How to stay compliant when paying international employees

According to the World Economic Forum (WEF), the world is experiencing a Fourth Industrial Revolution. Thanks to technology, human life, as we know it, is going through unprecedented change.

“The resulting shifts and disruptions mean that we live in a time of great promise and great peril,”  explains WEF founder and executive chairman Klaus Schwab. “The world has the potential to connect billions more people to digital networks, dramatically improve the efficiency of organizations and even manage assets in ways that can help regenerate the natural environment, potentially undoing the damage of previous industrial revolutions.”

The peril?

“Organizations might be unable to adapt, governments could fail to employ and regulate new technologies to capture their benefits, shifting power will create important new security concerns, inequality may grow, and societies fragment.”

Sometimes, in our daily lives, we don’t see the evolution that is taking place in front of us—which brings us to your company’s  payroll and workforce.

Small businesses are the unsung heroes of the Fourth Industrial Revolution. Unlike bigger companies, smaller organizations can be flexible and agile to change. Thanks to the evolving digital economy, it’s possible for your business to  hire smart people from all over the world.

This capability brings a competitive advantage to smaller organizations seeking to gain a competitive edge—after all, companies are only as high-performing as their workforce.

“We couldn’t find the people we needed to hire locally, where our company began in Chile,”  explains Allan Christensen, COO at Doist, in an interview. “We also knew we weren’t going to stay, but weren’t sure where we were heading next. We’re also bootstrapped and didn’t want to start teammates on a low salary. Building a remote-first  culture gave us access to super talented people in very remote locations.”

• Doist, a self-funded company, recently announced annual revenues of $20M+. It’s a smart move for companies to hire talent from around the world

Despite the benefits, international employment can be challenging to navigate

One of the barriers to hiring employees in a different country is managing payroll. Employment contracts, tax withholding guidelines, legal entity formation and human resources laws can be very different in a foreign country than in your local area. If you’re found to be in violation of a host country’s payroll laws, you risk being subject to fines and penalties. As a small business owner, the responsibility of a mistake will always fall on you—even if you’re unaware that your employment practices are breaking the law.

Doist’s solution has been to hire every team member as an independent contractor or freelancer . The company has brought on dozens of remote workers from varying countries. That means that everyone who works for the company is technically self-employed and responsible for being compliant with local payroll and local tax laws.

But, the independent contractor model isn’t the right fit for all organizations—especially for companies hiring workers in the United States, where employees depend on their employers for retirement benefits and health insurance. To protect U.S. citizens and residents, the IRS maintains rigid guidelines and strict criteria for whether a worker is an independent contractor or employee.

“Worker classification is important because it determines if an employer must withhold income taxes and pay Social Security, Medicare taxes, and unemployment tax on wages paid to an employee,” explains the website. “Businesses normally do not have to withhold or pay any taxes on payments to independent contractors. The earnings of a person working as an independent contractor are subject to self-employment tax.”

In California and other states, independent contractor guidelines are even stricter than the federal standard . A company without knowledge of state and local laws could end up becoming a target for a lawsuit. But, employment laws should not inhibit a company’s desire to expand. Consider the case that, in some countries, laws haven’t caught up to technology.

“There are so many burgeoning opportunities for startups and entrepreneurs in today’s increasingly globalizing world—particularly in developing markets where there is a growing middle class of new consumers driving higher demand for products and professional services than ever before,” says Andrew Lindquist, who consults for businesses looking to expand abroad.

These are rare, once-in-a-lifetime opportunities. That’s why you can’t let compliance barriers stand in the way of sourcing, hiring and paying international employees. While it’s impossible to understand the laws of every country in the world, you can learn how to navigate a delicate, intricate process.

Navigate compliance roadblocks with the following 3 tips

Risk shouldn’t stop you from taking leaps with your businesses. It’s possible to have the best of both worlds—a profitable business that doesn’t break the law. Here are some recommended tips for navigating the legal, tax and regulatory ramifications of paying international employees:

• Ask employees to stay on top of local laws. Gradient Metrics, a U.S.-based company that hires remote employees throughout Europe, relies on each team member, individually, to understand the payroll, legal and tax ramifications of that region. The company’s managing director explains:

“As a small business, we give careful thought to onboarding each employee,”

explains Kyle Block, the company’s managing director. “In some cases, we hire

local lawyers to ensure that everyone has the right guidance. We ask each team member to pay attention to local laws.”

At Doist, every team member is an independent contractor and receives a stipend to work with local tax and regulatory experts. The company helps every teammate remain financially and legally compliant.

“My biggest priority is to facilitate open dialogue with our executive team, ensuring that they have a dedicated stream of knowledge,”  explains Michelle Lakness, senior financial analyst at Doist.” I am constantly working with compliance, legal and finance experts to meet the needs of people within Doist as a whole, and to create a process that’s right for every single person on the team.”

• Define your payroll process. Payroll is the heart of your business. It’s the operation with the most moving parts. It’s also every business’s largest expense. When you define your  payroll process before running your numbers, you’ll minimize the potential for error.

One option is to  outsource your payroll to a specialized service, so that your

business can offload the burden of paying remote workers and international employees. You could work with an external consultant or outsourced HR provider. These services monitor policies that affect what your company and employees owe in a particular region.

Working with a third party to manage your payroll will alleviate multiple areas

of financial and legal risks that come with remote work and paying

international employees.

A business is only as strong as its infrastructure and processes.

• Work with industry experts, locally. For some businesses, there are ramifications and restrictions around paying international employees. If you’ve had geo-dispersed or remote workers on your payroll for a while, you may consider running a compliance audit to make sure you don’t have hidden tax surprisingly lurking beneath your business.

“Identifying the potential challenges for your business idea abroad will actually

help prepare you for the necessary legal and financial steps,” says Lindquist.

“For example, you may find there are certain laws or regulations in place for your industry, meaning you’ll have to adapt your product or service to be compliant. You may also uncover some challenges in protecting your intellectual property.

Apart from product/service regulations and intellectual property, other legal considerations involve labor laws, visas, leases/contracts, acquisition terms, real estate, data protection, business registration/structuring and taxation. A legal plan should be developed that addresses all these areas and anything else in the legal arena that may pertain to your business.”

The bottom line

Every business has the potential to become a global business. Technology has eradicated former barriers that existed within the international commercial ecosystem.

Grow your business sustainably by thinking globally. Every American small business has a springboard to find new employees overseas. Take careful steps forward to ensure that the rewards outweigh the risks.