International Hiring Simplified and Explained
Introduction: Benefits of Hiring Globally
There’s enormous potential in broadening your hiring pool. In today’s post-covid world, it’s become much easier to hire remotely. Technological advances have made it easier to work and connect, and social and cultural shifts are enabling work-from-home lifestyles.
Welcoming international employees to your team can bring cultural diversity, new languages, and new perspectives to your team. New geographic backgrounds can also help a business expand, providing necessary first-hand information about target markets and fueling international expansion.
Three Strategies for Hiring Foreign Employees
You have three different options when it comes to hiring foreign talent.
You can:
- Hire an independent contractor
- Hire a person through an Employer of Record
- Open a subsidiary
Each of these three choices has its advantages and disadvantages. The option you go with will depend on the needs of your business. Here’s our introduction to each option.
Hiring Independent Contractors
One of the most frequent models of business relationships with foreign individuals is hiring them as independent contractors.
Freelancing has grown in popularity, and many people prefer this working relationship because it brings flexibility to both parties. Hiring independent contractors means cost savings, flexibility in hiring and termination, and fewer legal obligations for the employer. On the other hand, contractors enjoy the freedom of working on their own terms and keeping their own hours.
Independent contractors are typically hired on a part-time basis or hired to complete a project. The employer only controls the outcome of their work. Contractors may operate as individuals or own a small business through which they can generate invoices. Each country has its own set of guidelines that define an independent contractor and their tax responsibilities.
Income taxes and employer-paid benefits
Independent contractors do not appear on your direct payroll. As an employer, you are not required to pay their income taxes, health insurance taxes, or unemployment taxes. Independent contractors have the sole responsibility of filing and paying their own income taxes.
Employer responsibility
Employers generally do not need to be responsible for payroll taxes, as the independent contractor is expected to report their pay as business income and pay any applicable taxes. However, employers are usually required to provide specific tax documentation in a timely manner for the contractor to file their taxes accurately.
A common legal issue to avoid is misclassification, where an employer categorizes a worker as an independent contractor when they should have had the status of an employee. Someone who is considered an independent contractor in your country does not automatically make them an independent contractor in another. Each country has its own regulations and tests to determine this classification.
Hiring through an Employer of Record (EOR)
Instead of handling the intricacies of hiring remotely, you can outsource the entire process using an Employer of Record (EOR). EOR refers to a company that hires and pays full-time employees on behalf of another company. Although the worker is under the EOR’s payroll, the company maintains oversight over the worker’s tasks and job responsibilities. It's the preferred solution for companies who don't want or can't undergo the time-consuming legal process to open a subsidiary office (a local legal entity). An EOR allows you to legally and compliantly hire foreign remote workers located anywhere in the world.
An EOR does the following:
- Creates, maintains, and terminates employee contracts on your behalf
- Processes payroll and timesheets
- Files payroll taxes
- Onboards new employees
- Runs background checks on employees
- Maintains insurance
- Handles HR duties regarding employee benefits, compensation, health insurance, etc.
Advantages of EOR Services
With an EOR service, employers can avoid the need to explore and learn new regulations and local laws in order to hire talented people outside of their country. You’re able to hire full-time employees without needing to open up a local entity. If you’re hiring from more than one country, the amount of local legislation you’ll need to understand will be hard to keep up with. When a company outsources the hiring process, the EOR takes over the responsibility for all employee benefits and rights for all countries. This helps ensure compliance with local labor law and other regulations.
An EOR also reduces your in-house HR workload. Training your HR staff, obtaining legal permits in the countries you’re hiring from, and completing other payroll and onboarding-related tasks yourself takes valuable resources away from your core competencies. Outsourcing is generally more affordable than creating in-house teams because you avoid having to cover salaries and benefits for the expanded team. The onboarding process is also outsourced, allowing new members to set up payment information quickly, receive tailored advice on legal matters, and obtain legal permits in their home countries with minimal input from you.
Income taxes and employer-paid benefits
The EOR calculates the required income taxes for the remote employees on your behalf. Tax slips and payslips are also covered.
Opening a Foreign Subsidiary
If an EOR service or an independent contractor hiring strategy isn’t the right fit, or if you want to pursue a traditional solution, you can open a foreign subsidiary.
A foreign subsidiary, also called a daughter company, is essentially a brand-new company in your country of choice. It is an entirely separate legal entity with its own corporate tax ID and legal structure.
Implications for the Parent Company
Opening a subsidiary means complying with the local law, opening bank accounts in local banks, and hiring local people. A daughter company is typically not subject to the tax laws of the holding company’s country. However, its finances will still be recorded in the parent company’s annual balance sheet. The holding company can influence the daughter’s company policy and business decisions, but its degree of control is limited, particularly if it sells any partial ownership stake to other parties.
A note on terminology: branch offices are not the same as subsidiary branches. A branch office belongs to the parent company but is not considered a separate legal entity like a subsidiary and doesn’t enjoy as much operating freedom.
Benefits and challenges of subsidiaries
A new subsidiary is a commitment to exploring a new market. The presence of a subsidiary in a specific market helps the parent company establish trust. Typically, opening a subsidiary means it’ll get a board of directors, who will enable a smoother implementation of the holding company’s values and policies. At the same time, the parent company has influence and control over the subsidiary’s decisions and plans, which makes it easier to execute different business strategies. As your company grows, you can also delegate different tasks to your subsidiaries, reducing workload. Finally, a subsidiary helps you protect yourself from liabilities. That means you get to keep the control with less risk to reputation, finances, and assets.
There are also challenges of opening a subsidiary you may need to deal with. For example, there may be cultural differences that you need to overcome depending on the host country. Establishing a subsidiary also takes more time and costs more than other forms of working with foreign employees and contractors.
Finding Remote Talent
Attracting international applicants is not as easy as opening up your application form to the public. Startups often find success in finding early hires through their social networks. Another common tactic is to use online platforms that connect companies with individual freelancers. These platforms will allow you to post job listings for various positions with specific skill sets and requirements.
The quality of your job description will affect the quality of candidates that apply. Remote roles are based on rewarding work rather than a location, so highlighting how the role is innovative and challenging can be a compelling solution to attract good candidates. Be open and transparent with your company culture so that prospective candidates can tell if it may be a good fit.
When evaluating candidates, keep in mind that a remote work style isn’t ideal for everyone. Look for traits that indicate a candidate would work effectively in a remote setting, such as independence and strong communication.
External recruiters or talent agents can bring additional expertise in finding the ideal remote hire, which may be particularly important if you are hiring for key positions. Done well, you’ll be able to source a diverse and widespread set of candidates.
Paying Remote Talent
Most employees and contractors are happy to be paid through direct deposit into their bank account. However, international payments have long been time-consuming and costly to set up. Recent fintech developments are making these transfers easier. With the proper payroll provider, paying remote workers can become as easy as authorizing a single automated bank withdrawal.
The ideal payroll provider will also accommodate differences in payroll deadlines from country to country. For example, in some countries, employee paychecks are sent on a monthly basis, while other countries are used to a semi-monthly or weekly payment schedule.
Payroll should also accommodate international currencies. Remote employees usually need to be paid in their local currency, while independent contractors may wish to be paid in high-utility currencies like USD or even in cryptocurrency. Choose a payroll provider that can accommodate payments to foreign remote employees and independent contractors alike and supports payments in multiple foreign currencies.
Compliance and Misclassification
Employers should be careful to avoid misclassifying workers. Companies may be financially motivated to misclassify a worker as an independent contractor because they can save money on not paying necessary payroll taxes, even though the worker performs duties in a manner that is consistent with that of an employee. As a result, these workers are left without the health insurance, social security, and the portion of their paycheck they were entitled to receive.
Employee misclassification is an issue that should be taken seriously. Government tax agencies often have specific tests to determine whether a worker is independent enough to be considered a small business or if they’re actually hired under disguised employment. Sometimes, employers and their workers make an honest mistake. But it can also result in legal liability and a costly ruling to pay unpaid benefits and taxes.
Briefly, there are three principal aspects of employment that separate an employee from an independent contractor:
Control: Do you control when, where, and how your worker does the work and to what degree?
Substitution: Do you need the worker to perform the service personally, or are they allowed to hire a substitute to do it?
Mutuality of obligation: Does your worker need to accept any work you offer?
When hiring independent contractors, ensure the working agreement outlines responsibilities that are consistent with an independent contractor’s. Your written contract should clearly outline:
- Clauses regarding data protection
- The governing body responsible in case of dispute (governing law)
- Project definition and requirements (scope of work)
- Project duration (termination and notice clauses)
- Compensation value (and expenses)
- Work relationship between parties NDA clauses, if applicable
- A non-compete clause, if applicable
Conclusion
There is no general purpose solution when it comes to hiring foreign workers. However, one thing’s for sure: Companies worldwide are looking into the global talent pool. Today, it’s easier than ever to hire someone compliantly, efficiently, and quickly.