For a company to expand its global footprint in a competitive marketplace almost always requires engaging workers on the ground. This is never truer than it is right now for multinational employers looking to take advantage of new markets, talent and opportunities. The legal risks and challenges in structuring these relationships differ significantly around the world, and the complexity is further compounded by the intersection with other areas of law, including tax, corporate and immigration, to name a few.

When considering whether to engage a worker in a new country, the main areas of consideration are employment, tax and corporate doing business requirements. This means that companies looking to get “boots on the ground” quickly need to be prepared to consider whether or not a local entity is required to engage workers, and the appropriate type of local presence, which is largely driven by tax and corporate considerations.

Engaging Without a Local Entity

If it is determined that no local presence is required, there are typically three options available for a non-local or “foreign” company to engage workers in country: (a) direct hires, (b) third-party hiring / outsourcing, and (c) independent contractors.

  • Direct Hires. In some jurisdictions, where the law limits the ability of a foreign employer to directly engage local nationals or practical obstacle exist (e.g., inability of a foreign employer to enroll employees in local social security or equivalent programs), employment law challenges may therefore prompt the company to establish a local presence or explore other options for engaging workers.

Even in those jurisdictions where it is possible to employ individuals from an employment law perspective without a local presence, certain procedural challenges remain. Furthermore, when hiring employees directly in-country, it is important to thoroughly monitor employee activities in order to manage tax liability and comply with corporate maintenance requirements.

  • Third-Party Hiring (Outsourcing). In many jurisdictions, a third-party hiring or outsourcing relationship can be used to engage workers without a local entity.

Three common ways to do this are:

  1. contracting with a local entity—typically a partner or distributor—to engage workers to service the foreign company’s account;
  2. use of licensed service providers, sometimes referred to as staffing agencies or labor dispatch companies; or
  3. professional employer organization, or ‘‘PEO,’’ which began in the U.S., but is quickly spreading as a hiring model.

A PEO hiring structure will, however, essentially document a dual-employment relationship, which could raise certain permanent establishment tax and corporate “doing business” issues if the company does not have a legal entity where the employees are being engaged.

  • Independent Contractors. As an alternative to directly hiring employees or engaging through a third party, a company may also consider engaging individuals as independent contractors. Directly engaging a local independent contractor who does not have or exercise the authority to conclude contracts will likely not create a taxable presence. The primary employment law risk is the potential liability created by misclassification of an individual as a contractor when in fact the individual is treated as, and acts as, an employee.

In addition, even if properly classified, in some jurisdictions contractors have specific registration and personal income tax obligations, which the foreign entity could be liable for if not properly paid by the individual. Some jurisdictions have special protections for independent contractors, depending on the type of activity they are engaged in, such as sales agents in Brazil and Colombia.

Hiring Through a Local Entity

Where a company determines to set up a local presence, the above hiring options exist as well, with some variation. In the case of direct hires and local employment, local employment laws will apply. All employment-related activities and employment documentation must be compliant with local laws. Further, a clear understanding of applicable collective bargaining agreements is imperative to ensure full compliance with wage and hour and benefits entitlements. Finally, implementation of the U.S. parent company code of conduct and business ethics is crucial to both comply with U.S. laws and not unwittingly create untenable situations where compliance with the U.S. codes means violation of local employment laws. Companies will need to carefully review all of these issues to ensure compliance locally.

PLANNING TIP

Taken together, local market requirements can appear overwhelming to companies expanding abroad for the first time. Yet, through an integrated analysis of employment, tax and corporate issues relevant to entering a new jurisdiction, as well as a little bit of planning, U.S. companies can help ensure a hospitable environment for their businesses in foreign markets.