International market expansion is a must for small to midsize businesses seeking real, sustainable growth. But some companies may avoid moving into a new market because of the risks and unknowns. One of the most difficult aspects of expanding overseas is staying compliant. Rules and regulations are a lot to manage. For many companies, it’s a full-time job.
In particular, many businesses fall into the complicated trap of navigating relationships with international independent contractors. Companies think that hiring contractors for overseas operations is a way to work around the system. That it’s a way to get in-country without establishing a legal entity and hiring full-time team members. If you’re reading this and thinking that it sounds like a great idea — think again.
Sure — plenty of companies hire contractors in foreign markets and find success, but it’s a very complicated relationship to manage. It’s one of the primary reasons companies run into compliance issues during international market expansion.
To help you avoid this trap, let’s take a look at how to manage international contractor relationships and why it’s so important.
International Market Expansion with International Contractors
When you pay attention to autonomy, overseas contractors may be a good option for your business if you’re not ready to hire full-time employees. If you choose to hire contractors during international market expansion, we still suggest partnering with an in-country expert. They can help you manage compliance and avoid labor disputes, which can occur with contractor relationships. An international consultant, or local attorney, will help you craft a proper agreement, which will meet the needs of your new country, cover IP protection, and clearly state autonomy.
Contractor Misclassification
Companies that hire contractors as a way to avoid the costs associated with full-time employees need to realize that there are risks involved. Sure, you’re saving costs associated with salaries, entitlements, and taxation, but you need to carefully manage this relationship to avoid penalties.
In international markets, and even in the US, misclassification is an expensive problem. For example, FedEx cut labor costs by more than 40% by misclassifying drives as independent contractors. The major corporation lowered costs so dramatically because they avoided paying for benefits and social security.
The problem is the drivers didn’t have much control over their schedule or how they performed their work.
In August 2014, the Ninth Circuit Court of Appeals ruled that FedEx misclassified 2,300 workers in California and Oregon as independent contractors. Two months later, the Kansas Supreme Court ruled that those “contractors” were actually employees. The dispute cost FedEx $228 million after a settlement.
In 2015, employers in the US paid more than $80 million in back wages and benefits for more than 100,000 workers after contractor misclassification.
These domestic examples should be a wake-up call for employers considering international market expansion because rules for contractors are more lenient in the US.
Plus, contractor misclassification is just one factor in labor law.
In foreign markets, contractor relationships are much more regulated and if issues arise in court, officials almost always side with the contractor. As a result, employers are faced with large penalties.
Managing Compliance Overseas
Whether you decide to hire contractors or full-time employees overseas, you need to ensure that you’re managing compliance at all times. Tackling this battle alone is difficult. As mentioned, there are different rules and regulations in each country.
For example, if you expand into Brazil, your company will deal with different issues than a business that moves into Ireland. Managing these responsibilities is burdensome for HR managers of small to midsize firms.
A few of the areas you’ll need to manage include:
- Benefits Withholdings
- Taxes
- Bonuses
- Agreements
Not only are these requirements different in every country, but they’re also changing all the time. If you’re not an expert in the country’s local laws, it’s very easy to miss something.
For example, at-will employment doesn’t exist overseas. As a result, you need to provide employees with ample notice – which varies from country to country – before termination. Without notice, your company has to pay severance or fines.
To help with overseas compliance management, many companies use a global expansion 2.0 service. For example, International PEO (Professional Employer Organization) and Foreign Subsidiary as a Service (FSaaS) help international companies establish a presence overseas and give employers tools to hire compliant employees. These employer of record (EOR) services take care of a company’s payroll, entitlements, withholdings, and taxes. You’re still responsible for day-to-day management of responsibilities and employee liabilities – the EOR just keeps them compliant.
