Global Expansion Pt. 1: International Labor Law and Regulatory Compliance

Welcome to Part One of Global Growth 101, a six-part blog series that highlights key components and research strategies for global expansion. Each part covers specific fundamentals of international growth and, collectively, offers thought-starters and strategies for successful expansion.

1. Labor Law and Regulatory Compliance
2. Cultural and Social Insights
3. Geographic and Logistics Considerations
4. Talent and Workforce Research
5. Customer Insights and Local Engagement
6. Legal and Risk Analysis

Expanding into global markets offers growth opportunities but requires navigating complex international labor laws and business regulations. This first installment of Velocity Global’s Global Growth 101 series explores key legal considerations for employers building global teams, from employment standards to hiring models.

Understanding labor laws in international markets

Working hours and overtime vary significantly by region. The EU caps weekly work at 48 hours (including overtime) with mandatory rest periods, while France enforces a 35-hour workweek. Countries like Japan and the U.S. set standards at 40 hours but differ in overtime rules. Spain limits annual overtime to 80 hours, whereas the U.S. mandates 1.5x pay beyond 40 hours.

Paid leave requirements range from four weeks annually in the EU to none federally mandated in the U.S. Countries like Thailand recently expanded severance pay for long-term employees, while Germany and Spain enforce strict termination protections.

Employee benefits often include healthcare, pensions, and social insurance. Austria requires employer contributions to social security (21% of wages), while the EU mandates health and safety protections. Missteps in benefits compliance can lead to penalties or reputational damage.

Termination policies and worker protections

Many countries prioritize employee rights during layoffs. Germany’s Termination Protection Act requires employers to exhaust alternatives like role transfers before dismissal. The International Labour Organization’s Termination of Employment Convention mandates valid reasons for termination and due process for workers. In Japan, firing employees is restricted to cases of serious misconduct.

Severance calculations also differ: Spain grants nine weeks’ pay per year of service, while Thailand offers up to 400 days for 20-year tenures. Misunderstanding these rules can result in costly litigation or fines.

Navigating hiring models: direct employment vs. employer of record (EOR)

Direct employment involves setting up a legal entity to manage payroll, taxes, and compliance. This offers long-term control but requires upfront costs and expertise in local laws.

An Employer of Record (EOR) like Velocity Global streamlines hiring by acting as the legal employer. EORs handle payroll, benefits, and compliance, which is ideal for short-term market tests or multi-country expansions.

When to choose a legal entity vs. an EOR

In short, choose an EOR for rapid entry into new markets or limited resources. Opt for a legal entity for permanent operations or full HR control.

Hiring locals vs. expatriates: key trade-offs

Local hires reduce costs and offer cultural fluency but may lack specialized skills. Expatriate employees bring global experience and multilingual capabilities but incur higher relocation and salary expenses.

For example, expat packages often cost 2-3x local salaries due to housing, taxes, and family support. In turn, expat roles work best for leadership positions or niche skill gaps, while local talent fosters community integration and long-term growth.

Common labor law pitfalls

Misclassifying employees as contractors can violate laws like the EU’s Working Time Directive, which excludes contractors from overtime protections. In Germany, misclassification risks back pay for benefits and penalties.

Non-compliance with benefits—such as omitting mandatory health insurance in Austria or pension contributions in Thailand—can trigger fines. Ensure employment contracts align with local leave, severance, and termination standards.

Maintaining global compliance with labor laws takes constant monitoring and adaptation. “Staying informed about changes in labor laws and regulations in each country where you operate is crucial for maintaining compliance,” explains Daniel H. Weberman, an accomplished business attorney proficient in international employment law.

“Regularly reviewing and updating your policies and procedures to align with the latest legal requirements demonstrates your commitment to ethical business practices and employee well-being,” Weberman advises in his blog post.

Taxation and payroll compliance

Balancing corporate tax obligations and payroll compliance is a cornerstone of successful global expansion. Below, we break down key considerations for employers managing international tax systems and cross-border payroll logistics.

Corporate tax rates by country

Corporate tax structures vary widely, impacting where businesses establish operations. Below are notable 2025 rates and regional averages:

Payroll requirements and compliance

Navigating global payroll compliance requires employers to adapt to regional social security systems, withholding tax rules, and mandatory deductions. Social security contributions, for example, are typically shared between employers and employees, but rates vary widely. In the U.S., employers split Social Security and Medicare taxes with workers, while countries like Germany require employers to cover larger portions of health and pension insurance.

Withholding taxes also differ by jurisdiction. Employees in progressive tax systems (e.g., France or Japan) have deductions scaled to income levels, while contractors are responsible for self-reporting taxes. Misclassification is a critical concern—treating employees as contractors can trigger penalties, such as retroactive pay or fines for unpaid employer contributions.

Local deductions add another layer of complexity. Some countries mandate contributions to unemployment funds, severance schemes, or housing allowances. Employers must also track regional pay cycles, such as weekly wages for specific roles in Mexico or monthly payments in EU nations.

Navigating cross-border payroll challenges: 5 actionable tips

Managing payroll across multiple jurisdictions introduces unique complexities, from currency fluctuations to regulatory updates. These strategies help businesses maintain accuracy, reduce risks, and support distributed teams effectively.

• Centralize compliance monitoring. Tax codes change frequently—13 countries adjusted corporate rates in 2024. Partner with an EOR to automate compliance updates and mitigate risks. For example, Velocity Global’s EOR solution ensures payroll adheres to regional laws without requiring in-country legal entities.
• Streamline multi-currency payments. Fluctuating exchange rates and cross-border transaction fees erode budgets. Use multi-currency payment platforms to reduce costs and ensure timely payments for international teams.
• Align pay cycles with local norms. Adapt schedules to regional requirements, such as weekly payments for blue-collar workers in Mexico or monthly cycles in Luxembourg. Automate pay cycles through centralized payroll systems to avoid delays.
• Prioritize data security. Comply with GDPR (EU) and CCPA (California) by storing payroll data in encrypted systems with restricted access. Partner with providers that offer ISO-certified security protocols for global teams.
• Unify payroll reporting. Fragmented systems increase audit risks. Centralize payroll data for all countries into a single dashboard using unified global payroll services, enabling real-time reporting and compliance tracking.

Trade regulations: managing international commerce

Navigating global trade requires businesses to balance compliance with regional laws, product standards, and customs processes. While regulations vary by country, understanding core principles helps avoid delays, fines, or shipment rejections. Below, we outline key considerations for managing cross-border commerce.

Understanding trade rules and restrictions

Most countries restrict or regulate goods like pharmaceuticals, electronics, and agricultural products. For example:

• Medical devices often require country-specific certifications (e.g., CE Marking in the EU).
• Food imports may need safety inspections or labeling adjustments to meet local standards.

Tariffs and taxes:

• Customs duties are fees applied to imported goods, often based on product type, origin, or value.
• Value-Added Tax (VAT) or Goods and Services Tax (GST) applies in many regions, such as the EU (15%–27%) or Singapore (9%).
• Trade agreements (e.g., USMCA, EU-Singapore FTA) can reduce or eliminate tariffs for qualifying goods.

Always verify if a product is subject to anti-dumping duties or embargoes, which vary by country and political climate.

Licensing and compliance essentials

Adhering to product certifications and operational requirements forms the foundation of compliant cross-border trade, helping businesses avoid penalties and shipment delays.

Product certifications:

• Mandatory standards. Electronics may require safety certifications (e.g., FCC in the U.S., KC Mark in South Korea).
• Industry-specific approvals. Chemicals often need REACH compliance in the EU, while toys require ASTM testing in the U.S.

“Maintaining consistent product quality is crucial to protecting your brand’s reputation, especially when working with overseas manufacturers, suppliers, or partners,” says Ross E. Pitcoff, International Law and IP Litigation Attorney. “With proper planning, technology, and legal frameworks, businesses can maintain product integrity and customer satisfaction across global markets.”

Free trade zones (FTZs):

FTZs allow businesses to import, store, or assemble goods without paying duties until products enter the local market. Benefits include:

• Duty deferral for cash flow flexibility.
• Simplified paperwork for re-exported goods.
• Exemptions from certain local taxes.

Best practices to streamline compliance

• Partner with local experts. Consultants or customs brokers help interpret regulations, classify products, and file paperwork correctly.
• Leverage compliance tools. Use digital platforms to automate tariff classifications, track certification deadlines, and manage documentation.
• Audit supply chains. Regularly review suppliers and logistics partners to ensure they meet evolving trade laws (e.g., forced labor bans).

Proactive trade management minimizes risks and keeps goods moving smoothly across borders.

Permanent establishment (PE) risk: tax triggers for international operations

Navigating permanent establishment risks is critical for businesses operating across borders. PE determines whether a foreign country can tax a company’s profits, making compliance essential to avoid penalties, double taxation, and legal disputes.

What is PE, and why does it matter?

A PE arises when a business has a taxable presence in a foreign country, typically triggered by:

• Fixed business locations. Offices, warehouses, or factories.
• Dependent agents. Employees or contractors who negotiate contracts or generate revenue locally.
• Long-term projects. Construction or service activities exceeding thresholds (e.g., six months in many countries).

Tax treaties often define PE to prevent international double taxation, but definitions vary. For example, remote employees working abroad or in digital sales may inadvertently create PE under evolving rules. If a PE is established, the host country can tax profits tied to that presence, impacting cash flow and compliance obligations.

How to determine the risk

Assess PE risk by evaluating these key triggers:

• Physical presence.
  • Leased offices, warehouses, or remote employees using a “fixed place of business” (e.g., a home office classified as a taxable location).
  • Retail pop-ups or temporary installations exceeding local duration thresholds.
• Agent activity.
  • Sales teams or contractors negotiating contracts or closing deals abroad.
  • Dependent agents acting on the company’s behalf (e.g., exclusive distributors in France).
• Project duration.
  • Service or construction projects lasting over six months in a single country (common in EU and ASEAN treaties).

Mitigating PE risks: proactive strategies

• Audit cross-border activity. Review contracts, employee locations, and revenue streams tied to foreign markets.
• Restructure agent agreements. Limit authority for third-party agents to avoid “habitual” decision-making.
• Leverage tax treaties. Determine PE thresholds under bilateral agreements (e.g., U.S.-Germany treaties cap project durations).
• Monitor project timelines. Track service or construction timelines to stay below local PE thresholds.
• Use an EOR. Partner with a global EOR to hire compliantly without establishing a physical presence.

Anticipating PE risks is vital for businesses operating internationally, as tax authorities may impose penalties or double taxation for non-compliance. Investing in proactive PE management protects profits and ensures tax compliance.

Wrangle the complexities of international labor law

Global expansion demands meticulous management of tax obligations to avoid costly penalties. Velocity Global’s EOR platform helps businesses hire compliantly in 185+ countries without triggering PE risks, eliminating the need for a physical entity. To learn more about how Velocity Global can simplify global compliance while keeping expansion agile and tax-efficient, get in touch.

Take the next step in our Global Growth 101 series and check out Part Two on Cultural and Social Insights. Explore key considerations and strategies to harmonize global operations with social and cultural norms.