Employing someone from Berlin while a company is located in Boston was an exceptional practice some time ago. However, nowadays, it has become quite usual to hire people from different corners of the globe, as remote working allows a team to operate in five or six different countries, each having its own regulations concerning remuneration, taxation, contract law, and labor rights.
Despite the numerous benefits brought by this approach for companies, cross-jurisdictional hiring creates quite a stack of legal questions that many companies learn about only after facing serious problems.
This article examines key legal considerations that arise from having employees work in other countries and states and discusses the possible approaches for both parties to cope with them.
Labor Law Generally Governs the Employee’s Location
One of the most common mistakes when it comes to employing people from other countries is to believe that the contract signed by headquarters solves everything. Generally, the laws that apply in the case of a labor relationship are those of the country where work is performed rather than the country where a company is registered.
In case an employee works in a country where they have to sit at a desk, the labor laws of this country will govern the situation regardless of the content of the contract and of the country issuing wages.
However, the application of local labor law generally results in additional expenses due to the fact that many countries impose quite stringent restrictions on working hours and provide generous holidays.
Moreover, most countries establish quite a complicated procedure for firing employees, which is unacceptable for American companies used to at-will employment. Adding a sentence, “this contract is governed by the laws of the home country,” does not solve this problem since courts in the jurisdiction of a worker will ignore this point in case of contradictions with the local labor laws.
Classification as an Employee
In many cases, the most important question is whether the person is classified as an employee or as an independent contractor, especially as many companies try to bypass local labor laws by trying to classify employees as contractors.
However, the authorities analyze the actual relations with the employee and do not take the type of the contract into consideration, which means that in case an individual works according to fixed hours, uses equipment of a company, reports to a supervisor of this company, and relies exclusively on this company for earning money, this person will be considered an employee despite the terms of the contract.
This issue can result in back taxes, failure to pay social contributions, financial penalties, and claims for different benefits that have not been paid to the employee, although he or she had the right to these benefits according to the law of a particular jurisdiction. As it happens quite frequently, the regulations concerning such situations have become more stringent in recent years. At least seven countries now apply special tests to establish whether a person working on certain terms is an employee.
Thus, making sure of the proper classification in advance and classifying an individual correctly can save both sides quite a lot of money as well as protect their legal position.
Taxation Issues – Tax Residency and Permanent Establishment
When an employee works in other countries, two major questions appear. The first one concerns taxation of an individual and is rather simple. Most countries calculate whether an individual is a resident of this country depending on the number of days this person spends in it during a certain period. Usually, it is one year and the threshold is about 183 days, although it can vary and depend on the tax treaties concluded between particular countries. Thus, relocating to another country can make the individual pay taxes in this new jurisdiction despite the fact that the person has not even planned to pay these taxes.
The second one is much more complicated and refers to a situation when an employee performs operations that create a permanent establishment of a company in another jurisdiction. According to the OECD Model Tax Convention, such a situation appears when an individual performs functions of concluding contracts and bringing income to a company in another country. This is why it is quite crucial for a company to know exactly where an employee works because creation of a permanent establishment in another country can force the company to pay corporate taxes there.
Immigration Regulations and the Right to Work in Another State
The possibility to perform a job remotely does not imply the possibility to perform this job in another country. In case a person works in another country, he or she usually needs the right to work in this new jurisdiction. Tourist status generally does not allow people to work, while performing a job in another country on an inappropriate visa leads to various difficulties both for an individual and the company hiring this person.
It should be noted that many countries offer special visas for digital nomads, allowing them to work from another state, and these visas have been introduced recently. However, each of such visas has its conditions in relation to the income, time spent in a country, and types of work allowed. Neither party to a labor relationship should be sure that a good internet connection and a laptop will allow the individual to work in this new country legally.
Data Protection Rules
Data protection is one of the trickiest issues related to the work of distributed companies because the regulations vary greatly among different jurisdictions. For example, GDPR establishes very stringent rules for collecting, storing, and transferring personal data and can apply to any company regardless of the fact that it is situated in other jurisdictions if it processes the data of EU citizens. In addition, other regions have their own data protection laws.
Apart from that, in many cases, there is a practical aspect of this problem, as company systems are often connected to a specific region. It means that servers can be regional or that certain internal systems can be accessible only from this country, or certain services may have only the license in a particular market. In this situation, using a computer from abroad leads to blocking or malfunction of such systems.
This is why a VPN is extremely helpful, as it allows the employee to access company systems over an encrypted connection from the approved location, which allows access to company systems constantly despite the fact that the worker is in another country. Thus, it ensures that sensitive data is protected during its transfer and provides reliable access to company systems.
Payroll, Benefits, and Social Contributions
Payment of salary in another country is quite a complicated procedure, as certain local rules determine the procedure of salary payment, mandatory deductions, and benefits that have to be paid. The differences can be even greater, as optional health insurance in one country can become an obligatory one in another, and paid leave can become mandatory there.
Moreover, there is also a problem related to social contributions, as both parties have to pay them and, in many cases, the situation results in paying contributions to two social systems. However, in case the necessary agreements are signed in advance, such double payments can be avoided.
That is why companies usually use one of several common practices in order to ensure compliance with the rules:
- Having an employer of record, which is a local company that employs the employee on behalf of the company and manages payroll and other benefits in this jurisdiction.
- Creating a separate legal entity of the company in countries where enough people are hired to cover the costs.
Different States, Same Issues
It should be mentioned that the problems that appear when employing someone from another country appear in the case of another state of the same country too. Each state has its own rules concerning taxes, income tax, salary payments, paid sick leave, and other labor issues. In case a company has people working in a single city, the expansion of a team may make the company register for taxes and fulfill other obligations in several different states.
Practical Approaches for Employers and Employees
Fortunately, these issues can be managed easily in case the company takes them into account in advance, which means that an employer should monitor the jurisdiction of employees, revise the contract in view of the local labor law, and obtain legal advice in any state where a company has a presence. In case an employee plans to relocate, he or she should talk to the employer and clarify tax and visa implications of this decision.
Thus, clear policies help more than anything else, as the determination of countries where hiring is acceptable, procedures for relocation, and usage of systems in other jurisdictions eliminate most of these problems from the very beginning.
Conclusion
Employing people working in other jurisdictions has become quite usual practice, and there are significant advantages in terms of talent availability, coverage of areas, and flexibility. Nevertheless, there are a number of legal questions that arise in such situations, but they are easily manageable. Employment law is regulated according to the jurisdiction of the worker, taxation can be applied unexpectedly, and immigration rules and data protection still play an important role. Companies that think about these issues in advance and employees who disclose their location can avoid complications that catch the others unexpectedly.