Perhaps unimaginable just a few years ago, remote and distributed workforces have become a mainstay of international business following the lockdown measures imposed during the COVID-19 pandemic. According to one LinkedIn survey, for example, there was a 241% increase in the remote-compatibility of jobs between 2021 and 2022.
The explosion in popularity and possibility of working with distributed workforces has brought with it numerous benefits for businesses, both large and small, with an international outlook. Reduced overheads, access to a global talent pool, improved employee satisfaction and retention, increased diversity and improved cost efficiency are but a few of the major benefits enjoyed by enterprises which embrace a more mobile workforce.
Yet with these benefits also comes a number of compliance concerns. The more widely dispersed your team, the trickier distributed workforce compliance can be to navigate, especially with local labour and tax laws varying dramatically from one jurisdiction to the next. We aim to provide you with a comprehensive guide to the most common compliance distributed workforce issues, followed by practical solutions to each.
What is a distributed workforce?
A distributed workforce is a workforce spread beyond your primary location or office HQ. Whilst sometimes used interchangeably with the term 'remote workforce,' not all distributed workforces work remotely. Some operate with all team members working from offices situated across several jurisdictions, both domestic and/or international. Others fit the 'remote' moniker more obviously, with an overseas team of employees working from their homes.
In essence, a distributed workforce is any workforce combining a mixture of remote employees, contractors, satellite office workers, and co-working space employees all collaborating digitally, with management ensuring compliance with employment and tax law, labour expectations, cyber security and more.
Exploring common compliance issues with distributed workforces and practical solutions for addressing them
The distributed workforce compliance issues you are liable to come across depend entirely on the nature of your business, the industry you operate in, and the countries or domestic jurisdictions you plan to expand your workforce into, among various other factors.
Effective compliance management in international business expansion requires competent cross-team collaboration, a comprehensive risk assessment, and often a partnership with a global business solutions provider.
Permanent Establishment
'Permanent Establishment' (PE) is a type of business presence in a region – one which is considered to be firmly established enough, usually by generating income through business practices in that region, that it should fall under the local tax authority's jurisdiction. When a tax authority, such as HMRC in the UK, deems a business to be permanently established, that business is obligated to pay all appropriate taxes. Non-compliance with PE can result in hefty fines, back taxes, and sometimes even legal action.
How to avoid triggering PE
There are two primary solutions to Permanent Establishment compliance: working with an Employer of Record or establishing a foreign subsidiary.
- Establishing a foreign subsidiary in the overseas region gives you, the business, a legal tax legitimacy to operate in that country or region. You will still be obliged to pay your new local tax body taxes such as corporation tax, and to make the correct withholdings on employee salaries, etc., but you will avoid the risks associated with PE . Establishing a foreign subsidiary, however, is both complex and costly.
- Partnering with an Employer of Record (EoR)removes you from the responsibility of having to establish a foreign subsidiary. Instead, the Employer of Record will be able to compliantly manage your business affairs in the country or countries in question through their own wholly-owned legal entities, ensuring cost-effectiveness and mitigating risks of you triggering PE.
Employee misclassification
Each country tends to have its own criteria for defining and distinguishing between employees and independent contractors. Typically, the decision on which category a worker falls into depends on the degree of control an employer can exert over them, as well as the degree to which the worker financially relies on the business.
It is almost always the employer's duty to correctly classify each of their employees and contractors in each of the jurisdictions they operate in, both at home and abroad. With distributed workforces, classification becomes particularly important, given that your team is likely to comprise both contractors and deemed employees working across a variety of locations.
Failure to comply with employee classification requirements can result in fines, legal action, and the obligation to pay misclassified employees the holiday pay, insurance and pension contributions, and worker benefits they were previously denied.
How to classify remote and distributed employees compliantly
The very best way to avoid employee misclassification is to familiarise your HR department with the intricate differences between classifications across the regions you employ in. Since the definitions and processes of distinguishing employees from contractors can frequently change, regular refresher assessments are key to your continued compliance.
Once again, working with an Employer of Record with a history of expertise in independent contractor solutions and HR consultancy can provide an affordable, efficient, and effective means of mitigating compliance distributed workforce risks like misclassification altogether.
International and local labour law compliance
Similarly, the labour laws and regulations affecting your distributed workforce differ from country to country. Employment law serves to protect the rights and interests of both employees and their employers, but complying with the specific laws of each territory you employ in can quickly become complex and confusing.
For example, it is a legal requirement in many South American countries to pay employees a 13th month salary, whereas it is more of a cultural expectation in some Southeast Asian countries, and is not practised at all in places like the US, UK, and Canada.
Failure to comply with employment law carries a great many risks, both financial and legal.
How to comply with different employment laws
We've compiled a complete guide to complying with employment law, but suffice here to say that the key to avoiding employment law infringements lies in accurate record keeping, clear communication, transparency of expectations, and compassionate inclusivity.
Regular risk assessments of each territory you plan to branch into can also help to determine whether your enterprise has the scope and capacity to accommodate a region's nuanced employment laws.
Familiarity with international labour laws and standards is also fundamental to establishing a global employment framework of a high, secure standard, which is less likely to come into conflict with local deviations.
Tax regulations
Depending on the countries your distributed workforce are based in, you will be required to make different tax contributions on your employees' behalf, as well as to pay different corporate taxes to the local tax body.
How to comply with the tax regulations affecting a distributed workforce
Ensuring your financial and legal teams keep abreast of evolving tax regulations in each of the territories you do business in is one of the most surefire ways to ensure compliance. Unless, of course, you opt to work with a trusted global payroll provider, capable of ensuring full tax compliance no matter where you choose to employ or send your distributed workforce.
Alternatively, of course, you can establish your own global payroll department – a specialised division dedicated to navigating the complexities of paying employees overseas efficiently, legally, and compliantly, whilst making all of the necessary withholdings and contributions.
Cyber security
Finally, it is important to note that the risk to your cyber security increases the wider your workforce distribution, primarily because a remote team must communicate digitally, rather than in person. This means that sensitive information – financial, legal, and related to personnel – will be regularly exchanged over the internet, putting your company at risk of data breaches or worse.
How to protect company and employee data remotely
We've compiled a list of non-negotiables in data security to aid you in shoring up your distributed workforce's technological weak spots. Best practices like data encryption, strict password management and personnel authentication, data backup, employee training, and continual monitoring of your company's internal systems can all help to ensure the distribution of your workforce does not negatively impact your cyber security.
Conclusion
Distributed workforces bring myriad benefits to the business seeking to expand its operations internationally, or to broaden its horizons through the perspective of a more diverse, international team. Yet managing, paying, and employing remote teams of employees and contractors also increases the compliance risks businesses face.
The safest, most cost-effective and efficient way a company and its HR team can ensure distributed workforce compliance across tax, employment law, and more, is to partner with a dedicated Employer of Record, capable of handling many different aspects of international employment and payroll on your behalf.
Copyright 2024. Sponsored post made possible by Mauve Group, a trusted global business solutions provider with over 27 years of experience helping businesses expand overseas compliantly. Follow Mauve on X .