If you’re considering expansion overseas, you’re probably starting to learn about international employment practices. Questions on this topic are common among our clients because it’s a complicated subject, similar to US tax code but without the same level of accessibility to information and it’s potentially in a different language.
Now imagine learning not only foreign tax laws but also new benefit requirements, termination restrictions, and employee classifications in a fresh market; talk about complicated. This is exactly why we receive so many questions about international employment practices. There are many legal liabilities involved and you need to get it right. If you don’t, look forward to heavy penalties.
To help ease your mind, below we discuss the international employment practices you need to keep an eye on. Keep in mind this list is not exhaustive and should not be the basis for your legal decisions. If you have more questions please contact us or an attorney directly.
Independent Contractors vs. Employees
Hiring an independent contractor in an international market is a much different process than in the States. First, it’s important to understand that you cannot hire a foreign employee through a US employment contract. To hire internationally, you need to create a local contract that abides by the target country’s laws and withholding requirements. If you fail to meet these requirements, prepare yourself for hefty fines if the country determines that your contractor is operating as an employee.
It’s common for independent contractors in foreign regions to fall under the classification of employee, especially if a conflict arises. Sometimes even the best-written contracts get thrown out the window by international courts. If this happens, the contractor is subject to the same benefits and withholdings as your employees. As you can imagine, that quickly gets expensive.
Payroll Withholdings Vary in Every Country
If you fall victim to the independent contractor dilemma mentioned above, you have to provide them with all of the withholdings required by the country. These vary in each region, but typically include the following:
- Social Security
- Pension Fund
- Health Care
- 13th Month
Each country has its deduction requirements and these can change. For example Ontario, a Canadian province, has varying schedules for tax and pension payments. These vary depending on the type of employee and sector of your operations.
Staying on top of these requirements is a full-time job and may be unrealistic for your team. Working with a firm like Velocity Global to manage your international payroll may be the best option to ensure you stay on track.
Sending Expats Into a New Country is Not Easier Than Hiring a Foreign Employee
You may think that sending one of your domestic employees into your overseas operation may be easier than hiring a foreign employee, but you’re wrong. This type of employee is subject to liability risks such as visa acquisition and taxes.
Expat Tax Requirements
If you have UAE expats, they must report income earned in the country subject to the Foreign Account Tax Compliance Act. Also, Americans with a balance of $10,000 or more in their bank accounts must submit a Report of Foreign Bank and Financial Accounts each year. If expats fail to meet these newly updated requirements, they could have their passport revoked.
Employees working in international countries may require accounts with local payroll and their host country payroll to stay compliant with tax liabilities.
Work Visa Requirements
Obtaining a work visa is difficult. Some countries, like Australia, use a sponsor system to help an employee get a permit to start operations abroad. Other countries, like Brazil, have various entrance visas that can only be obtained by submitting a request in-person or through an agent. All of these options take time and come with a cost.
International Employment Practices Mean Saying Goodbye to “At-Will” Employees
In the US, it’s standard to hire an employee on an at-will basis. This means that they can quit, or you can fire them without many restrictions. Obviously, there are factors that affect terminations that employers must abide by, including anti-discrimination laws; but for the most part, if an employee is underperforming, you can fire them if they were hired at-will.
This simply doesn’t exist outside the US. According to Baker & McKenzie, a global law firm we follow, at-will employment will not be upheld in international courts. Jurisdictions outside our waters each have specific laws surrounding the reasons an employee can be terminated.
For example, in Brazil, an employer needs to have cause to fire an employee. This “cause” is limited to gross misconduct and restricts terminations for poor performance or economic downfalls.
Learn the Country’s Wage, Benefit and Coverage Requirements
Every country has its required wages and benefits entitled to each employee. It’s the employer’s responsibility to meet these demands.
A good place to start is understanding your target country’s minimum wage. In the UK, for example, there is a national minimum wage that depends on age and employment status.
When drafting a foreign employee’s offer letter, you also need to quote their salary in local currency rather than US dollars. This prevents exchange rates fluctuation, which could reduce or increase your employee’s salary from month-to-month.
In regards to benefits, vacation and paid time off requirements are drastically different than the US in many countries. Belgium and the Netherlands require employers to pay employees an increased salary during their vacation. In Hungary, employers need to take into consideration an employee’s family because they accrue more vacation days if they have more children.
We strongly suggest assessing your current plan for hiring internationally. If you are unsure about how to handle a certain situation, consult with your attorney or call Velocity Global for advice. Our team of International Consultants work with companies facing the same hurdles on a daily basis.