How To Pay International Employees | Top Ways With Pros and Cons

August 16, 2023
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Looking for common ways to pay international employees? Here is the TL;DR version:

  1. Pay international employees directly as independent contractors (Not recommended).
  2. Establish a local entity and pay international employees via the company payroll.
  3. Establish a local entity and pay international employees via a professional employer organisation.
  4. Skip establishing a local entity and outsource payroll process to an employer of record.

Now, let’s look at each of these methods in detail.

1. Pay International Employees Directly as Independent Contractors (Not Recommended)

This is a shortcut you may take. You can hire your international employees as independent contractors and pay them directly via bank transfer or any payment platform like Paypal, Wise etc. 

No extra paperwork to establish yourself overseas

No need to understand local taxes 

No need to pay any employee benefits

But be wary of local laws. Different countries view contractor relationships differently. For example, as per Indian law, contractors must be free to work for multiple companies, have complete control over their work and be able to choose their work hours. US law says an individual is a contractor if the client/employer has right over only the result and no control over how things are done.

So, if you hire a contractor who doesn't fit into these conditions, you may get into trouble with legal authorities, mainly for misclassification risks (more on this shortly). 

Pros

  • Ideal for short-term projects

It saves you from a ton of administrative tasks of opening a branch in the country, setting up the entire payroll system and more.

Cons

  • Attracts heavy misclassification risks

Employee misclassification means improperly classifying employees as independent contractors. It can attract legal penalties and tax implications from the government side. The contractor can also knock on the doors of a court, saying they were employees by legal definition but were not provided with the rightful benefits for it. Companies have gotten stuck in such issues in the past. Not so long ago, Uber and Lyft drivers claimed $630 million from the cab aggregator companies for misclassifying them. 

2. Establish a Local Entity and Pay International Employees via Company Payroll

Another obvious-sounding way of paying foreign employees would be to expand in that country by setting up a local entity. It is a big move and involves the below steps: 

1. Researching legal requirements, labour and tax laws in the country

2. Completing paperwork for registering the entity

3. Obtaining any important permits, licences and approvals

4. Opening a bank account

5. Finalising office space and infrastructure

6. Setting up bookkeeping and accounting

7. Deciding salary benchmarks and benefits packages as per legal requirements and market expectations.

And these are just steps at a high level. Going through this entire process would make sense for companies planning major expansions in a new country. But any startup just expanding in a new market would find this process tedious. 

Pros

  • Long-term monetary benefits

Some countries provide subsidies, grants or low tax rates to attract foreign investment. For instance, the Canadian government offers low tax rates to foreign businesses to motivate them to expand in their country. So, while it is a heavy investment initially, you can avail benefits in the long run. 

Cons

  • Investment is huge both in terms of time and money 

You have to complete lengthy procedures before even onboarding a single hire. And the entire initial setup needs huge investment upfront. It’s a time-taking and costly exercise to begin with.  

  • Less flexibility

After so much investment, it's difficult to exit the market if things don't work out. There are many risks of having a permanent establishment. Market conditions fluctuate from time to time. For instance, Singapore recently observed a huge hike in residential rents, thus increasing business costs suddenly. Many businesses are relocating their personnel out of Singapore, but to make a complete move is definitely a big decision for any company that went through the entire grind of making the setup. 

  • More administrative burden

Having an entity in a new country further adds the below administrative tasks:

  • Managing payroll and benefits as per that country’s local laws
  • Dealing with more compliance obligations and staying up to date with rules and regulations
  • Providing regular HR support to employees in the new establishment.

3. Establish a Local Entity and Pay International Employees via Professional Employer Organisation

You can set up the local entity and outsource payroll or any HR functions to a professional employer organisation (PEO). 

A PEO is a service-based organisation offering comprehensive HR services, including payroll processing, benefits administration, compliance management and handling employee queries. 

They enter a joint-employment relationship with companies and become a co-employer for employees.  

Pros

  • Payroll and taxation support

PEO takes care of payroll for overseas employees and also withholds necessary taxes according to local laws. 

  • Benefits administration

PEO works with providers and helps you offer suitable benefits packages to your employees. They also make any necessary deduction in payroll for benefits and manage the entire pay cycle with benefits.

  • Assisted compliance

PEOs offer guidance for keeping benefits and payroll in sync with legal norms. They also take the paperwork and record-keeping off your plate and continuously help you stay compliant with laws.

Cons

  • Still have to establish a local entity

PEOs don't save you from the hassle and time-taking process of establishing a local entity. You can work with a PEO only when you have a local entity.

  • Services vary from region to region

PEOs can have more penetration in certain markets and less penetration in a few. Service varies accordingly. It is another prerequisite for you to research further if the PEO is experienced in the region you wish to expand in. 

4. Skip Establishing a Local Entity and Outsource Payroll to an Employer of Record

The last way to pay international employees is to skip establishing a local entity and pay via an employer of record (EOR)

An EOR is a third-party organisation which hires employees on your behalf and becomes their employer on paper. They also take on all administrative tasks of employees, like payroll management, benefits, contracts and other HR duties. 

So you can take care of the business side of things and the EOR will take over all things HR. 

Pros

  • Speeds up the process

No need to spend time (and money) on setting up a local entity. Find the top talent in the location of your choosing and you can onboard them in a matter of minutes.  

  • Takes all HR tasks off your plate

EORs take on all administrative tasks of employees, like paying international employees, monitoring benefits and providing regular HR support to employees for day-to-day queries. 

  • Assists in compliance with local laws 

EORs monitor all paperwork, agreements, taxes and benefits to align with local law. It helps you meet all compliance obligations.

Cons

  • Service varies from country to country

An EOR could be more penetrated into one region and less in another. So you may find that the team's knowledge of local laws and services totally varies from region to region. 

Why Is Partnering With an EOR Beneficial for Startups?

We summed up all the methods on how to pay overseas employees. Let's look at how EORs are a great fit for startups. 

1. Optimises Resources

Firstly, EORs save you both time and money that could go into establishing a legal entity and local HR team. They hire on your behalf and take care of all HR duties so you can work within the budget. They also handle all the paperwork and reduce the compliance burden on your team.

2. Gives Room to Experiment

EOR lets you play around and see if the new market works for you before going brick and mortar. You can easily explore a new market, hire employees in any country without worrying about how to pay a foreign employee and exit if it doesn't work. EORs give the freedom to experiment to any fast-growing startup.

3. Promotes Faster Expansion

You don't have to wait for months to establish a local entity before making a single hire. EOR reduces your market barriers and eases global employment outsourcing. So you can not only experiment but also experiment fast and make dynamic decisions.

Pro tip: Rapid EOR offers special pricing for startups to promote their fast growth. 

Why Rapid Is the Best Choice for Paying Your Employees in India

Looking for a reliable way to pay your Indian team? Rapid EOR can take care of all steps: pre-payroll, payroll and post-payroll. 

Rapid helps you with: 

Pre-payroll tasks

Hiring on your behalf: You don't have to go through the rigamarole of setting up an entity. 

Providing adequate benefits options: Rapid offers flexible medical insurance plans so you can easily choose one as per your budget:

Here are the three plans we currently offer:

1. Pro - Coverage up to ₹500,000 for the employee only

2. Power - Coverage up to ₹1,000,000 for the employee, their spouse and up to 4 children.

3. Premium - Coverage up to ₹2,000,000 for the employee, their spouse, up to 4 children and parents or parents-in-law.

Fast onboarding process: Rapid works with reliable third-party vendors for background checks for your employees. You can also easily generate contracts customised for local laws/requirements. Further, our digital onboarding portal reduces onboarding time from 6 to 9 months to 5 minutes.

Payroll tasks

Payroll and tax administration: Rapid completes payroll processing and withholds taxes per Indian norms. 

Post-payroll tasks

Giving compliance support: Rapid has deep expertise in India for over 25 years and we understand local laws, the job market and taxation. We assist you throughout the process so you can stay compliant with the laws.

HR support: Employees can have further queries and may need HR support. We can provide day-to-day HR support to your Indian team.

Pay your Indian team rapidly. Book a demo with us today! 

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