own data protection assessments and certifications. Data Security Regulations in Israel and General Data Protection Law in Brazil are the most similar to GDPR, while countries such as Bahrain and South Korea have noticeably different provisions.
For a company that works heavily with data on an international scale, hiring a Data Protection Officer (DPO) is the best course of action.
Every company or organization which processes the personal data of EU citizens is required to hire a DPO. In addition to GDPR, their compliance efforts include foreign data protection laws.
Compliance Officers are the legal experts who create a company’s compliance program and practice compliance-related due diligence.
These tasks relate to:
Companies that hire internationally–especially companies that want to hire in more than one additional country–often need to look outside their own company to ensure compliance, especially if they can’t afford to staff an entire compliance team. That’s where an employer of record (EOR) comes in.
An EOR acts as a co-employer for your company, assuming legal responsibility for employment compliance wherever you hire. EORs set up local entities in countries around the world–for instance, Deel has entities in 150+ countries. When you want to hire employees in another country, the EOR generates an employment contract that complies with their local labor laws. EORs also provide financial services like payroll and taxes, and manages the legal aspects of hiring so you can focus on the employee, not the compliance.
Learn more about hiring international employees with an EOR.
A permanent establishment (PE) is a fixed, physical place of business that generates revenue and is therefore susceptible to local tax obligations. PE mismanagement means you fail to pay those taxes. Interest, fines, and back taxes depend on your industry and the country.
According to The Organization for Economic Co-operation and Development (OECD), there are several types of Permanent Establishments:
Offices, branches, factories, warehouses, management facilities, and places where natural resources are extracted are the most common types of PEs. Notable exclusions include:
4. Failing to meet immigration and visa requirements
Employers must jump through several bureaucratic hoops before they’re able to sponsor an employee's visa and relocate them. For instance, employment-based immigrant visas for the U.S. require the following documents:
The US government may take months to process the application and can reject it outright for the smallest of administrative errors, wasting both you and your potential employee’s time.
If you have full-time employees in foreign countries, the best course of action is to:
Working with independent contractors is flexible, cost-effective, and comfortable, provided that you:
Staying compliant with local laws is the number one concern for many employers wanting to hire internationally, but don't let it stop you from diving into the global talent pool.
Deel ensures each contract a full-time employee or contractor signs is entirely compliant with local regulations. Finally, there is no need to learn a new set of rules each time you're ready to hire in a new country.
Sounds like the solution you're looking for? Read all about managing compliance seamlessly, or book a demo to see Deel in action today.
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