A complete guide to employing a foreign workforce
The way people work has changed. The global workforce now works more hours remotely than ever before. The pandemic accelerated a shift towards working from home and has ushered in a “remote-first” culture.
Reasons for employing foreign workers abroad
People from different backgrounds usually have different viewpoints and approaches to solving problems. This leads to what is known as neurodiversity - a celebration of diverse ways of thinking, which can help teams thrive. Besides neurodiversity, there are many benefits to hiring foreign employees abroad.
It generally costs less
Due to the differences in living costs between different countries, your staffing costs may be significantly lower when hiring employees abroad and paying in the local currency. In addition, you do not need to pay for visa applications, residence permits or work permits if the workers stay in their home countries.
People are more likely to buy from your brand if they perceive it as diverse
Consumers are becoming more conscious of diversity and equity in the workplace. According to one study, customers are more likely to buy from brands that have global suppliers. Another study confirmed that diversity, or heterogeneity, increases productivity as long as there are adequate team-building efforts. In short, diversity is good for your bottom line, as long as you make successful attempts to overcome any language or cultural barriers.
There is a huge pool of workers
By some estimates, there are over 1 billion skilled workers who can deliver their services remotely. Ignoring this vast pool and focusing only on the narrow local talent market will likely limit the potential of your business.
The global talent market is more agile and flexible
Whether you are hiring for an assignment, a project, or on a long-term basis, you will find what you need in the global talent market. When hiring for short term assignments, if performance is not satisfactory, you can quickly employ another worker.
You can tap into a new market
By hiring an overseas team in a market you are looking to enter, you will get a head start understanding business customs and making connections. Plus, a local team will help with communication in a language foreign to you.
The business case for hiring foreign employees is a strong one. Still, you need to be systematic about the process to get the best outcome every time you make a hire.
How to employ a foreign worker
The objective of the recruitment process is to hire someone who meets or exceeds your performance expectations within the context of your organisation. To meet this objective, you must follow those steps:
1. Be very clear about your strategic goals
First and foremost, the person you hire should help you execute your strategy and get you closer to your north star, regardless of any cost savings you are looking to make by hiring overseas. Ensure you know precisely why you are hiring and what objective you need to achieve.
2. Identify your needs with precision and be clear about the selection criteria
Being crystal clear on who you are looking to hire and what skills and experience they need to possess helps you screen candidates much faster, making the whole process more efficient.
3. Identify the best job market
Where is the talent you are looking for likely to be looking for work? If, for example, you are looking for developers, you may want to advertise the job opening on platforms where IT specialists look for work. Consider hiring specialist recruiters in that field or location to help you source the best candidates.
4. Conduct the necessary interviews and assessment rounds.
Your interviews and tests should be designed to determine which candidates meet your selection criteria and which do not. If a language skill is required, include that as part of the recruitment process.
5. Hire slowly, fire fast
As the old business wisdom goes, taking your time before making the final decision and sending a job offer is crucial, especially when hiring on a long-term basis. Choosing the wrong candidate can have a particularly bad effect since poor performance can be contagious.
Even if you perfect all the above steps, there are still plenty of things to consider once you decide to hire foreign employees.
What To Consider When Employing Foreign Employees
An employer can choose from different contract types when hiring employees overseas. The contract type selected will determine the legal status of the employee working abroad. The following contract options exist:
1. The foreign employee will be self-employed (a sole trader)
Many foreign workers have a sole-trader company registered in their home countries. This makes matters easier as you can hire them as freelancers or consultants, and they can even work from their home office.
- The employee will send you invoices to settle payments, and they will be treated as suppliers.
- They will have no tax liability in your country, and you will pay them their gross fees.
- Even though this arrangement is simple, you may have to look deeper into the local employment laws where the worker lives. For example:
- In some countries, if a worker earns more than 80% of their income from a single source, they will be considered an employee.
- Local laws often govern the dispute resolution process.
2. The foreign employee will have an employment contract
In some cases, such as when the foreign employee does not have a legal entity or if you want them to be associated with your company, you might want to sign an employment contract with them.
This situation is a bit trickier since UK law requires virtual or physical presence in the UK to consider the relationship as an “employment” relationship.
As a result, you will often need to have a local contract alongside a UK employment contract for your overseas employees.
- The laws governing your contract with overseas workers may not be those of the UK.
- The worker might still be considered self-employed in their country, and you can still include them in your payroll on a No Tax (NT) code issued by Her Majesty’s Revenues and Customs (HMRC).
- Even if you managed to obtain an NT code from HMRC, this does not mean that the employee is exempt from paying tax in the country of the “employer” - the UK. Moreover, this does not mean that the employer is exempt from paying National Insurance.
- You will need to do due diligence and understand the local laws where the employee lives. These laws impact how the contract is interpreted and how disputes are resolved. You should think ahead about potential conflicts with employees and ensure that the dispute resolution process meets your needs and protects your rights.
3. The employer will register a branch office abroad where the employee works
This option might be suitable in some countries, but not all. A foreign branch can help companies explore new markets before expansion.
- The caveat with this solution is that it is temporary at best, as local laws typically do not allow this to be a permanent arrangement.
- The tax on the employee’s income will need to be paid to the local authorities from the branch office.
4. The employee works as a subsidiary
Like a sole trader, the subsidiary has the employer as its only customer and sends them an invoice to be paid. The parent company hires the subsidiary company abroad for which the employee works.
- Establishing a subsidiary usually requires a lot of paperwork and is much more demanding than registering a sole trader company.
- Thus, it is a more suitable option only when you want to hire several employees rather than one and expect to have significant operations in a foreign country.
- The subsidiary will pay taxes on behalf of the employee (or employees). In most cases, the tax liability lies in the foreign country where the profit is made.
Payment methods and transfer of funds
As an employer, you must make an agreement with your employees working abroad about how they will be paid, including details such as:
- How the funds will be transferred. Will you transfer payment via wire transfer, debit cards, or will you use an international payment provider?
- In which currency you will transfer the funds. Will you transfer the payment in your business’ local currency or the local currency of the employee? It’s worth considering the benefits and risks of both for both parties.
- Exchange rate risk. Suppose you agree on a salary in the local currency of the employee, and inflation occurs abroad causing the exchange rate to move. In that case, you may want to consider fixing the exchange rate using a forward contract. Our currency experts here at Clear Treasury can talk you through how it works.
- Who should shoulder the costs? The costs can include the transfer fees depending on the payment method and the exchange costs (if you transfer in a different currency). You should have an agreement in place about who should cover those costs.
Supply chains are becoming globalised. If you sell your products in international markets, then it only makes sense that you hire a multinational team with the ability to cater to those markets. However, you must consider all facets of hiring a foreign workforce, including pay, contracts and handling taxes and legalities.
Pay Your Overseas Workers On Time Every Time With Clear Treasury
Clear Treasury is an international payment provider with expertise in conducting international transactions at a business level. Our advisors can answer all of your questions about paying foreign employees in a risk-free way that works for you and your staff.
What is a forward contract?
A forward contract is a foreign exchange agreement to buy one currency by selling another on a specified date within the next 12 months at a price agreed on now, known as the forward rate.
Goodwille – a Clear Treasury case study
Goodwille is a company whose need for effective foreign exchange management is fundamental to the very core of its business.
Mitigating currency risks for international businesses
Company growth can be defined in several ways. Most obviously, it refers to increasing revenues as a result of being in business, but it can also mean growing in terms of the number of people it employs, how many clients or customers it has or the number of offices or outlets it operates domestically and internationally.
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