Companies are now able to tap into talent from all over the world, thanks to remote work. In 2024, remote employment increased from 5.7% to 22%, according to Forbes.
By 2025, the number of Americans working remotely is projected to reach 32.6 million, up from 9 million in 2018. Access to specialized expertise and cost savings are just two of the many benefits of hiring remote workers overseas. In terms of safeguarding company interests and remaining in compliance with the law, it may pose difficulties. The article discusses the potential risks of employing remote workers overseas, as well as how an EOR can help to mitigate these challenges.
The benefits of hiring remote workers
Remote work increases productivity while cutting costs. According to a survey by Global Workplace Analytics, companies can save about $11,000 per employee per year by allowing half-time remote work. During the pandemic, employers in the United States saved more than $30 billion per day because of remote work. With 94% to 99% of American workers favoring remote options, even part-time, remote work is a big talent magnet.
Employee Retention: Working remotely has the potential to boost job satisfaction, leading to higher rates of employee retention. Working remotely has a major effect on employee retention, according to 71% of workers.
Lower Employee Turnover: The majority of remote workers would rather keep working from home; 35% would think about it, and 24% would even take a pay cut if it meant they could stay remote.
Cost Savings: Cuts out costs for renting an office, buying furniture, hiring cleaners, and stocking up on office supplies.
Two companies that effectively reduced their real estate expenditures were IBM ($50 million) and Sun Microsystems ($68 million).
Increased Productivity: Personalized workspaces, shorter commutes, fewer interruptions, and regular but shorter breaks all lead to more productivity. Despite the abrupt change, 32.2% of managers experienced an increase in productivity, and as remote work became more common, 68% saw an even greater increase.
Talent Pool Expansion: The competition for local candidates can be reduced when companies recruit top talent from across the country or even the world. Remote hiring increases workforce diversity, which in turn can boost company performance.
Environmental Impact: Remote work helps to reduce the number of cars on the road, resulting in lower pollution levels. Congestion on the roads, gas conservation of almost three billion gallons, and emissions of greenhouse gases can all be achieved by reducing commutes.
Risks of Hiring Remote Workers Overseas
Despite the benefits, companies run the risk of incurring legal and financial liabilities when they employ remote workers in other nations. Employment law complexity, possible tax obligations, and permanent establishment (PE) risks are all factors to consider.
1. Compliance with Local Employment Laws: Remote employees must adhere to their country’s labor laws, which govern contracts, wages, benefits, and terminations. Noncompliance can result in penalties and financial repercussions.
Key Regulations to Know for the US:
● Wage and Hour Laws: Employers are obligated to pay non-exempt employees who work more than 40 hours per week overtime pay, which is 1.5 times the regular wage, following the highest applicable minimum wage laws.
● Health and Safety: Employers must address home office hazards and adhere to the Affordable Care Act (ACA) for employee health.
● Tax Compliance: Taxes are calculated based on the employee’s work location rather than the employer’s. State tax regulations differ, and some agreements may exempt employees from multiple state taxes.
● Equal Opportunity and Anti-Discrimination: Remote employees are protected from discrimination, and states such as Washington and California require salary range disclosures to ensure pay equity.
● Disability Accommodation: Employers must modify the working environment to accommodate employees with disabilities.
2. Tax Nexus and Permanent Establishment Risks: Hiring remote workers from other countries may result in a tax nexus, requiring corporate taxes to be paid in that country. A single remote employee in another country, state, or municipality can establish a taxable presence or permanent establishment (PE) there. This includes activities such as business trips, hiring contractors, signing contracts, and establishing a remote office. If a PE is triggered, it is usually necessary to report and pay local corporate income taxes. Misunderstanding PE laws can result in double taxation, penalties, and reputational damage.
3. Worker Classification: Misclassifying workers as independent contractors instead of employees can lead to serious legal issues, such as fines and harm to your reputation, especially since worker classification regulations are becoming more stringent in many countries.
● Tax Violation Penalties: Fines of up to three percent of the misclassified worker’s salary, full payment of unpaid FICA taxes, and forty percent of FICA taxes not withheld are among the severe tax penalties that can result from misclassifying workers. Also, a $50 fine for each W-2 form that is missing can add up fast.
● Federal Law Violation Penalties: Penalties for violations of federal employment laws include fines of up to $1,000 per misclassified worker, possible imprisonment for up to one year, and the possibility of class-action lawsuits requesting damages and legal fees. Businesses might also have to pay for their employees’ benefits or undergo more audits.
● Reputational Damage: Damage to a company’s image from a high-profile misclassification case can cause employees to leave and discourage recruits. Protests by current employees could damage the company’s reputation even more.
4. Data Protection and Privacy: Concerns about privacy and cybersecurity are heightened by remote work. Cyberattacks increased dramatically in 2023, affecting more than 343 million people worldwide. Data breaches increased by 72% between 2021 and 2023, exceeding previous records.
Security Risks
● Increased Vulnerability: Remote work can increase security risks because it exposes sensitive data and intellectual property to potential breaches.
● External Access: Employees who access company systems from outside the office network increase the risk of data breaches and cybersecurity threats.
● Unsecured Networks: Remote work frequently involves the use of unsecured networks, increasing vulnerability to hacking, malware, and phishing attacks.
Complying with data protection laws and regulations, such as GDPR or HIPAA depending on the nature of the business, is essential for ensuring legal compliance and protecting both the organization and its employees.
How an Employer of Record (EOR) Can Protect Your Business
An Employer of Record (EOR) can help overcome remote hiring challenges by taking on the legal and administrative responsibilities of hiring and managing remote workers overseas. Here’s how an EOR can protect businesses:
1. Simplified Compliance with Local Laws
An EOR acts as a company’s legal employer, responsible for all aspects of local labor laws.
The EOR ensures that all operations, from drafting compliant employment contracts to managing payroll and benefits, are in line with the legal requirements of the worker’s location. This enables businesses to focus on growth without being concerned about compliance risks.
2. Mitigating Permanent Establishment Risk
One of the primary advantages of using an EOR is that it could help avoid having PE status. Businesses can reduce the risk of corporate tax liabilities by hiring employees in foreign countries through an EOR rather than establishing a legal entity there. EORs handle local payroll, tax filings, and employment obligations, ensuring that businesses do not unintentionally establish a tax presence in a foreign jurisdiction.
3. Protecting Against Worker Misclassification
With evolving global legislation on worker classification, using an EOR assists businesses in avoiding costly misclassification errors. The EOR ensures that workers are correctly classified as employees rather than independent contractors, reducing the likelihood of legal disputes and financial penalties.
4. Ensuring Data Security and Privacy
Many EORs also provide strong data security measures to protect sensitive information and ensure compliance with cross-border data privacy regulations. This is especially important when remote employees handle customer or company data from multiple jurisdictions.
Conclusion
Hiring remote workers from other countries gives businesses access to global talent, but it also introduces risks such as compliance, taxation, and data security. An Employer of Record (EOR) is an excellent solution for remote hiring globally to mitigate these risks by managing local legal requirements, ensuring proper worker classification, and lowering the likelihood of permanent establishment status. As more businesses embrace remote work, partnering with an EOR can provide a cost-effective and compliant way to hire international talent while protecting the company from potential legal and financial pitfalls.
Keep up to date with our stories on LinkedIn, Twitter , Facebook and Instagram.
