India is full of talent — with over 1.4 billion people, it is the second-largest country by population and the second-largest English-speaking country after the United States. India is also one of the top hubs for remote workers. It offers a growing talent pool in the information technology (IT) sector, making it an attractive opportunity and savvy choice for U.S. companies looking to grow their workforce and international presence.
Can a U.S. Company Employ Someone in India?
A U.S. company can hire employees in India. However, there are distinct differences between the employment laws in the U.S. and India, so it’s critical to understand the hiring nuances and compliance risks that come with targeting international talent. Whether you’re looking to establish an office in the country, hire remote employees, or work with contractors, the following guide lays out your options for expanding your global workforce in India.
How Do U.S. Companies Hire and Pay Employees in India?
There are three ways to hire and pay talent in India: set up a foreign entity, partner with an employer of record, or engage with contractors. Which one you decide on depends on various factors, including time, cost, number of employees you wish to hire, and your company’s long-term goals.
1. Set Up a Foreign Entity in India
If you plan to hire a large team in India or seek to establish a long-term presence in the country, you can set up a legal entity in India by creating a local branch or subsidiary. Doing so allows your U.S. company to handle hiring and employment logistics internally, resulting in fewer employment costs in the long run.
Keep in mind that setting up an entity does require extensive in-country knowledge of India’s legal, corporate, and payroll regulations. Your company will be tasked with researching the laws, handling complex HR tasks, managing complicated payroll, and risking noncompliance if done incorrectly. Establishing an entity is a time-consuming and costly process that may not be worthwhile if you only plan to hire a small number of employees in India.
2. Partner With a Global Employer of Record
Partnering with a global Employer of Record (EoR) allows you to quickly hire employees in India without establishing a foreign entity. An EoR operates as a legal entity with a team of experts well-versed in India’s employment laws and regulations. An EoR will handle all of the hiring, payroll services, benefits, and taxes on your behalf to ensure local compliance and support for your Indian workforce.
3. Engage Contractors in India
Instead of setting up an entity or hiring full-time employees, another option is to engage contractors in India for short-term projects or services. An international contractor provides their services as a self-employed individual, which allows for more flexibility and cost savings for a company. Companies can target specialized expertise that falls out of their regular scope of work, all while saving on time and money that would otherwise be spent on training, administration, and payroll.
Compliance Risks When Hiring Employees in India
Because employment laws and regulations differ in each country, there are compliance risks when hiring employees in a foreign market. When expanding your workforce into the Indian market, it’s important to understand the different regulations and how they apply.
Employment Law Variance in Different States
India has 29 states, and the employment laws vary from state to state. Along with taxes, other factors that differ between states include minimum wage, sick leave, and overtime rates.
For example, the national-level minimum wage in India is 178 Indian Rupees (INR), or $2.34 USD per day, but this varies depending on state, industry, occupation, and skill level. According to 2020 data, the daily wage rate in Kerala was 670.1 INR compared to 205.6 INR in Madhya Pradesh. Partnering with an EoR helps navigate the multifaceted laws and maintain compliance.
Incorrect Payroll Contributions
There are differences between U.S. and Indian employer contributions, which directly affect payroll items like your employee’s take-home pay and social security.
The Employee’s Provident Fund (EPF) is India’s social security system and is required for all foreign businesses with more than 20 employees. It is similar to the U.S. 401K; however, employers and employees each contribute 12% as required by the EPF. As part of the EPF scheme, the employer must also factor in an administration fee and Employees’ Deposit Linked Insurance fee. Additionally, with the onset of the COVID-19 pandemic and the global lockdown in 2020, the Indian government has made it mandatory for all employers to provide medical insurance for employees in India.
If you have an ongoing and stable presence in India, you may have a permanent establishment and are therefore liable to local corporate taxes. To be considered a permanent establishment, a business must regularly conduct business in the country, have a fixed or permanent location there, and wholly or partially operate its business through that venue. If your company is generating revenue from a fixed location in India, failure to understand and identify permanent establishment will lead to compliance risks, such as unpaid taxes, legal issues, interest, and employer liabilities.
If you decide to engage contractors instead of hiring employees in India, improper classification is a risk. Misclassification risks include fines, legal issues, and employee entitlement back pay. When engaging with an international contractor in India for short-term services or projects, a company should learn the necessary classification, tax laws, and reporting for both the U.S. and India. A Form W-8BEN determines the proper tax reporting and withholdings for international contractors and is completed by the contractor to document their status as a foreign worker.
However, understanding how to classify your workforce in a foreign market is still a complicated process, so many companies opt to work with an experienced partner with in-country insight into locally compliant contracts, reporting, and payroll to avoid misclassification.
How to Hire and Pay Talent in India Compliantly
Expanding into India’s market is an exciting and rewarding opportunity if done compliantly. Partnering with an experienced partner like Velocity Global eliminates the challenges of setting up an entity and helps you navigate India’s local employment laws.
Our global Employer of Record solution manages all risk mitigation, payroll, and compliance so you can focus on running your business and supporting your workforce. Velocity Global’s Contractor Management solution also helps you engage contractors in foreign markets by handling all the workforce classification and payroll systems you need to stay compliant.
Connect with Velocity Global today and learn how our solutions can help you tap into India’s talent and expand your global possibilities.