Four Common Global Compliance Mistakes & How to Avoid Them
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Global hiring is on the rise: in 2021, companies (mostly from North America) hired more than double the number of employees from Latin America, Asia, Europe, and the Middle East than in previous years. When it comes to hiring talent, the world is your oyster (or your Smörgåsbord, if you’re hiring out of Scandinavia).
But global compliance issues are still a major barrier to a truly multinational talent marketplace. Risk management for labor and tax laws in multiple countries requires significant time and expertise. And if employers fail to comply, they risk jail time, bans, and hefty financial penalties.
But global compliance management shouldn’t stop you from going global–we’re here to help. Below, we describe four major global compliance mistakes employers make, and how to resolve them. Continue reading to never lose sleep over compliance issues again.
1. Employee misclassification: independent contractor or employee?
Misclassifying employees as independent contractors is among the most common mistakes in employment in general, let alone international employment. Employee misclassification is when workers perform the duties of employees and qualify for employee entitlements—but companies compensate them as independent contractors.
Misclassification is usually accidental but sometimes is a deliberate, unethical cost-saving strategy because employers don’t have to provide benefits to independent contractors.
Governments treat misclassification as a grave form of tax evasion because:
- The government loses tax revenue (unemployment insurance and taxes) employers must pay for each employee
- Workers are denied healthcare, social security, and other employee benefits
Employee misclassification penalties
Intentional or not, employee misclassification is punishable by law. Each country has its own punishments. The IRS and the U.S. Department of Labor dole out severe consequences in the US, especially for intentional or large-scale misclassification.
Employers face lenient sanctions to undo employee damage if the misclassification was an oversight. Employers must:
- Pay 1.5% of the employee’s salaries plus interest
- Match 40% of the employee’s Medicare and Social Security and 100% of their FICA contributions
If the IRS and DOL decide employee misclassification was intentional, consequences are more drastic.
Like with accidental misclassification, employers need to pay 100% of FICA contributions for themselves and the employees.
Other penalties add up to $1,000 per misclassified employee, and the employer needs to pay a 20% extra on top of the employee's wages. In some cases, breaking compliance rules may even cost jail time (up to one year).
How to determine workers’ status correctly?
Again, each country has its own way of determining worker status. But generally, workers who work full-time according to strict schedules and expectations count as employees. Workers with multiple clients and plenty of freedom count as independent contractors.
In the US, two official tests help decide your workers' status:
Internal Revenue Service (IRS) Test: The extent of the company’s control over the worker, according to three categories, determines classification:
- Behavioral control: independent contractors choose their own schedule, tools, workplace, and way of working
- Financial control: employees receive equipment, education, and other business expenses, while Independent contractors do not
- Relationship: employers receive benefits and generally (though not always) do not have fixed-term contracts
Department of Labor (DOL) Economic Reality Test: Independent Contractor Status under the FLSA (Fair Labor Standards Act) proposes a set of rules to classify workers, including:
- Economic reality test: independent contractors are self-employed while employees are economically dependent on their employer
- Two core factors: independent contractors have significant control over their work and and revenue based on their initiative and investment
If you’re still unsure, fill out the Form SS-8: Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding) to get an official ruling from the IRS.
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2. Violating local payroll, data privacy, and other labor laws
Compliance requirements vary from one place to another: countries have all sorts of distinct rules, many of them easy to break. Take Portugal, for example. Portugal recently introduced some important rules for employers:
- Employers with over ten employees cannot contact workers outside of office hours
- Workers with children (up to 8 years old) don’t need to announce they’ll be working from home in advance
- Companies must reimburse remote work expenses like higher electricity and internet bills.
Do you want to register as a sole proprietor in Portugal? Learn more here!
We couldn’t begin to cover every labor law for every country in one article. Two major categories of local labor laws stand out: global payroll laws and data privacy and protection laws.
Global payroll non-compliance
Global payroll is one of the most complex parts of running an international business. Taxes, health insurance, currency exchange, pension and 401k contributions, days off, maternity leave: there’s plenty of room for mistakes.
Data Privacy and Data Protection regulations
The General Data Protection Regulation (GDPR) is an organization that sets data protection standards for member states of the EU and the UK. Their flagship assessment, the Data Processing Agreement, is a document all employers hiring in the region must adhere to and sign to ensure they protect employee data according to the GDPR’s standards.
Other countries have their own data protection assessments and certifications. Data Security Regulations in Israel and General Data Protection Law in Brazil are the most similar to GDPR, while countries such as Bahrain and South Korea have noticeably different provisions.
For a company that works heavily with data on an international scale, hiring a Data Protection Officer (DPO) is the best course of action.
Every company or organization which processes the personal data of EU citizens is required to hire a DPO. In addition to GDPR, their compliance efforts include foreign data protection laws.
Compliance Officers are the legal experts who create a company’s compliance program and practice compliance-related due diligence.
These tasks relate to:
- Internal and external communication, procedures, and processes;
- Monitoring domestic rules and legislation in all countries where you’re doing business;
- Employee training and education in legal matters.
Avoid common compliance mistakes with an EOR
Companies that hire internationally–especially companies that want to hire in more than one additional country–often need to look outside their own company to ensure compliance, especially if they can’t afford to staff an entire compliance team. That’s where an employer of record (EOR) comes in.
An EOR acts as a co-employer for your company, assuming legal responsibility for employment compliance wherever you hire. EORs set up local entities in countries around the world–for instance, Deel has entities in 150+ countries. When you want to hire employees in another country, the EOR generates an employment contract that complies with their local labor laws. EORs also provides financial services like payroll and taxes, and manages the legal aspects of hiring so you can focus on the employee, not the compliance.
Learn more about hiring international employees with an EOR.
3. Permanent establishment (PE) mismanagement
A permanent establishment (PE) is a fixed, physical place of business that generates revenue and is therefore susceptible to local tax obligations. PE mismanagement means you fail to pay those taxes. Interest, fines, and back taxes depend on your industry and the country.
Types of permanent establishments
According to The Organization for Economic Co-operation and Development (OECD), there are several types of Permanent Establishments:
- Fixed place of business
- A construction/project
- An agency with an independent agent
Offices, branches, factories, warehouses, management facilities, and places where natural resources are extracted are the most common types of PEs. Notable exclusions include:
- Activities related to support and preparation of goods and services
- Storages used solely to deliver goods and services to customers and clients
- Toll processing
- Purchasing and information-gathering activities
4. Failing to meet immigration and visa requirements
Employers must jump through several bureaucratic hoops before they’re able to sponsor an employee's visa and relocate them. For instance, employment-based immigrant visas for the U.S. require following documents:
- A passport valid for 6 months (unless longer validity is requested)
- Completed Form DS-260
- Two 2x2 photographs
- Applicant’s civil documents
- Financial support
- Completed medical examination forms
The US government may take months to process the application and can reject it outright for the smallest of administrative errors, wasting both you and your potential employee’s time.
Best practices for compliant international hiring
If you have full-time employees in foreign countries, the best course of action is to:
- Hire local experts well-versed in domestic labor law, compliance, and regulation
- Use services of an EOR to ensure compliance while you focus on running your business
- Employ compliance and data protection officers to avoid penalties
Working with independent contractors is flexible, cost-effective, and comfortable, provided that you:
- Know how to differentiate employees and independent contractors
- Promptly pay independent contractors on time
Use Deel to hire global employees without risk
Staying compliant with local laws is the number one concern for many employers wanting to hire internationally, but don't let it stop you from diving into the global talent pool.
Deel ensures each contract a full-time employee or contractor signs is entirely compliant with local regulations. Finally, there is no need to learn a new set of rules each time you're ready to hire in a new country.