Introduction
Probably you are already familiar with the many benefits associated with hiring remote employees. By hiring remote, you can hire from a much bigger pool of candidates – and you can dramatically reduce your salary expenses.
But how difficult is it legally and administratively to employ remote workers? If you know how to do it, it’s as easy as traditional (on-site) hiring, especially when it comes to European Union companies hiring remote workers in other EU countries. Many popular companies have already done it, and the number of companies hiring remotely grows every year.
Examples of EU-based remote companies include:
…etc.
Two options
There are two options when it comes to remote hiring in the EU: (1) contractor agreement or (2) employment agreement. Most companies choose the contractor agreement route – it gives you the benefits with almost no downsides.
Option 1: Contractor agreement (recommended)
European law takes precedence over national law when an EU company employs a worker based in another EU country (the Costa v. ENEL. case and the Lisbon Treaty). According to EU law, the applicable legislation is the local legislation, i.e. the law of the country where the worker is based (Article 12 of Regulation (EC) No 883/2004).
The local legislation allows for a contractor relationship (see the local Commercial/Trade law; it is relatively similar across continental Europe). Note that this makes the relation technically not an employment relation: it’s one business (the company) agreeing with another business (the worker) to purchase services on an ongoing basis. If you have worked with freelancers, it’s exactly the same.
After signing a contractual agreement with the worker (which can be your usual employment agreement with adjustments) – you are almost done. This business-to-business agreement approach is more flexible than employment agreement; for example, you can specify which national legislation would apply for the agreement. The only thing that remains is: the worker must invoice you each month according to the agreement. You pay and process the invoice as any other invoice, e.g. consulting services invoices, cleaning services invoices or electricity bill invoices.
Contractor Agreement Taxation
Taxation is equally easy. The company pays taxes on the expense as usual and in its own country. The expense is taxed just as a company expense (unlike salary, which creates tax liabilities for pension, healthcare etc.). Even though you don’t pay for pension, healthcare etc., the payment that you agree with the worker should still account for those expenses. The reason is that the worker, being a contractor, must follow all local legislation as a self-employed entity. As such, the effective tax burden upon you and the worker combined, may or may not decline compared to on-site hiring (depending on the tax rates in the two countries). However, note that most of your savings will come from the difference between the salaries across countries and not the differences between the tax rates.
The best advantage of this agreement structure is that it’s very quick and easy for the employer. It doesn’t add any legal/administrative burden to the company. Also, you won’t have to deal with the national legislation or institutions of the worker’s country.
The main disadvantage of this agreement structure is that it makes it a bit more difficult for the worker compared to an employment agreement. As self-employed, the worker would need to follow the local legislation, which may require incorporation (registering a company), depending on the country. The worker would need to take care of taxes (healthcare, pension etc.) on their own, which can be a significant hassle. In any case, our experience shows that most workers would gladly agree to this, given the benefits of working remotely. We recommend that the workers to find a local accountant who provides can take care of the administrative tasks on their behalf. Depending on the country, this service can be rather cheap (such as 25 euro/month).
Option 2: Employment agreement (not recommended)
Again, the EU law takes precedence and states that the applicable legislation is the one where the worker is based. Labor laws are relatively similar between continental Europe so we can generalize a bit. If you choose Option 2, as an employer, you would need to comply with the Labor law of the country where the worker is based. By default, you are responsible for handling all the administrative tasks. This also includes tax expenses for the employee in the country where the employee is based. You may even be required to register a subsidiary company in the country.
As you can imagine, the administrative burden in Option 2 is significant. To avoid the language and distance barriers, our default recommendation is to use Option 1 (like most other companies). Option 1 gives you the benefits of remote work without adding any administrative/legal burden.
How can we help?
At RemoteMore, we help companies to find the best full-time remote developers for their job openings. Based on our experience, we can help you with either finding the right developer – or we can help with figuring out the administrative tasks related to the hiring process.
Disclaimer: This article is intended as an introduction and does NOT constitute legal advice. Before taking action, you should consult with a lawyer about the specifics of your case.
