The logistics of expanding a U.S. business into a new country are complex—including adhering to local laws and navigating a new culture. Learning how to pay international employees is yet another learning curve.
This guide outlines ways for paying international employees while maintaining compliance with local employment and payroll laws.
How does a U.S. company pay foreign employees?
Once a company decides to expand overseas, the next step is to determine how to legally hire and pay international employees.
There are two primary ways to legally pay foreign employees overseas. First, a company can set up and incorporate a legal entity. Second, a company can use a global employer of record (EOR). Both options allow companies to expand their workforce, but the former requires far more commitment and risk.
Set up a legal entity in the foreign country
Setting up a legal entity is a natural choice for companies that want to permanently establish themselves in a new country.
For example, if a U.S. manufacturing company expands into India to open a new plant, it would likely create a legal entity in India. While entity establishment is costly anda time-consuming process, it may be a worthwhile investment for companies that see long-term or permanent operations.
U.S. companies that create legal entities in other countries still face the challenge of payroll for international employees. If a company has legal entities in more than one country, payroll becomes even more complicated.
A multi-country payroll solution makes it easy for U.S. companies to pay international employees across multiple countries and mitigates the need to manage multiple payroll providers. Standard multi-country payroll offers country-compliant payroll processes, reduces payroll reruns, automates payroll for multiple countries, and integrates with other payroll tasks such as time and attendance management.
Partner with an EOR
Not all companies have to set up a legal entity to do business in another country. Rather than going through the expensive, time-consuming process of establishing an entity, many companies opt to partner with a global EORinstead.
An EOR streamlines global expansion and hiring for companies by simplifying processes such as onboarding, payroll, and benefits. The EOR becomes the legal employer of a company’s supported employees and ensures hiring and payroll compliance with local labor laws in each country.
For example, if a U.S. software company wanted to hire a team of workers in France to develop a new product, it would benefit from partnering with an EOR. EORs have the expertise on how to pay international employees, navigate complex labor laws, and ensure employees get paid on time.
Global payroll, an integrated feature of a standard EOR solution, takes care of paying international employees in multiple countries. If that same U.S. software company also has a team in the U.K., the EOR would manage paying employees in both France and the U.K. through one platform.
What is the total cost of employment for international employees?
Hiring employees is more expensive than bringing on contractors due to payroll contribution requirements. In the U.S., it’s common for companies to make payroll contributions to their employees’ health insurance, retirement funds, and disability insurance. This additional indirect compensation is fairly straightforward when onboarding an American employee.
Hiring and paying international employees is more complex.
Calculating and managing foreign payroll contributions is challenging for U.S. companies because required contributions tend to vary at both the regional and national levels. The employer takes on more challenges and more risk when trying to determine those contributions alone.
An employer of record partner demystifies foreign payroll contributions and removes the employer's burden of navigating this process.
Learn more: The Complete Guide to Employee Cost
Alternatives to paying international employees
Hiring international employees isn’t the only option if your company plans to expand. Some companies may choose to hire contractors if they have temporary needs that require international expertise.
For example, if a U.S. marketing agency needs an Italian subject matter expert to create content for a new client, they may choose to engage and pay an international contractor. The company can access the talent it needs without onboarding an employee and making major changes to its workforce.
Hire and pay overseas contractors
Once you’ve found the international contractor you intend to work with, the next step is onboarding and paying them. This isn’t as easy as just sending a PayPal payment: Hiring contractors requires U.S. companies to understand local labor laws to ensure they aren’t misclassifying their talent.
Contractor misclassification refers to the illegal practice of classifying employees as contractors. Employees and contractors are classified differently by law as it relates to factors such as their financial relationship with the company and the degree of control over their work.
Companies may misclassify employees as contractors in an attempt to avoid paying taxes, or they may misclassify their talent unintentionally. Either way, should local authorities classify your contractors as employees, you may face fines, legal fees, employee back pay, business interruptions, and reputational damage.
Paying international contractors comes with its own set of challenges. Some difficulties include needing a secure platform, fast payments, and abiding by international payment regulations.
To avoid the inevitable risks and costs that come with hiring and paying contractors, many companies choose to partner with an EOR to quickly and compliantly hire and pay full-time employees or convert their existing contractors into employees.
Learn more: How to Avoid the Risks of Independent Contractor Misclassification
Challenges and risks with global payroll
Paying international employees presents a number of challenges and risks, which is why it’s important to partner with a trusted EOR.
Below are some global payroll challenges and risks when paying international employees:
- Misclassifying workers
- Dealing with complex labor laws
- Navigating payroll contributions and taxes
- Risking permanent establishment commitments
- Adhering to immigration requirements
As you can see, many of these risks revolve around compliance with local laws and employee protections. An EOR takes most of the guesswork out of the process of hiring and paying international employees so companies can focus on business operations.
Streamline your payroll for international employees
U.S. companies that expand internationally should hit the ground running without worrying about payroll for international employees.
Rather than setting up a legal entity, Velocity Global’s EOR solution streamlines and simplifies onboarding, payroll, benefits, and many other HR tasks for growing U.S. companies. Our integrated global payroll capabilities make paying international employees simple and risk-free across multiple countries.
Contact Velocity Global today to find out how to pay international employees the easy way.
I'm an expert in international business expansion and payroll compliance, with a deep understanding of the intricacies involved in paying international employees. My expertise is rooted in practical knowledge, having navigated the complexities of global workforce management firsthand. Allow me to provide insights into the concepts covered in the article regarding the logistics of expanding a U.S. business into a new country and paying international employees.
Setting Up a Legal Entity: Setting up a legal entity in a foreign country is a strategic move for companies aiming for a long-term presence. It involves creating a legal structure in the new country, which can be a time-consuming and costly process. This approach is suitable for businesses looking to establish permanent operations, such as a manufacturing company opening a new plant in India. However, payroll complexities arise when dealing with legal entities in multiple countries, necessitating a multi-country payroll solution.
Multi-Country Payroll Solutions: Managing payroll across multiple countries can be challenging. A multi-country payroll solution is a vital tool for U.S. companies with legal entities in different nations. This solution ensures compliance with local payroll processes, reduces reruns, automates tasks, and integrates with other HR functions like time and attendance management.
Employer of Record (EOR): An alternative to setting up a legal entity is partnering with a global Employer of Record (EOR). An EOR streamlines global expansion by handling onboarding, payroll, and benefits. It becomes the legal employer, ensuring compliance with local labor laws. This approach is beneficial for companies with temporary or project-based international staffing needs. EORs often include a global payroll feature that simplifies paying international employees in various countries through a unified platform.
Total Cost of Employment: Hiring international employees incurs additional costs compared to engaging contractors due to payroll contribution requirements. U.S. companies commonly contribute to health insurance, retirement funds, and disability insurance for their employees. Calculating and managing foreign payroll contributions becomes complex due to variations at regional and national levels. An EOR partner assists in navigating and understanding these contributions, reducing the burden on the employer.
Contractor vs. Employee: Companies may opt for hiring international contractors for temporary needs, avoiding the complexities associated with full-time employees. However, misclassifying employees as contractors can lead to legal issues. Understanding local labor laws is crucial to avoid fines, legal fees, and reputational damage. Secure platforms, fast payments, and compliance with international payment regulations are essential when paying international contractors.
Challenges and Risks with Global Payroll: Paying international employees involves challenges and risks such as misclassification, complex labor laws, payroll contributions, tax considerations, and adherence to immigration requirements. Partnering with a trusted EOR helps mitigate these risks by providing expertise in navigating local laws and ensuring compliance with employee protections.
In conclusion, expanding a U.S. business globally and paying international employees require careful consideration of legal and cultural factors. Choosing between setting up a legal entity and partnering with an EOR depends on the company's long-term goals and the nature of its international operations. Payroll solutions, whether through legal entities or EORs, play a crucial role in ensuring compliance and simplifying the complexities of managing an international workforce.
