Hiring and paying remote workers abroad: Understanding your risks and options

6 October 2021
Companies have always employed a contingent of remote workers abroad, including expatriates on long-term assignments, home office workers sent for temporary duties or local nationals with on-the-ground expertise.

But during the pandemic, remote work exploded — and there may be no going back to business as usual. For example, a recent Upwork study found that by 2025, over 36 million US citizens will be working remotely, an 87 percent increase from pre-pandemic times.

Of course, most remote workers are likely to remain in their home countries. But a shortage of talent at home and the productivity gains companies have experienced from teleworking in the past year and a half have made managers more open to the idea of allowing work from anywhere. And some employees are thrilled at the prospect of decamping to a sunny Caribbean island or a flat in the heart of a European capital.

“A lot of younger-generation workers would like to work from a café in Italy, because they can. Today’s technology allows them to connect and collaborate across borders,” says Jason Mendelsohn, global mobility director at Vistra.

In addition, the dynamics of hiring visa workers have changed, with more choosing or needing to remain in their home countries.

“During Covid, many workers on visas moved back home to be with their families,” says JP Gooch, vice president of EOR operations at Vistra.

And as visa restrictions multiplied — for both pandemic-related and political reasons — local nationals who once would have moved cross-continent to be closer to their employer have had to remain at home.

All of these trends have combined to produce a larger number of workers clocking in from afar, leading employers to a new hiring paradigm. “We call it ‘employment portability,’” Mendelsohn says.

Choosing an employment solution

The primary means of paying workers in any country is through a legal entity, such as a subsidiary or branch. Establishing a legal entity provides flexibility and lowers compliance risks, but it can be time-consuming and expensive. In short, it may not be the best option for paying remote workers, depending on the length of their assignments, the activities performed, local laws and other factors.

Apart from establishing a local legal entity, employers have three main options for hiring and paying cross-border remote workers: registering as a non-resident employer, using an employer of record company (sometimes called an international professional employer organization, or PEO), or hiring independent contractors. Choosing the right solution involves considering the employee’s circumstances, the country’s regulations and the employer’s risk tolerance.

For home workers sent abroad on short-term assignment in a country where the employer does not have a legal presence, the simplest option may be to register as a non-resident employer (NRE) and keep the worker on the home-country payroll. NGOs and universities often send staffers abroad temporarily for research projects, and private companies may have short-term business interests abroad.

“If someone from the US is working in Canada for less than six months, you’re not switching their employment to Canada. You don’t need to pay them local benefits, and their social security is covered by a reciprocal agreement between the two countries,” says Bill Kirwan, vice president, advisory at Vistra.

It’s important to check local rules when performing due diligence in this area, as some countries don’t allow NREs. Tax residency rules can also come into play. Switzerland, for example, considers workers who stay over 90 days to be residents for tax purposes. Many other countries start to impose tax liabilities after 183 days.

For longer term assignments or local-national hires, using an employer of record (EOR) firm is a better solution. The EOR firm hires the workers, manages payroll, and accounts for and pays any locally required benefits, which may include paid holidays, vacation time, medical benefits, maternity and paternity leave, and others specific to the country. The company that has hired the EOR firm manages the workers’ job duties and performance and pays the EOR for employment administration and benefits services.

An EOR also works well when employing former visa workers who have returned to their home countries from HQ or another established office to work remotely. As mentioned, this has been a common situation during the pandemic.

“We saw a spike in EOR services for visa holders during the pandemic,” Gooch says. “They were full employees before, so it isn’t fair to re-hire them as contractors simply because they’ve moved from a country where the company has a legal entity to another country where the company doesn’t have one. An EOR allows you to maintain compliance and pay workers wherever they may be.”

Local hires

Companies may decide to hire local nationals abroad simply to address a talent shortage, particularly for IT and software development skills.

“Many companies these days — especially tech companies — want to hire globally, without restrictions. If they find someone in another country with the right skillset, an EOR can be perfect for them,” Kirwan says.

For other companies, the traditional allure of cost-effective outsourcing retains its appeal.

“Cost is often a driver,” Kirwan says. “Companies contemplate hiring in countries such as India or Eastern Europe, which have a well-educated but not-too-expensive workforce.”

In the past, it was common for organizations that needed local nationals to hire them as independent contractors. But today, that’s become a dangerous solution, especially in the US and Western Europe. As the gig economy has grown, governments are increasingly questioning whether contractors such as Uber and Lyft drivers are really independent or are being deliberately misclassified to enable employers to evade tax payments.

Legislation is murky and evolving. Using an EOR allows employers to avoid bad publicity from improper hires, as well as potential compliance violations and fines.

EOR risks

An EOR solution is not risk-free. Employers should check into the company’s reputation — local laws change frequently and not all companies do a thorough job of keeping up. If a violation occurs, the employer, as well as the EOR, can be held legally responsible.

A more common risk is triggering a legal presence, or permanent establishment (PE), which will require the employer to pay corporate taxes and/or value-added taxes (VAT). Double taxation and penalties may also be assessed.

“The dreaded permanent establishment designation is something you must always watch out for,” Kirwan says. “Different countries have different rules about it.”

The number of employees you hire, their length of employment and the nature of their work all play a part in determining permanent establishment. NREs and EORs are designed to be short-term solutions and, again, do not eliminate PE risks.

“The longer you have people in country and the more there are, the higher the risk of PE becomes,” Kirwan says.

Rules vary, but in general, if you plan to keep workers in a country for over a year or hire more than half a dozen of them, you should look into creating a legal entity. But keep in mind that in many situations, you can trigger a permanent establishment with only a single employee working for less than a year. Establishing a legal entity can take several months, so you should plan in advance.

Another important PE consideration is revenue generation in the local country.

“Hiring sales people who produce revenue or make deals with local clients is a big red flag,” Kirwan says. “You’re far less likely to get a PE situation for a remote IT worker.”

Preparing for employment portability

As remote working expands in scale and scope, it offers employers new possibilities for hiring talent and testing new locations. But each hiring and payment option comes with caveats too risky to ignore. Understanding local laws and consulting with legal and tax professionals in advance will allow employers to chart a course of action while remaining flexible. Moving from plan A to plan B is always easier when you’re prepared.