Key takeaways
|
Hiring employees from overseas locations has many benefits—it helps companies broaden their talent pool, build cultural diversity, and lower employer costs.
However, companies hiring internationally have to navigate a new host of employment laws. Specifically, they must create employment contracts that comply with each new hire’s local labor laws, tax requirements, statutory benefits, and other hard-to-manage compliance considerations.
This article guides you through the essential elements of international employment contracts. You’ll also get the necessary steps to build a comprehensive and compliant contract that safeguards your company against legal and financial penalties.
Disclaimer: This post is provided for informational purposes and should not be considered legal advice. Seek advice from an employment law firm for more info.
What is an international employment contract?
An international contract is a legally binding agreement between an employer from one country and an employee from another, which must comply with the employee’s local employment laws. The employer’s local employment laws don’t apply when hiring abroad.
International employment contracts can’t follow a single template for every international hire since labor laws differ from country to country. Each contract will require different employee benefits such as minimum wage, overtime policy, termination clauses, and intellectual property rights depending on the employee's country of tax residence.
For instance, if you’re a US company hiring employees in Colombia, Italy, and the Philippines, you must explore each country’s local labor laws and tax regulations to create three unique contracts.
When do you need an international employment contract?
International employment contracts are necessary when you hire an employee who resides in a foreign country while working for you.
The increase in remote work and global hiring has brought many employees and businesses into this situation. The employer is based in one country, while the employee works from their home country or lives as a digital nomad and travels through multiple countries while working.
Some employers relocate their employees to the country where the company is based. In this scenario, you don’t require an international employment contract since the employee resides in the same country. Their income becomes locally sourced and subject to the country’s taxes.
Note: US residents who work abroad still have to pay US income tax, but they may obtain tax exemptions if their host country has a tax treaty with the US.
Why is it essential to have an international employment contract?
Global hiring brings more complexity to business relationships and exposes companies to legal risks. An international employment contract is critical for both employer and employee protection in a multinational employment arrangement.
It serves as a guide and evidence in case of a dispute
In case there’s a dispute between the employer and the employee, addressing the written contract serves as a point of reference to help resolve the matter.
For example, suppose the contract includes a non-disclosure agreement (NDA), and the employee shares confidential company information with an unauthorized party. In that case, the company can refer back to the contract to inform the employee and use the contract as evidence should the issue escalate.
It helps you comply with nuanced international labor laws
Labor laws vary by country—minimum wages, legal reasons for contract termination, and probation periods can be totally different in LATAM countries compared to the Balkans or Asia, for example.
Employers must create a contract that provides employees with their country’s unique statutory employment rights to avoid legal and financial penalties. In case a dispute is resolved by arbitration, the court will make a decision based on local laws.
Keeping up with the intricacies of international labor laws can become quite complicated when hiring from multiple countries, especially for small human resources teams. The risk of not having a proper contract is too severe.
One solution that provides companies with legal protection could be to open a subsidiary company and operate locally. However, you may not have the time and resources to go through this demanding process. In that case, you can rely on a global employer of record (EOR) to offer expert knowledge of local regulations.
An EOR is an organization that hires international employees on your behalf, assuming complete legal liability instead of you. EORs are typically in charge of drafting the necessary documentation and onboarding new hires, running your global payroll, administering employee benefits, filing taxes, and terminating contracts when the time comes.
EORs operate with teams of local experts who have the necessary knowledge to ensure complete compliance with local employment laws when creating international employment contracts.
Local laws usually require it
Employers and employees only sometimes need to sign an employment contract in some other countries, like Spain, Belgium, or Brazil. However, a written employment contract is mandatory in many countries, including the UK, China, and New Zealand, regardless of the employer’s location, especially for work permits.
The resource hub for expanding your business teams and market reach through global scaling.
9 essential elements of an international employment contract
You recruited the ideal foreign candidate. Now it’s time to define the employment relationship. When drafting the international employment contract, include these nine essential elements:
1. Basic details
The beginning of the contract should include the basic information about the employer, employee, and the job the employee will perform:
- Employee personal information (full legal name, address, tax identification number)
- Employer information (company name, address, employer identification number)
- Contract start and end date
Job title
2. Type of employment contract
Define the type of contract based on the number of hours the employee will work and the length of employment:
- Full-time contract or part-time contract
- Fixed-term contract or indefinite-term contract
Some countries may require an indefinite-term contract after a specific period, so you should define the reason for and length of fixed-term employment. For example, the employee may be a substitute for an employee on parental leave or a seasonal worker.
Additionally, if you haven’t at this point, spend time evaluating whether you should classify the new hire as an employee or an independent contractor. Failure to properly classify the employee may leave you guilty of worker misclassification and subject to fines.
3. Working hours and overtime policy
Define the working hours and your overtime policy if the employee’s position allows overtime work.
In most countries, the standard working hours range from 40 to 44 hours per week. Other countries may have different regulations. For instance, European Union (EU) states that workers:
- Can’t work longer than 48 hours per week
- Need to have at least uninterrupted 24 hours of rest every week
- Need to have at least 11 hours of rest every day
4. Employee compensation and benefits
Employee compensation and mandatory benefits around the globe include the minimum wage, statutory benefits such as social security, health insurance, workers’ compensation, and paid time off. They’re different for every country, so you must ensure that your international contract guarantees a foreign employee all of their statutory rights.
For example, some LATAM and Asian countries require a 13th-month pay for full-time employees, while in some countries, it’s only considered a good practice. Check out our employee cost calculator to learn more about the local employer requirements and calculate overall employment costs.
5. Probationary period
The law in the employee’s country may define how long a probationary period can last. After the probationary period ends, the employer must give the employee an employment agreement in most countries, as you cannot renew them.
In some countries, like Turkey, you can hold the employee on probation for up to two months. In Belgium, for example, a probation period is no longer allowed. On the other hand, the United Arab Emirates has probationary periods of up to six months.
6. Termination policy and notice period
In most countries, you must have a valid cause or mutual consent to end an employment contract. In an international employment contract, local regulations regarding termination apply.
Note that in most countries, there are certain restrictions or prohibitions regarding employee termination. Here are a few examples:
- You cannot fire an employee during maternity leave
- You cannot fire an employee because they filed a complaint against you
- You cannot fire an employee on sick leave without a just cause
- You cannot fire a pre-pensioner without a just cause
International employment contracts must also include a notice period clause, ranging from ten days to two months, depending on the country. The notice usually needs to be in writing.
Depending on the employee’s country, you may also be required to pay severance. For example, in Ireland, only employees dismissed for being redundant get severance pay if they worked for the employer for two years.
7. Intellectual property rights
Having an international employment contract is critical if you want to protect your intellectual property. Intellectual property, which may include designs, copyright, trade secrets, and company know-how, typically belongs to the employer as long as the employee created it under the employment contract. Anything created outside of this contract is considered the employee’s intellectual property.
Also, include the IP protection clause in the independent contractor agreement if you work with contractors. In some countries, independent contractors are entitled to their intellectual property unless the contract states otherwise.
8. Confidentiality requirements
International contracts should also include post-termination restrictive covenants that prevent the employee from sharing confidential information with unauthorized parties. These agreements are valid during the employment period as well and may include the following:
- Non-compete agreements
- Non-disclosure agreements (NDAs)
- Customer non-solicits
- Employee non-solicits
The length of the restriction period depends on the country. Some agreements may not be enforceable in some countries or only under specific circumstances. For example, if you hire a person from Mexico, post-termination customer non-solicits are not enforceable.
9. Additional country-specific clauses
If the country you hire from has any specific provisions commonly included in local contracts, you may also want or need to include them.
For example, Rome I is an EU regulation determining the law governing contracts concluded within the EU from December 17, 2009. It applies to all contracts in EU countries except for Denmark.
According to this regulation, the parties involved in a contract have freedom of choice of law and can choose which law they want to govern them. However, the provision still ensures that employees receive their local employment rights.
If the parties don’t choose a governing law, the law of the country where the employee performs most of their work applies.
Common issues and gaps in international employment contracts
Even the most attentive international employment contracts can contain mistakes. Some of the most common payroll and compliance issues and gaps include:
Incorrect CBAs (collective bargaining agreements)
A collective bargaining agreement is a written, legally binding agreement between an employer and a union representing the workers. Some countries (especially in the EU, like Sweden or Denmark) require you to sign a CBA as part of the employment contract. If you fail to do so, or if it does not follow the specific legislation set up for this type of agreement, you might find yourself in hot waters.
Global payroll issues
As the company expands internationally, your financial team needs to plan for new factors affecting the payroll process. These factors may include different bank charges for international money transfers, currency exchange, and payment method availability.
Learn more about global payroll.
Inaccurate salary rises
Some countries clearly regulate when and how remuneration can increase. These regulations can range from setting a maximum number of times per year when salary rises are allowed to imposing a mandatory percentage by which salaries have to be increased according to inflation, the number of years spent in a company, and so on.
For example, in Serbia, employees have a legal entitlement to a salary increase of 0.4% of their net salary for every year spent with the employer.
Accrued time off
When an employee leaves a company, they are often entitled to a payout for the leave time they have not used. This can be regulated by both country-specific legislation and internal company policies.
International employment contracts FAQs
Can an independent contractor have an international contract?
Yes, independent contractors can also have international contracts when working with foreign clients. These contracts define the relationship between the contractor and the client, outlining the scope of work, payment methods, deadlines, and other relevant aspects of the business arrangement.
Independent contractor agreements protect both the client and the contractor, clearly outlining that the client isn’t a legal employer and doesn’t need to provide the contractor with statutory employment benefits.
Do expatriates need an international employment contract?
Usually, if a US expat lives and works abroad and is on a foreign company’s payroll, they need to have an international employment contract. If the expat is still employed by a US company, the answer will be determined on a case-by-case basis.
Are there verbal international employment contracts?
In many countries, verbal agreements are valid, but when you hire internationally, it’s recommended to have a written contract to avoid disputes and help solve them more easily.
What are the advantages of international employment?
International employment can bring many benefits to companies. For example, employers may hire from countries with a lower cost of living, which decreases their overall employer costs. Also, they can search for global talent when specific skills aren’t available locally.
Global talent also provides employers with different cultural perspectives, first-hand experiences from a new market, and coverage for multiple time zones, which may facilitate global expansion.
In what language does the international employment contract need to be?
In the majority of countries, the language of the international employment contract isn’t determined by the law. It can be in any language that both parties signing the contract understand.
International agreements are usually in English, although some countries like Indonesia or China require them in one of their national languages.
Generate compliant international employment contracts with Deel
Writing an international employment contract on your own is possible. But it’s also exhausting, time-consuming, and full of risk. You also need to have it reviewed by a legal team familiar with the labor laws of the particular country you’re hiring from. It’s complex. But it shouldn’t stop you from international hiring.
Deel is a global hiring platform that enables companies worldwide to hire legally in 150+ countries hassle-free. You can onboard new employees in minutes, have them sign fully compliant contracts, pay them in a single click, file taxes automatically, and offer employee benefits that may not be available to you otherwise. We act as an employer of record and take all legal responsibility for your global team while you manage their day-to-day activities.
Sounds like an ideal solution for your expansion plans? Book a demo with our team and ask all you want to know.
.svg)
