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International Labor Compliance – How to Avoid the Traps

By April 15, 2016September 30th, 2020No Comments
International Labor Compliance - How to Avoid the Traps

If hiring independent consultants or employees in a new country is part of your business strategy, you’ll have to become familiar with international labor compliance. It’s a robust subject with plenty of positives for building your brand overseas, but there are also many traps you must avoid to protect your company.  In order to help you have a firm understanding of how to handle these international labor compliance traps, we discuss areas at risk and how to avoid the issues.

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Establishing a Taxable Presence (or not)

To legally hire a local employee, you need to establish an entity in your target country. You will then be able to provide them with the necessary entitlements and tax withholdings required by labor laws. Setting up an entity is a capital investment that you may not be willing to make right now. Especially if you are just testing the market. The maintenance of the legal entity can be very time consuming and expensive as well.

Instead, use FSaaS to set up a taxable presence in your new country without establishing an entity. This is an aggregate of services that allows you to hire in-country and operate your business.  FSaaS also takes substantially less time and money, while being more flexible.

This service also protects you from potential audits or employment classification disputes. Many times, these could come from an agreement dispute with an independent contractor. If a contractor decides that their work was actually classified as an employee’s responsibilities, they can take their dispute to labor courts and challenge their job status. You will need to show up and have a legal presence in the country to challenge your contractor’s dispute.  FSaaS helps with this portion of the legal battle not just by giving you the power of enforceability, but also by focusing on managing risk proactively.

Protect your Intellectual Property (IP)

Do not assume that your IP is protected when working with foreign independent contractors.  Each country varies, but know that unlike the United States, IP is not automatically addressed in agreements between your company and an independent contractor.

If a dispute arises between you and your contractor, you cannot rely on your domestic Government to assist with the protection of your IP internationally. To avoid losing valuable information that belongs to your brand, ensure that you develop solid agreements with contractors under their country’s law that specifically address the protection of your IP before signing off on a new hire.

Be Weary of International Confidentiality and Non-Compete Clauses

Similar to your IP, international confidentiality and non-compete agreements are not assumed in foreign contracts. For confidentiality agreements, you need to make clarifications in agreements that specifically apply to the foreign jurisdiction. Do not rely on the language you use in your US contracts to get the job done.

If you’re working with an international contractor and want to include a non-compete clause in their agreement, think twice. Independent contractors in other countries need to be autonomous to be considered a non-permanent employee. Making them sign a non-compete clause takes away their right to work for all other companies. If they are considered an employee by labor courts, they are entitled to all the benefits given to your permanent employees, so be careful.

Learn the Labor Laws and Tax Code, or Hire a Consultant

If you think keeping tabs on the US tax code is tough, wait until you start learning the labor laws in your new country. It’s an ever-changing landscape that requires a full-time set of eyes to manage.

In many countries, the withholding standards, benefits, termination variances and tax laws change every year. Plus, if you’re working in multiple countries, each region has its own set of rules. It’s your responsibility to stay on top of these changes and make sure you’re making all the proper withholdings.

If you don’t have the resources, consider hiring an outside consultant like Velocity Global to assist you. We work in 185 countries and can help you manage these important tasks. Give us a call today to discuss your specific needs!