In the past years, we have seen the exponential growth of companies hiring talent outside of their HQ. They resort to seeking candidates within the global market. Although this is good news for the development of remote work, there are common HR compliance challenges that arise from it. In this article, we will cover the main challenges, as well as dos and don’ts of hiring foreign talent.
Definition: What is HR Compliance
Simply put, HR compliance is a series of processes, policies, and procedures that are outlined to ensure a company is following through with practices that abide by the law and regulations of each state.
- HR Compliance Regulations: Hiring Globally
- Legal Regulations
- Compliance Training
- HR Compliance Checklist
Written By: Anja Simic
The first challenge, or rather, the question to be asked, is whether the new worker should be classified as an employee or a contractor. There has been an increasing number of local government regulations that try to avoid misclassification of employees in both US and European countries (IR35 in the UK, for example).
When it comes to hiring contractors, there are three routes you can take. They are as follows:
- Opening a subsidiary. This is highly costly and not the most efficient way if you’re planning on hiring only one person in a specific country.
- Hiring through an employer of record (EOR), which means you are hiring a local entity to run your payroll and benefits. Although this is expensive, it is sometimes necessary.
- Hiring an independent contractor. Some reasons that make the third option the most common is the reduced costs, as the contractor is responsible for covering their taxes and benefits.
What companies don’t often realize is the complexity of hiring overseas. Some consider this to be a simple exchange between the contractor providing work and the company sending funds. There is a lot more that needs to be taken into careful consideration to ensure both sides are protected.
The most common mistake companies make when hiring a foreign contractor is not having a proper contract or in many cases, not having a contract at all. Without a contract, there could be severe complications in the event of an HR audit or dispute. Regardless of the scope of work and project duration, a contract must be in place to protect both parties.
Having a standard contract that is sent to every contractor might be as risky as not having a contract at all. To minimize the risks, create a contract that is localized to both parties’ regulations. This means that if you are a company from the US hiring in the Philippines, you need to make sure the contract you are sending covers all the necessary points for both US and the Philippines. Each country has specific regulations when it comes to hiring contractors; make sure you take them into account when hiring.
A good contract needs to cover some of the standard elements that can easily be overlooked, especially if a company doesn’t have a dedicated HR department, or wants to cut costs by not seeking legal support.
There are several essentials that must be included in a legally compliant contract; they are as follows:
Scope of work: Include all the details of the services the contractor is providing. Feel free to go into details, as this will be considered a reference point for any activity to be taken. This also helps differentiate responsibility and accountability when you have more than one person with the same or similar title. Whenever the scope of work changes, a contract should be revised and resigned.
Compensation and expenses: This is pretty standard, but it’s still worth mentioning that the benefits and compensation should be clearly defined. Moreover, specify whether the worker is entitled to any expenses or reimbursements. The contractor can, in fact, be entitled to bonuses, but that must be covered in the contract itself. Be careful and take into account any limitations under the contractor’s local laws, as some reimbursements may be subject to misclassification.
Relationship of the parties and liability: As already mentioned, the liability becomes an important factor when you are hiring in a foreign country. Research and find out who is responsible for taxes and benefits. In most cases, the contractor is the one responsible, but it’s worth double-checking.
Ownership of work: This is when you need to be very careful. In some countries, the ownership of work lies with the contractor, meaning that whatever the produce will be theirs, even after the working relationship has ended.
Confidentiality and data protection clauses: This is important because it protects the company’s sensitive information. You can define how the document’s turnover is handled during and after the relationship ends. Using a confidentiality agreement template will help protect your company.
A non-compete clause: This might not be necessary for short-term contracts, but it might be for longer ones. This adds another layer of protection to the company after the contract ends.
Termination and notice period: How and when you end a contract should be included in the contract itself. This gives both parties the clarity around the terms in which the relationship can be terminated.
Governing law and dispute resolution: In case of any disputes, this section of the contract will be the defining factor if it comes to legal disputes. Usually, the country where the company is established dictates the governing law and resolution process.
As already mentioned, each country has its own regulations, and even distinguishes different variations of being a contractor. A person can act as an individual, a solopreneur, micropreneur (sole-trader), or in some cases, a business owner/entity. Knowing the type of status of the person you are hiring as a contractor is essential to protect both parties from any risks. Seeking local legal advice is advisable to help you determine the requirements. Once you do that, you can ask the contractor to provide you with compliance documentation such as proof of registration, tax registry number, benefits registration, or other.
On the company side, ensure you have all the required documents so you can present them in case of an audit. In the US, foreign contractors need to have a Form W-8BEN (for individuals) and W-8BENE (for entities) to prove they are not US citizens. In addition, a company needs to issue a 1009-MISC form for each contractor who has earned more than $600 over the course of a year. We have seen the recent reintroduction of the 1099-NEC Form, so check if you need to submit that as well.
Keeping track of all the changes in local (and global) regulations can seem like a laborious task, but it’s one that is essential to perform. Fortunately, changes in regulations don’t happen often. It’s a good idea to review regulations and policy changes quarterly for each country where you are hiring.
Paying your foreign contractors – Which is the best way?
The last step of setting up compliantly, although very important, is to determine the best way to run your payroll. International payroll can be complex, as financial institutions of each country have different regulations. It’s worth noting that some countries have limiting policies about sending and receiving money from certain countries.
Once you determine that your contractor can be paid, choose a method of payment that suits both you and the contractor. In many cases, sending funds internationally goes through an intermediary bank (and their own network, at times, called SWIFT), which is both costly and can take days, sometimes even weeks. Depending on the bank, the fees can reach $60 for each transaction, which is usually charged to the receiving end.
Payment Methods for Contractors
Nowadays, there are numerous payment methods that don’t include intermediary banks- Paypal, Transferwise, Payoneer, just to name a few. Some of them, Transferwise, for example, offer local payouts, which significantly decreases fees and gives more flexibility to the contractor, as they can receive the money directly into their local bank account. Again, fees are being charged, so it’s worth investigating how much that is.
Whichever method you opt for, make sure to keep all the invoices, receipts, and statements at hand. Using a document management system is a good way to keep everything organized If you have a method to store documents digitally, even better! In the case of an HR audit, clean bookkeeping will save you a lot of time and resources.
Whether your company is small or large, compliance training is something that you should consider investing in if you want to remain legally compliant. In your employee handbook, you can include information on the type of compliance training you will offer, if any, and whether certain employees will need to obtain an HR compliance certificate for the job.
Is there any easier way to navigate complex compliance requirements? Absolutely! Here’s a general checklist to refer to with each new hire you make:
- Create a localized contract that takes into account both parties’ regulations
- Research and collect information about the requirements of registration of the contractor
- Ask the contractor to provide proof of business, tax, and benefits registration
- Collect necessary information and tax forms (W-8BEN, W-9, 1099-MISC, 1099-NEC, and others if applicable)
- Determine the best way to pay your contractor
- Collect all invoices for the work done
- Collect all the receipts and expenses if applicable
Streamline your compliance with Deel
Deel simplifies hiring anyone, anywhere. Its all-in-one platform streamlines compliance and payments through our independent contractor and EOR models. With Deel you can set up legally binding contracts that cover local labor laws in over 120 countries. Also, get paid in the payment method of your choice, and enjoy 24/7 customer support. For our US clients, we generate legal documents and tax forms such as W8, W9, 1099, and others.