Paying Transnational Telecommuters Can Trip Employers Up

Select the best approach to pay workers in countries where the employer has no operations

By Joanne Sammer Feb 8, 2018
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An employee wants to move to another country and continue working for his U.S.-based employer. Another employee cannot renew her visa and must return to her home country but can do her job remotely. Promising talent in another country has much needed skills but no interest in moving to the U.S.

If the employer involved has operations in the country in question, it's a relatively simple matter to transfer the employees or hire them through the local entity. But what if the employer has no presence in the country involved? This is where things can get complicated.

In some cases, an employer could be tempted to find a "workaround" to avoid the expense and administrative burden of creating the legal infrastructure necessary to employ and pay someone living outside the employer's home nation. By doing so, however, these organizations open themselves up to a host of potential legal consequences and HR headaches.

 "When companies fly under the radar on these matters, it is easy for skeletons to come out," said Nicole Sahin, CEO of Globalization Partners, a global professional employer organization (PEO) based in Boston. "When that happens, you have to clean up the mess."

For example, if a worker living in a country that mandates generous paid-leave benefits is not being paid for time off as local laws requires, the U.S. employer could face significant liability. "This gives the employee a lot of leverage" if, for instance, the employer ever needs to fire that employee, Sahin said.

A key consideration is how many employees are involved and how long each employee will be living and working in the other country.

For example, Ecuador allows foreign employers to keep an employee who lives and works in Ecuador on the company's home country payroll if there is only one employee involved, said Donald Dowling, a shareholder with law firm Littler Mendelson P.C. in New York. An employee on a short-term assignment with a clear end date, such as within three months, could be paid as an independent contractor or that assignment could be treated as an extended business trip with no change to the employee's status.

[SHRM members-only toolkit: Designing Global Compensation Systems]

Taxing Issues

Challenges also arise when a non-U.S. employer has employees who are working in the U.S.

"Let's say an Italian company based in Milan keeps an employee on its payroll when that employee moves to Chicago and begins working remotely," Dowling said. In this case, both parties could face significant legal jeopardy—the employee if he or she does not report that income or file a U.S. income tax return or pay taxes, and the employer for not withholding required U.S. payroll taxes.

Change the situation to involve a U.S. employer with an employee living in just about any other country and the legal consequences could be similarly harsh.

[SHRM members-only HR Q&A: Where do expatriates pay income tax?]

Finding the Right Solution

In general, there are five options available for handling these situations, said Dowling. Not all of these solutions are legally viable in every location or situation. Employers, therefore, should evaluate the circumstances and choose the solution that fits best.

  • Form a subsidiary. This is perhaps the most effective way to deal with these situations but it is also the most expensive. With this approach, the employer forms a subsidiary company in the country in which the employees live and work so that the subsidiary can hire and pay those employees.
  • Hire and pay the person from the U.S. Under some circumstances, such as a short-term
    assignment overseas, an employer can hire and pay overseas workers from the U.S. One example of this is a foreign correspondent for a U.S.-based newspaper or magazine.
  • Contract with a temporary employment agency or a Professional Employer Organization. Employers can work with either a local temp agency or PEO in a specific country or contract with a global PEO that can handle these situations no matter where the employees involved are living. In either case, the agency or PEO hires the employees and pays them through the PEO's payroll in the specific country involved.
  • Work with a local entity. Employers can arrange to place the employee on a "shadow payroll" of a local entity that pays the individual as if he or she were an employee of the local entity and according to the laws of the local country. The U.S. employer then reimburses the local entity for all related costs.
  • Hire the person as a genuine independent contractor. The final option is for the employer to pay an individual as an independent contractor. However, the individual must fit the legal criteria of an independent contractor for the country in which he or she lives, not the criteria set forth by the IRS for U.S. workers.

    In Spain, for example, an independent contractor who spends 75 percent or more of their full-time effort working for a single client may be classified as "economically dependent autonomous workers" who must be provided benefits such as paid time off and severance pay, blogged Dave Heinstein, CPA, managing partner at San Diego-based Profitwise Accounting.

These are complicated situations and it's important for employers to get the details right. Sahin urged companies to bring all key stakeholders into the decision-making process, including the managers involved, HR, finance and legal counsel.

"There should also be a process in place to ensure that these situations are cleared in advance," Sahin advised. This can prevent managers from developing their own ad hoc solutions that could get everyone involved into legal trouble.

Related SHRM Article:

How to Pay Employees Working Across International Borders, SHRM Online Global HR, December 2015

Joanne Sammer is a New Jersey-based business and financial writer.


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