In a tight talent marketplace, hiring internationally can be the key to scale an agile and flexible remote workforce. Organizations with remote work policies have been able to significantly increase their geographic area of recruitment, creating more competition for talent. In our recent benchmark report, Cisive Insights: Talent Screening Trends 2021, Cisive asked survey participants if their organization recruits internationally, and the majority (just over 75%) do.
However, it’s important to understand that hiring remote workers residing in a country outside of the U.S. can create compliance and legal issues when it comes to taxes, payroll, background screening, and type of contract. The complicated laws of many countries can create liability in these four areas specifically and they are the reason why U.S. employers hiring international workers rely on vendor partners to handle some of the tasks human resources teams perform for domestic employees.
Employee income tax is paid in the country where employees are tax residents, not where the company is based or headquartered. Tax residency for a remote worker is determined by factors like citizenship, right to work, and how long they have worked (and will continue to live and work) in a particular country.
In the simplest terms (and note that many factors can complicate this): If your remote employee is not a U.S. citizen and all work will be performed outside the country, your remote worker will need to complete IRS Form W-8BEN. If the contractor meets the criteria and properly fills out the form, their wages as nonresident aliens likely won’t be subject to withholding. In the event that their status can’t be verified, you may need to withhold up to 30% of their earnings for taxes.
The two most common ways to hire and pay a foreign employee are to set up an entity (branch or subsidiary), or use an employer of record (EOR) — these are common due to the various complexities around taxes and payroll internationally. When you pay remote employees, you’re responsible for withholding payroll taxes from their paychecks, just like you do with your in-house employees. However, you must comply with all the tax laws and regulations in the country in which the employee lives.
Your company will need to set up a compliant payroll system for each country or region your remote workers are based in, taking local paydays, contributions, taxes, and regulations into account. Not having access to the most recent information for each country and region can put your organization at risk of fines or legal action.
Many employers hiring internationally will work with a Professional Employer Organization (PEO), which acts as a local EOR and can provide full payroll and employment compliance services in the employee’s country.
Some countries require you to pay your remote workers in the local currency. For example, an employee based in Brazil must receive their salary in Brazilian reais and an employee based in Argentina must receive their salary in Argentinian pesos, but Italy, South Africa and the United Kingdom have no special requirements for wages paid to foreign workers.
Additionally, employer and employee contributions (mandatory payments that contribute to a deferred benefit, like a pension or healthcare) have to be paid in accordance with the law of the country or region where the employee is resident, so it’s important to confirm your remote worker’s tax residency when you hire them.
Because of the complexities mentioned above, some companies assume that contracting will solve their remote payroll issues. But misclassifying an employee as a contractor is regarded as non-compliance and severely penalized by local authorities.
You can hire international workers to join your company either as contractors or full-time employees. It’s important to understand the difference between these two types of hires because it influences the international global payroll process. If you misclassify a worker, you’re looking at potential fines and even criminal penalties.
A contractor is typically an independent worker hired to take part in seasonal or one-off projects and are less involved in company culture than full-time employees. From an international global payroll perspective, contractors are easier to handle. Depending on the country, they typically don’t receive benefits, and employers don’t pay for and withhold employment and payroll taxes, Social Security and Medicare taxes (FICA), and state and federal unemployment (SUTA and FUTA) taxes.
Full-time employees are brought on under the expectation of a long-term relationship with the company. When you hire full-time employees, you’re obligated by law to pay for and withhold taxes, as well as to provide benefits, including health insurance, sick leave, and paid time off. If you hire employees globally, you have to comply with local tax and employment laws. (Note that some of those laws may apply to contractors, too, depending on the country.)
Local employment laws include factors like minimum wages, working hours, parental leave, paid time off, and notice periods, which vary from country to country. For instance, in Argentina, male employees are only allowed two days of paternity leave, while in Spain, they are entitled to 16 weeks.
The legal implications of international background screening involve the intersection of U.S. and foreign laws and can be extraordinarily complex. It is important to understand both the laws that apply in both the U.S. and the relevant foreign country. For example, the obligations of the Fair Credit Reporting Act (FCRA) may apply for international screening. If you’re working with a vendor partner to outsource international screening, the vendor has an FCRA obligation to take reasonable procedures to ensure accuracy. If there is a negative public record, such as a criminal-record “hit,” then the firm must make sure the information is correct, current and collected in a way that does not violate any data- or privacy-protection rules.
Working with a reputable vendor partner familiar with the resources and laws of each country of origin can overcome liability, time, and accuracy concerns. Cisive offers a single global platform and a flexible solution to support international and domestic requirements — including multi-language capabilities.
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