You may have questions about how to employ overseas workers for your business especially if you have a startup company that plans to operate overseas. We have put together a guide explaining your options, and how you can easily employ overseas workers without setting up multiple branch offices in foreign destinations.
How to Employ Overseas Workers
There are two basic choices when it comes to employing a worker overseas: employee or independent contractor. There are pros and cons for each, and distinct methods for engagement, supervision and payment.
Startups venturing into foreign markets have to be aware of their limitations in complying with local rules and regulations, and will often look to outsource the employment and payment functions for both contractors and employees.
Hire as Contractor
The first inclination for a startup may be to hire independent contractors, since it can keep labor costs down as you venture into a new market. One of the challenges for startups are keeping costs in control, and ICs can be up to 40% less expensive than an employee doing similar work.
Although this sounds good, there are pitfalls with hiring contractors overseas, and the risks have to be closely managed. The chief financial risk is having your contractor reclassified as an employee, and being liable for back withholding on taxes and benefits. Some countries, such as China prohibit the use of ICs altogether, forcing companies to use only employees for both locals and expats alike.
The advantages of using contractors include no need to meet local employment and payroll rules, and the low administrative burden for your startup.
Reasons Not to Hire Contractors:
Increased Immigration Scrutiny of Business Activity
Immigration authorities may view using independent contractors as a way of circumventing work permit and visa requirements for normal employees. They could scrutinize their activity and position to make sure they are really functioning as independent contractors and not ‘stealth’ employees.
Some ICs may not abide by work permit or withholding requirements on their own, further exposing your company to non-compliance if they behave like employees.
Too Large a Workforce – Exceeds Local Limits
Some countries will have a limit on percentage of expat workers of any type in relation to local workers. There may also be limits on how many contractors vs. employees are engaged (such as the 10% maximum IC limit in Philippines) to prevent abuse of the contractor relationship.
Workers May Prefer to Be Employees
In many cases, both expats and locals may want the benefits and legal protections afforded to employees, rather than shouldering the burden of handling their own in country compliance.
Even contractors who initially agree may change their mind at some point and make a claim for employment benefits. For this reason, there may be advantages to shifting existing contractors into an employment relationship if your startup’s commitment to a country is increasing.
Hire as Employee
Whether sending workers from your home country or hiring locals in the destination, employees are typically more costly than ICs and will require more attention to legal compliance. If you go the DIY route, that will require local incorporation and setting up a compliant payroll, which for a startup may mean excessive cost and time delay.
The better option is using a GEO local employer of record to do it for you, a cost efficient and quick method of deploying workers in the foreign destination. The GEO employee is a perfect blend of DIY employment and independent contractor approaches, insulating your startup from compliance risk, and minimizing administrative burdens.
How Can Startups Pay Their Overseas Workers – Pros and Cons
Once the decision has been made to hire either a contractor or employee, the next step is to learn your choices in paying them for their work. The method of payment will have an impact on worker classification, cost and efficiency.
Contractors can be paid directly with little risk, but there must be some form of invoicing and project completion verification. Employees may need some type of local payroll in the host country for direct payment, or there is a chance of violating employment laws.
Paying employees remotely, (i.e. from the home country payroll) may not be permitted in some countries, or may be limited in scope. Contractors can be safely paid remotely in their home country with proper invoicing.
Incorporate Locally and Run Payroll
The most expensive option of payment is to set up a local corporation and establish a compliant payroll in the destination. This is often impractical for a startup that is engaged in simple market testing or sales activity.
Use a Third Party Payroll or Employment Service
There are third party options available for both contractors and employees to avoid the complexity and exposure of DIY payment methods. A startup should closely consider either a contractor management service for ICs, or a GEO local employer of record for employees. The third party takes all responsibility for work permits, payment and withholding, offering an ideal service for a new company expanding overseas.