How to Pay Employees Working Across International Borders

You face some risks if your company hasn't registered to do business in other countries

By Pamela Babcock Dec 2, 2015
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NEW YORK—Paying U.S. personnel in countries where the employer has no registered presence can be tricky. Many organizations fail to realize the risks and run afoul of payroll and tax compliance requirements. Here are the ways to legally pay an individual in these situations, according to attorney Donald C. Dowling, a partner at K&L Gates in New York City.

There are several cases when a company might be doing business in another country without first registering with the local government: a temporary employee is working on a special project in a new country overseas or a company is “tiptoeing” into a country to test the market. Or a company may be trying to hire a worker who lives in a foreign country but would be working entirely on assignments for the U.S. company. Trailing spouses or staff who have personal reasons to move abroad but are still doing U.S.-based work can incur these risks. As do organizations operating temporarily in developing countries often hire local support workers such as drivers and personal attendants on an ad hoc basis, paying them in cash.

HR professionals should make a strong case for compliance with local overseas payroll laws. Avoid “just do it” arguments, and don’t accept claims from anyone who says, “I’ll accept the risk personally,” Dowling said Nov. 18 at a presentation by the New York City Society for Human Resource Management’s global special interest group.

Dowling said international payroll risks come up more than ever because of the growing use of technology, which facilitates remote work as never before possible.

Reasons Not to Register In-Country

When a multinational or nonprofit company launches a presence in a foreign market by opening a new local office, facility or factory, it’s typically required to register a branch, representative office or subsidiary with local authorities in order to do business legally and hire and pay staff locally. In most cases, Dowling said, clients are told by local host country attorneys to register an in-country corporate presence, get a local taxpayer ID and put the person on the local payroll.

“That’s the straightforward way to go into a new country,” said Dowling, who specializes in outbound international employment law and advises multinationals on cross-border employment law compliance.

But some organizations may not be ready to register a full-fledged legal entity. A company may be “just dipping its toes in the water of a country temporarily” before seeing if it might merit a bigger investment, Dowling said.

For example, a representative from a small machine shop in Michigan near the Canadian border may meet someone at a conference from Canada who could sell its product there but not be ready to expand until business picks up.

Another scenario involves remote workers. A U.S. company might want to hire someone in Argentina who can work from home, but the work would be for the U.S company (and not be related to any work in Argentina). Or a U.S. organization may need someone for an out-of-country temporary position for not just two weeks, but 18 months.

A final scenario is an individual moving for personal reasons, such as a trailing spouse whose partner is being sent to Sweden and the spouse wants to work remotely from home in Sweden for a U.S. company.

“The boss may say, ‘Sure, that would be fine.’ But the boss is not thinking from an HR perspective,” Dowling cautioned.

Making the Case for Compliance

Management personnel in some organizations, especially nonprofits, often cross their fingers and hope they’ll get away with keeping these "floating" employees on U.S. payroll. Or they think payroll providers like ADP or Ceridian can handle payroll, not realizing that the provider would need a client’s taxpayer ID for that country.

“Payroll providers ... are merely an administrative service cutting a paycheck in your name with your taxpayer ID reporting to the government,” Dowling explained.

In the U.S., employers must report employee income to the IRS and withhold federal, state and sometimes city taxes. They also have to report to Social Security and make contributions to it, as well as help fund state unemployment insurance and state workers’ compensation insurance. Dowling said most other countries, except possibly some oil-rich countries, have laws similar to those in the U.S. for reporting payroll. And just like in the U.S., in many countries there’s the potential for criminal liability, not to mention steep fines to collect lost revenues, for not reporting income.

Dowling says the best way for HR to address internal resistance to compliance with overseas payroll laws is to pose a rhetorical question: If a foreign (non-U.S.) company had a trailing spouse working out of their New York City home on “home office” projects that had nothing to do with New York, would you advise them to just pay the person on the foreign payroll? Of course not.

“You’d think long and hard before you tell the foreign company to just ignore U.S. laws,” Dowling said.

4 Ways to Pay People

In general, there are four ways to pay a floating employee.

  1. Register or make the person an employee of a local affiliate. If you send someone to France and your organization is registered or has a subsidiary there, you can put the person on your payroll or you can “second” them to an affiliate or business partner. But organizations don’t typically incorporate foreign subsidiaries just to payroll one or two employees, so they look for other options. 

  2. Put the employee on the home-country payroll. Say you’re sending an employee from the U.S. to Spain. It would be easy to keep the employee on U.S. payroll, but as soon as Spain becomes the place of employment, Spanish payroll laws likely kick in, making the home-country payroll structure a compliance risk.

    But home-country payroll can sometimes be legal. If the employee works overseas for a short period of time, like a couple of months, an organization can likely keep the employee on the U.S. payroll “because the place of employment hasn’t shifted,” Dowling said. The host country might tax the employee and require a visa, but personal tax and immigration issues are separate from payroll law compliance.

    Another way to do this is with a host country workaround. Some countries (not the U.S.) allow workarounds for offshore employers without any in-country presence or place of business, so check with local law.

    These workarounds generally fall into three categories: Under the foreign employer exception (available in the U.K. and Thailand), if a company doesn’t do business or have a permanent establishment locally, it can hire and pay local staff without making local withholdings and contributions. The worker bears the burden of tax and social security filings as if self-employed.

    France, Estonia, Sri Lanka and some other countries offer a payroll law compliance option for the employer, under which foreign employers with no in-country premises can make special “payroll only” registrations with in-country tax and social security agencies so they can issue a legal local payroll.

    Payroll law option for the worker
    . Some countries, for example some in Africa, allow an individual employed by a foreign employer not doing business in-country to self-declare as “foreign payrolled” to the local tax agency.

  3. Make the person a leased or assigned employee. This is a form of secondment or lending. The employee is employed by entity A but doing work on a daily basis for entity B. For example, an organization may need to send an employee to another country to handle customer service and can ask its in-country customer to payroll that person.

    If there’s no local business partner, temporary agencies like Adecco, Manpower or Kelly often provide leased employment. “You can say we want Steve or Sarah, and Adecco will hire them and put them on the Adecco payroll,” Dowling explained. A floating employee in Argentina could be paid by Adecco, which would second the person’s services to your firm. The former U.S.-based employee typically resigns or his or her employment is suspended during this time, Dowling noted.

    A variation on leased employment is creating a “shadow payroll.” Division A of a U.S. company may do something completely different from its sister division B, which alone operates in France. If division A needs to send someone to France, it can ask division B to fill out the paperwork and report wages to French Social Security and the like, and can reimburse division B for doing the payroll.

    “From the French payrolling point of view, it looks like the employee is being paid by division B, so you’re complying with all the payroll laws,” Dowling explained. 

  4. Pay the worker as a legitimate independent contractor. This is risky and usually not the best route. Say an organization needs a salesperson in England but doesn’t want to register there, so classifies the salesman as an “independent contractor.” If that’s such a great idea, Dowling asks, then why not make all your U.S. salespeople independent contractors, since you’ll save on Social Security, employee benefit contributions and the like?

    The answer is that you can’t because they’re performing as employees. Dowling said there’s general consensus around the world about legitimate contractor classification. If the person has set work hours and receives benefits and performance evaluations, then he or she is an employee.

    A salesperson who represents product lines for a variety of companies in addition to yours might be able to be paid as an independent contractor, but if someone’s title is executive vice president and the person is on your organizational chart, that’s not going to fly, Dowling said.
Pamela Babcock is a freelance writer based in the New York City area.
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