What are the legal risks when hiring abroad? How to resolve them?


Rosen Valchev

20 February 2023


As remote work has swept the world with its popularity, employers start to pay attention to their legal risks due to hiring internationally. Even though there are so many benefits to hiring internationally, it is important to address the legal risks and the required changes in payroll procedures.

Companies that want to hire workers from a foreign country must create both financially efficient and legally compliant contracts. In most countries, there are two ways companies can hire people - both of which have their positives and negatives. One way is through a contractor relationship, and the other is through an employment relationship.

Before we examine these two types of contractual relationships, let’s examine why you must be VERY, VERY CAUTIOUS about the many legal risks existing when hiring people in other countries.

The Legal Risks and Problems of Remote Hiring

On a national level, handling payrolls is quite easy - the only laws to consider are those of the country you are operating in. Most business owners (or the payroll specialists they employ) are very familiar with their local employment legislation. Therefore expensive mistakes and complications rarely occur.

But when the business goes outside of their national borders, that is when things get very complicated, very fast.

That’s because when you hire a remote worker residing in a foreign country, you have to abide by the labor laws and legislation of that particular foreign country (in addition to the general legislation of your country). Taxes and social security also must be paid in the respective foreign country where the work is being performed.

Let’s take a quick look at a practical example. The company XYZ incorporated in the United Kingdom hired Karl - a remote developer from Germany. The company XYZ hired Karl on a contractor agreement, and in their contract, it is explicitly stated that Karl is a contractor and he is responsible for paying his own taxes and social security. That sounds nice and easy, right?

However, XYZ did not realize that according to German labor laws (like most national labor laws), Karl is actually being “misclassified” as a contractor! Even though in their contract it’s specified that Karl is a “contractor”, in reality, he is an employee of XYZ according to the German authorities. That’s because, in Germany, you cannot work for a prolonged period of time with just one client if you are a contractor. There is a specific definition clarifying that limit in detail in the German labor laws.

So here is how the whole situation gets really expensive, really fast. Karl is “misclassified”, and he’s actually an employee of XYZ, which means that XYZ is responsible for paying ALL of the employer contributions for him in Germany. This includes, but it’s not limited to income tax, solidarity tax and levies on social insurance schemes that cover pensions, unemployment benefits, health insurance and long-term care insurance.

On top of that, XYZ now has an “employment presence” in Germany. This automatically leads to tax liability in the country. Therefore, the German authorities demand that XYZ must incorporate in Germany and do annual tax statements, accounting and so on - all in Germany, submitted to the German tax authorities according to the German standards. Having a company HQ based in the United Kingdom and no customers based outside of the United Kingdom - does not change that, at least not automatically.

For the “misclassification” of Karl, the tax authorities in Germany will impose a fine on XYZ, plus they will demand all taxes and social security back in time from the day they started working together.

Furthermore, the Managing Director may be held personally liable under German criminal laws for wrongful non-payment of the employee's taxes and social security contributions. This means that the company’s Managing Director can be sentenced to up to 5 years of imprisonment and/or charged with a fine personally.

Besides the personal liability, the German tax authorities may also claim that if you have an employee/employees in their country, you automatically owe them taxes on your global Company revenue/profits (according to German law).

It’s important to note that the above scenario could happen in most countries. This is NOT something specific to Germany. That’s only one example of a county where the authorities closely monitor these types of work relationships. Since remote work is gaining rapid popularity, the countries which haven’t paid much attention until now will likely start tightening their enforcement as well.

Employment Classification Demystified

Classification is the legal procedure of deciding whether a person is a contractor or an employee of a company. Different countries have different classification laws.

In Germany, for example, there is a list of around 10 vague criteria, and most cases are decided qualitatively/subjectively based on those vague criteria. This means that, in reality, there is always a considerable legal risk of being accused of employee misclassification.

As you have already seen, misclassification can cause serious trouble both for a company and its managing directors on a personal level. Risking additional taxes on your global revenue/profits or severe fines and imprisonment is simply not worth it.

Even if you can prove in court that the misclassification of the foreign employee/employees was completely unintentional, you are still not excused from penalties and other liabilities.

To hire and pay remote workers safely, you’ll need deep knowledge of the legislation in each country where you intend to hire a remote worker. Practically, you’ll have to use the services of a labor lawyer in each and every country where you intend to hire, both initially and on ongoing basis:

  1. To set up initial contracts compliant with local labor laws
  2. On an ongoing basis, to be able to pay your remote workers while keeping in compliance with local laws and regulations.

Now that you are aware of the risks that come with remote payroll, let’s see how RemoteMore can help you avoid ALL of these issues.

How RemoteMore Resolves Classification Risks

At RemoteMore, we would take care of the Classification through our extensive network of local labor lawyers that spans most countries around the world.

We would not only do the classification for you, but we would be the “employer of record” - making us responsible for any legal risk involved. If we are wrong in our classification (or we have any other legal risks from the employment agreements), we would be the party that is responsible according to the national authorities. In other words, we will take care and assume all of the legal risks - making remote hiring 100% safe for you!

We work with labor lawyers and companies specializing in classification across most countries around the world. This allows us to confidently take the legal liability/risk and act as your legal shield, protecting you fully from any possible liability due to compliance problems, such as misclassification.

Do we provide this service for your countries of interest?

Email our team at contact@remotemore.com for an up-to-date answer.

Now let’s take a closer look at the two ways you can hire remote workers without having legal problems and headaches.

1) Contractor Payroll with RemoteMore

Do you already have a foreign contractor that you want to hire?

RemoteMore can help you hire any person as an independent contractor (in most countries worldwide, exceptions include North Korea, China, Iran).

If you have already found a foreign contractor that you want to work with, we can help you set up a compliant contractor agreement and payroll. This will only cost you €1 per working hour of theirs. This means that if the independent contractor works 100 hours per month, you’ll only pay €100 per month to avoid all risks related to internationa contractorl payroll.

Once again, we provide risk-free contracts for you, and we assume all of the possible legal risks and liabilities for the contract/contracts. Your convenience is at the top of our minds, so at the end of the month, you get one easy-to-pay invoice from us - regardless of how many contractors you have hired.

Furthermore, you can work with our US or Germany-based entity, and we would do the payment processing to the relevant countries (which for some receiving countries can be complicated in itself, e.g. Egypt).

2) Employment Payroll with RemoteMore

Do you want to hire remote workers as employees? No problem - RemoteMore can help you with that as well! With RemoteMore employment payroll, we’ll hire the remote worker in our company (or our partner’s company, depending on the country). In this way, we would avoid international employment problems as the employee and the company will be located in the same country, simplifying everything.

Our pricing for Employment Payroll starts from €500/month, depending on the country where the employees reside. Once again, by being the so-called Employer of Record, RemoteMore assumes all the possible legal liabilities, leaving no risk of misclassification for you. We would also be responsible for all the administrative work involved in paying the different local taxes and staying compliant with the local labor laws.

As with Contractor Payroll, all you get at the end of the month is one easy-to-pay invoice from us - regardless of how many employees you have hired.

Furthermore, you can work with our US or Germany-based entity, and we would do the payment processing to the relevant countries (which for some receiving countries can be complicated in itself, e.g. Egypt).

… Alternatively, hire Remote Developers Directly from our Marketplace

When you hire developers from RemoteMore’s hiring marketplace, payroll is already included as part of the service, so you won't need to pay for that service additionally.

This means that the salaries you see on our hiring marketplace are the final prices that you would pay for hiring a remote developer. The only exception is a 5% one-time success fee calculated from the developer’s monthly salary when you successfully hire a developer.

In other words, when you hire remote developers through our marketplace - you do NOT need to buy also our Contractor or Employee Payroll services. Because that is already included for free as part of the price that you pay for using our hiring marketplace.

So if you’re looking to hire qualified remote developers with competitive salaries, then look no further than RemoteMore’s website! Sign up today and we will schedule your developer interviews in no time!

Visit https://app.remotemore.com/signup_companies and register in less then 5 minutes.

You get great developers for your team - we take care of everything else!

Legal disclaimer:

The blog post does not, and is not intended to constitute a legal advice; instead, all information, content, and materials available on this blog post are for general informational purposes only. All liability with respect to actions taken or not taken based on the contents of this blog post are hereby expressly disclaimed. The content on this posting is provided on an "as is" basis with no guarantees of completeness, accuracy, usefulness or timeliness. Readers of this blog post should contact RemoteMore or their attorney to obtain advice with respect to any particular legal matter. No reader of this blog is encouraged to act (or refrain from acting) in a specific way on the sole basis of the information provided in this blog post.