One out of every five companies we speak with has an employee located in an overseas market working under a U.S. employment contract for the U.S. HQ entity. In some cases, this is due to the fact that the executive team simply doesn’t have the time to put a proper structure in place before the employee starts (and intends to rectify the situation down the road). But in most cases the root cause is that the executive team is not aware that this structure isn’t legal or valid. Below you will find the reasons why this is a problem and why it matters.
Why You Can’t Just Hire Someone in an Overseas Market to Your U.S. Company:
- An employee working in a country is subject to the employment laws of that country. Particulars of the employment contract should be specific to that country. Your U.S. employment contract is probably not sufficient and you can start with removing that “at will” employment clause.
- The labor authority rules on employee vs. employer cases and they need a local entity to bring to court. If you don’t have a local entity hiring that employee, you’re going to trigger all sorts of bigger picture issues (see below under “why it matters”).
- Employees and employers must pay into social security (health, pension, workers comp, etc) when working in a country. Only a local company can register and remit these payments to the authorities. Further, the best local talent is going to want their local pension and without a locally-employing company, you can’t provide a local pension.
- Many countries require the company to withhold and remit income taxes on behalf of the employee. Only a local company can register and remit these payments to the authorities.
- If you are sending a foreign national into a market, a local company must be the “sponsor” for that work permit – foreign companies cannot sponsor work permits. Without the work permit, the foreign national does not have the right to work in the country.
Why It Matters:
- Local employment laws override whatever is in the contract if they contradict. Your employee can bring claims for most anything they choose since your foreign contract is basically silent on all local employment issues.
- Your employee won’t have access to the local health program or national pension scheme.
- Your employee won’t have access to sick pay or benefits.
- Your employee is probably getting paid in some currency other than their home currency; which costs them money to exchange and results in potentially wild fluctuations from month to month.
- Read here for a better understanding of foreign employment.
The authorities get upset if no one is paying into the social security systems. If they find you are employing someone and not paying into the system, the following typically occurs:
- Fines and penalties
- Immediate payment of past-due liabilities going back to the first day of employment
- Triggering a broader employment audit
- Realization that you don’t have a legal employment vehicle locally, which opens up the Permanent Establishment conversation about why you don’t have a local tax-generating legal entity
- Which leads to a tax audit
- Which requires you to set up an entity
- And pay fines and penalties for previous noncompliance
- And the previously unpaid tax liabilities for the income the authorities unilaterally decide you owe
If you have a foreign national working in the country without a valid work permit they will be deported IMMEDIATELY. If this happens in the Middle East, the employee will be thrown in jail.
- Hopefully, your clients and prospects weren’t planning on meeting with that employee that day/week/month
- Hopefully, the employee didn’t have much in terms of valuables or sentimental items left at their apartment, because they may not be coming back to collect them
- At that point, you’re red-flagged by the authorities. Even if you want to set up a local presence and hire compliantly, they may make your life difficult or outright prevent you from operating in their country
Going Global? Take the Leap with an Experienced Expansion Partner
Long story short, the risks just aren’t worth it. If the person is truly a contractor, then sign them to a locally compliant contractor agreement; make sure they stay firmly in the “contractor” category. If they aren’t a contractor or you’re operating in a country like Brazil that doesn’t recognize “contractors” at all, then use an International PEO (Professional Employer Organization) to hire the employee on your behalf. Velocity Global’s International PEO solution can help ensure that the person hired as part of your global expansion is classified correctly, allowing us to become your Employer of Record and to hire on your behalf. Ready to source and secure the right talent to lead your global expansion plans? We can help make it happen.