Key takeaways:
- Worker misclassification is one of the most significant risks of hiring overseas, and one that many companies underestimate.
- Businesses that don’t tailor benefits to an employee’s home country run the risk of not only violating the law, but also their employee’s trust.
- Companies that want to avoid taking on the significant risk of international employment should consider partnering with an EOR.
Remote work has permanently changed how companies grow. Talent is no longer limited by geography, and for many teams, hiring internationally is the default rather than the exception. A designer in Mexico, an engineer in Poland, a customer success manager in Australia — all working for the same company, often without that company owning a single foreign entity.
On the surface, this looks like progress. Faster hiring, deeper pools of talent, lower costs, and more flexibility for everyone involved.
But global employment introduces a set of risks that many teams underestimate. Not because they’re careless, but because the most dangerous employment risks are rarely obvious. Work gets done. People get paid. Everything seems fine … until it isn’t.
Misclassification That Feels “Low Risk”
Worker misclassification is one of the most common global employment risks, yet it’s still widely misunderstood. It tends to come into play when a business begins adding contractors to its ranks.
Many companies default to hiring international workers as contractors because it feels easier. Onboarding contractors is faster. There’s less paperwork. No benefits to manage. Fewer long-term obligations. Especially for early-stage or lean teams, this can feel like a reasonable compromise.
The issue is that worker classification isn’t determined by what you call someone in a contract. It’s determined by how they actually perform the work, particularly in the eyes of that country’s authorities.
When determining employment status, regulatory bodies evaluate a variety of factors, such as:
- Does the person work fixed hours set by the company?
- Do they report to a manager?
- Are they economically dependent on one company?
- Are they using company tools, systems, or branding?
- Do they perform core business functions?
If the answer to most of these questions is yes, that person is likely considered an employee under local law, regardless of what the agreement says. And crucially, the liability usually sits with the company, not the worker.
If a company is found to have misclassified workers, it could owe back taxes, unpaid social contributions, interest, and fines.
Many teams assume misclassification is a problem only when the worker complains. In reality, audits, regulatory reviews, acquisitions, or even visa applications can surface these issues years later.
Employment Contracts That Don’t Translate Across Borders
Contracts are another aspect of employment where companies often assume that what’s legal in one country is legal everywhere. Wrong.
A contract that’s perfectly legal in one country can be partially invalid or non-compliant in another. Employment law is deeply local, and every detail matters.
Some of the most common contract-related risks include:
- Termination clauses that don’t meet local notice or severance requirements
- Probation periods that exceed what’s legally allowed
- Failure to provide mandatory benefits or allowances
- Non-compete or confidentiality clauses that aren’t enforceable locally
- Working hours and overtime terms that conflict with local labor codes
These gaps often go unnoticed because there aren’t necessarily warning signs right away. The employee signs on the dotted line, and work begins.
The risk usually appears when something changes. A termination, a performance issue, a restructuring, or a dispute. At that point, companies realize the contract doesn’t offer the protection they assumed it did.
In some cases, an invalid clause doesn’t just fail to protect the employer; it can also expose the employer to liability.
Payroll Compliance Is More Than Just Paying People
When companies think about payroll risk, they often focus on whether employees are paid on time. And yes, obviously, paying people on time is important, but there are many other hidden pitfalls in global payroll.
In addition to timely payments, it’s essential to ensure accuracy on a variety of other elements, including:
- Income tax withholding
- Employer social security contributions
- Mandatory pension or insurance payments
- Statutory bonuses, like 13th or 14th-month salaries
- Country-specific reporting and filings
In many countries, these obligations may change annually as rates shift and new reporting requirements arise.
A common oversight is assuming that a payment platform or payroll provider automatically handles compliance end-to-end. In reality, some providers only process payments, leaving filings, calculations, or statutory updates to the employer.
When mistakes happen, they rarely trigger immediate alerts. Penalties often accumulate quietly until a local authority reviews records or an employee flags an issue.
By the time it’s discovered, the problem can span months or years of payroll cycles, and the employer could find themselves on the hook for thousands in overdue payments, as well as fines and penalties.
Benefits Gaps That Undermine Retention
Benefits are often treated as optional for international hires, especially when those employees are remote. Or, they receive the same benefits package as the folks at company HQ.
From a legal standpoint, that can be risky. From a retention standpoint, it’s even riskier.
In many countries, benefits like health insurance, pension contributions, paid leave, or meal allowances are not perks; they are legally mandated or, at the very least, part of the local employment norms.
When companies don’t offer these types of benefits, employees notice. It creates a sense of feeling second best compared to colleagues in other countries.
In this case, the risk doesn’t result in a fine or a lawsuit. It shows up as disengagement, lower loyalty, and higher turnover.
Permanent Establishment Risk: Hiding in Plain Sight
Permanent establishment (PE) is one of the least understood global employment risks, but it can have a significant impact on a company’s bottom line.
In a nutshell, PE risk arises when a company’s activities in a country are deemed to have created a taxable presence, even without establishing a formal entity.
Many businesses assume PE risk only applies to large corporations. In reality, it’s about activity, not company size.
Simply hiring employees won’t necessarily trigger PE, but certain activities can increase the risk significantly, such as:
- Senior employees making strategic or revenue-generating decisions locally
- Sales teams negotiating and closing contracts
- Long-term, centralized operations in one country
What makes PE risk dangerous is how it can be practically invisible. Companies can operate for years without realizing they’ve crossed a threshold.
The consequences, however, can be severe if a company is found to have created a PE, even if unintentionally. Backdated corporate taxes, penalties, interest, and forced registration can all follow.
Data Privacy Assumptions That Don’t Hold Globally
Different countries have different rules around how employee data can be collected, stored, transferred, and accessed. Some regions, such as the EU, have particularly strict requirements, especially when data crosses borders.
Failure to comply with data privacy laws can lead to steep penalties.
Employers should ask themselves several questions to ensure employee data integrity, such as:
- Where is employee data stored?
- Who has access to it?
- Is consent properly documented?
- Are vendors compliant with local regulations regarding data handling?
Data security is not exactly top of mind for many companies until there’s a complaint, breach, or regulatory inquiry. At that point, a company will likely have to scramble to mitigate the damage, and could potentially also face fines and damage to its reputation.
Working Hours, Overtime, and Time Zone Drift
It’s no secret that remote work can sometimes blur employee work-life balance, especially when workers are spread across time zones. But did you know that it can also become a compliance issue?
In many countries, labor laws regulate:
- Maximum working hours
- Mandatory rest periods
- Overtime compensation
It’s fairly common for inadvertent violations of these laws to occur among globally remote teams. For example, if an employee regularly works late nights to overlap with another time zone, that can trigger overtime obligations or violations, even if the employee agreed to the schedule.
To avoid running afoul of international labor laws, companies need to carefully track working hours and ensure they’re meeting all local requirements, such as France’s right to disconnect law.
One-Size-Fits-All HR Policies
Creating centralized HR policies makes sense from an operational standpoint, as they promote consistency and efficiency. The problem is when a company assumes the policies can apply evenly across borders.
Companies managing an international team will quickly realize that it’s not feasible to create blanket HR policies since the majority of countries have laws on the books governing:
- Holidays
- Paid leave
- Pension contributions
- Mandatory bonuses, such as 13th-month pay
- Probationary periods
- Termination
- Severance pay
When companies try to roll out universal HR policies, it can quickly lead to legal trouble. Just as importantly, it frustrates employees who know their local rights, such as transport vouchers in Brazil or employer contributions for prescription glasses in Poland, and expect those benefits to be clearly reflected in company policy.
The Long-Term Risk of Inconsistent Offboarding
Remote teams often underestimate how complex international offboarding can be, especially when it occurs infrequently.
When it’s time to part ways with an employee, there are multiple aspects of the separation process where an employer might run into legal issues if they aren’t up to speed on local labor laws.
Termination processes, notice periods, severance calculations, final pay timing, and documentation requirements vary widely by country, and mishandling the offboarding process is one of the fastest ways to trigger disputes or regulatory attention.
The risk isn’t just legal. It also affects an employer’s brand, especially in smaller talent markets where word travels quickly.
Why These Risks Are So Easy to Miss
Most of these risks don’t cause immediate business disruption. Teams can hire, onboard, and operate in multiple countries, and everything might seem fine, at least initially.
Issues tend to surface during:
- A termination or restructuring
- A funding round or acquisition due diligence
- An employee complaint
- A government audit
By the time a company becomes aware of a problem, the cost of fixing it is significantly higher than the cost of preventing it in the first place, which is why it’s so essential to be proactive about international compliance.
Reducing Risk Without Slowing Down
Global hiring should give your business a chance to grow without slowing you down or piling on unnecessary risk. One solution — partnering with an Employer of Record.
An EOR takes on the responsibility for all the legal and HR details related to global hiring, including:
- Worker classification
- Creating locally compliant contracts
- Shipping equipment
- Onboarding
- Payroll
- Employee benefits
- Compliance with regional laws
Instead of learning local employment law the hard way, teams get a structured, compliant foundation from day one and avoid potential legal issues since the EOR assumes the risk as the international employees’ official employer.
Global hiring is no longer the purview of mega corporations. For many growing teams, it’s central to their operations. Working with an EOR like RemoFirst allows these companies to move quickly, remain compliant, and reduce legal exposure as they expand.
Want to learn more about how an EOR can help you expand across borders? Schedule a demo with RemoFirst today.
