How do I hire somebody in this country? What is the process? What infrastructure do I need? What are the key things to be careful of?
These are just some of the most common questions that we get asked by those interested and expanding their international payroll and operations. Managing payroll and operations has its own challenges in one country, let alone in more than one than one country—or perhaps even in many!
Challenging, yes, but not impossible! It becomes easier when you have experts in your corner. At Cintra Global, this is what we do day in, day out. We’re here to guide you every step of the way—smoothing the way, avoiding problems and unnecessary liabilities and minimising the risks.
Let us share some of our pearls of wisdom with you if you’re looking to expand and manage an international workforce and business. We’ll cover a few basics of choosing the right set-up and subsequently how to manage your international payroll and operations to lead you in the direction of global success.
How to Set Up Your International Payroll
First things first when hiring people from overseas… it’s essential that you are aware of the three main mechanisms of international hiring.
Independent Contractors:
This does not create an employer-employee relationship, which is why the dynamics are simpler than other options. The contractor acts like a supplier and invoices for their work. There will be a relationship to manage but there is no payroll to set up or maintain.
There’s a high potential for liability by hiring this way, should what is a contractor in your eyes gets classified under local law as a de-facto employee. And there are other risks attached depending on how long they work for you and if they exclusively work for your company.
Employer of Record (EOR):
With this, an employee will have a contract with a third-party company, who act like an agency on your behalf. This entity will provide fully compliant local employment in a specific country. Again, there’s no payroll to set up. All you have to do is reach out to that entity for employee leasing and pay their service charge. Although the operational involvement in ‘managing’ an employee via a third party is not as straightforward as the ‘hire’.
The upfront cost can be relatively low and it’s a great option for where local law is complex. Admin-wise, there is little to handle because the ‘agency’—the EOR provider—looks after all the paperwork and compliance for you.
But there’s a grey area when it comes to tax compliance with this method of ‘employment’, which can also be risky. You’ll be limited in terms of benefits and culture. Cost-wise, this is sustainable for low headcount but if you’re growing a team quickly, this quickly becomes very expensive because fees are usually based on a percentage of salary.
In terms of future-proofing this solution, we would say that providing visa sponsorship is possible via EOR or PEO solutions but it’s extremely complex.
Direct Employment:
This involves engaging directly with employees, establishing payroll, and creating a contract directly with your company. Their lifecycle with the company will be managed directly through HR.
In certain countries, like Canada, Australia, and many countries in Europe, you can implement a tax-compliant payroll without the need to fully set-up and register your company in that country. There are also other options where you can have soft touch registrations, meaning you can still run payroll without having the additional operational burden of VAT registration and other filings.
There are still considerations you’ll want to manage. And please note, this option will only work for businesses with less than four or five workers that are engaged in non-commercial activities such as customer and sales support. Employment without a legal entity will mean you won’t benefit from legal protection, either against permanent establishment or visa sponsorship, which may become an operational and payroll consideration down the line.
In cases where you do need a full legal entity, there will be a higher upfront cost because incorporating a legal team means that local representation expenses need to be settled. There’s also a high administrative burden because there will be payroll filings, local VAT filings, corporate tax filings, and local compliance to take care of (unless you outsource them to us, because we can do this for you!). We’d recommend this for companies that where any or all of the following apply:
- Expanding to more than five employees
- Employing senior management
- Have a physical office.
How to Manage Permanent Establishment Risk (PER)
Permanent Establishment Risk means that you can (without realising it) be exposed to or incur certain forms of taxation in a country. Paying the fines for such contraventions are as costly in money as they are in the administrative burden and time to resolve. They are an operations nightmare waiting to happen.
The risk can be managed and mitigated with the right know-how. Here are some clues that may define and guide your set-up both of the business and the way you hire your international team:
Commercial activity: This relates to everything that creates revenue. In other words, if you hire an individual from a certain country where you don’t have a legal entity, this can trigger the risk of exposure to taxation and tax assessment—definitely if their role is to generate business or sales opportunities. In most cases, this risk doesn’t materialise. However, some countries, such as Sweden, are strict when it comes to this.
Senior management activity: Having a director, founder, vice president, or anyone in top management from another country will create permanent establishment risk.
Fixed place of business: It’s in the name. Having a permanent establishment in another country triggers tax exposure. Creating a legal entity is a very deliberate and purposeful way of highlighting to local authorities that you are permanently established there. But the definition in each country can vary, which means there are a lot of companies also trigger permanent establishment by mistake— why we’re here to guide you in the right direction!
Employment Law Considerations
If you are directly employing individuals from other countries, whether you have a legal entity or not, there are some important points that you must consider.
Local Employment Law Always Applies – Local to the Employee, Not You!
We’ve seen many organisations in the past that they have given international workers a UK employment contract because a UK-based company will employ them. This is completely incorrect. When a company hires somebody from another country, the employment relationship will always be governed by the employment law in that other country. The contract will need to comply with the local law – local to the employee, not local to the business HQ!
Union Requirements, Collective Bargaining Agreements and More
In some countries, there are union requirements and collective bargaining agreements that need to be assessed and complied with. Sometimes the employee will engage their lawyer to confirm that the assessment is correct. This is something that we don’t typically deal with in the UK, which is why many businesses with UK headquarters don’t always understand the risks.
You also have to keep in mind that local statutory minimum benefits must apply alongside the requisite employer insurance. For example, in France, employees always get tax-free perks, holiday allowances, and other French benefits. However, as an employer, you must provide specific insurance as if somebody came to the UK for employment. It includes employee liability insurance and public liability insurance.
Local pay quirks
For UK-based companies, you have to keep in mind that there are local pay quirks in other places. This commonly occurs when you hire people in countries where employees still get a salary when they take a holiday. Moreover, there are some places, such as Italy, the Philippines and Brazil, where all employees qualify for 13th and 14th-month salaries. In countries like Norway, workers are entitled to have an extra half salary within a particular month.
Failing to completely understand what is required locally can become marginal costs to your business, and an operational complication. This is why it’s crucial that these details must be correctly and carefully dealt with in the employment contract. Staying with Italy as an example, if you don’t address the 13th or 14th-month pay in the employment contract, you may end up paying 14 months of salary instead of 12.
Time-Sensitive Aspects of Hiring Overseas Workers
In the UK, it is common for there to be a disjointed timeline in terms of onboarding. However, this is not always allowed in other countries. In countries like Italy and Spain, employment contracts must be filed with the social security for each employee. This needs to be done on or before the start date stated in the legal contract.
Payrolling and Managing Expats
Work Permit and Visa Considerations
Let’s say you are planning to transfer somebody to Singapore to start at a new office. It’s crucial that first, you should set up a legal entity that needs to apply for the ability to sponsor visas and put it in place.
Social Security Exemptions
There is a planning opportunity here in terms of savings on social security. Sometimes, tax planning can result in the ability to provide some positive benefits to employees without them being taxable. There’s also the concept of a shadow payroll which involves moving somebody to another country and payrolling them in their home country. The purpose of this is to make sure that they maintain the continuity of social security benefits.
When running shadow payroll, your company is bound to run a payroll in their respective home countries because that is where the employe will be taxed and exposed to their local laws.
Requirements Around the Ratio of Expats to Local Hires
Here’s a quick example: Cintra Global had a client who was setting up a legal entity in Thailand and wanted to transfer somebody there. But before they could get an expat on board, they must first hire three or four locals. This particular ratio needs to be maintained, i.e. 1 expat per 4-5 local employees. In other words, if they plan on taking a second expat, they should also have a total of six or eight local hires.
Split Locations and Cross-Border Travel
We’ve dealt with situations where workers live in one country but work regularly or permanently in another country. Another client we’ve supported through global expansion had an office in Germany but wanted to hire somebody who lives in the Netherlands. In other words, this employee will have to travel to Germany every day to work. Granted, this is pretty unique. Complicated situations like this don’t often occur, but it is important to consider how to treat and tax people, specifically when they travel extensively for business and visit the same place repeatedly.
Your Guide to International Payroll and Global Operations Success
Before diving into hiring workers from various locations across the world, the first thing you will want to do is get some advice—highly experienced, expert advice where possible. There are many options, many risks, many complexities. But the good news is that they are all manageable.
For a more in-depth explanation on the different mechanisms for international payroll, risks and compliance issues, please fill out this form to access and download our webinar.
