In this episode of our Cross-Border Catch-Up podcast series, Patty Shapiro (San Diego) and Shirin Aboujawde (London), both of whom are members of the firm's Cross-Border Practice Group, discuss what it means to be a non-resident employer, including the benefits and challenges associated with employing staff abroad without establishing a legal entity. Shirin and Patty address key legal and compliance risks, such as the importance of adhering to local employment laws and managing tax liabilities. They also explore the flexibility that being a non-resident employer offers, such as the relative ease of hiring employees in foreign markets without the lengthy process involved in setting up or dismantling a local entity.
Transcript
Announcer: Welcome to the Ogletree Deakins Podcast, where we provide listeners with brief discussions about important workplace legal issues. Our podcasts are for informational purposes only and should not be construed as legal advice. You can subscribe through your favorite podcast service. Please consider rating this podcast so we can get your feedback and improve our programs. Please enjoy the podcast.
Patty Shapiro: Hi, and welcome to the Cross-Border
Catch-Up, the podcast for global employers who want to stay in
the know about cutting-edge employment issues worldwide. I am Patty
Shapiro, and I am here today with my colleague, Shirin Aboujawde.
We're cross-border attorneys here at Ogletree, and today
we're going to talk about what it means to be a non-resident
employer.
Thanks for joining us today, Shirin.
Shirin Aboujawde: Thanks for having me, Patty.
Patty Shapiro: Let's jump right in. For those who might not be familiar, what exactly is a non-resident employer?
Shirin Aboujawde: So, a non-resident employer is this phenomenon
that not a lot of people know about. It is essentially a way for
any employer, including U.S. employers, to employ employees abroad
in some countries without establishing a legal entity. Now, there
are obviously ways that U.S. employers and foreign employers can
employ people abroad. Lots of people know about employers of record
or framing an employee as an independent contractor, but those are
riddled with risks, and also they are never truly the
employer's employee. In fact, in those situations, you do
everything possible to avoid framing them as your employee. But
with a non-resident employer option, you can actually be the
employer of an employee located in the jurisdiction where you
don't have an entity.
Now this isn't available everywhere, so don't go running
out the door thinking that you can hire people all over the world.
But there are quite a few countries, mainly in Europe but also
elsewhere, that are now allowing for this option.
Patty Shapiro: Okay. Sounds like it's maybe a more viable option for some foreign employers than these other methods of employing talent. What are some key legal and compliance risks that companies should consider?
Shirin Aboujawde: Off the bat, the employment laws of the
jurisdiction in which the employee is located are going to apply.
So, for those U.S. employers who think, okay, great, I can have an
at-will employee located outside of the U.S. No, not going to work.
Try again. Right? I wish. So, the local laws are going to apply to
that employee, and that's something that you're going to be
aware of; you can't agree or contract out of or get away from
it just because you don't have a local entity in place.
The other point is you don't get out of potential tax risks.
Now, if you are engaging people who aren't generating revenue,
executing contracts, negotiating contracts, then in a few
jurisdictions, that's not going to be an issue from a tax
perspective. There are some jurisdictions where even if you have
someone there as an employee for a certain period of time,
you're going to end up creating a permanent establishment, but
in not all jurisdictions. But if the person is revenue generating,
then you're going to be subject to the same tax risks that you
would be subject to if you set up an entity. So, you would have the
same corporate tax liabilities, you would have to do corporate tax
filings and the like. So, you're not going to get out of any of
the tax risks that are associated with having people on the ground
abroad.
Patty Shapiro: Okay. And what about the flip side? What are the advantages of being a non-resident employer?
Shirin Aboujawde: Well, there were loads, right? First of all,
you've got full control over the employment relationship. So,
you're not doing this two-step where you've got an
independent contractor or someone who's employed by an EOR. You
have to keep pretending that they're not your employee here.
They're totally your employee. You can performance manage them.
You can make them part of your bonus programs, your equity
programs. You have the full remit of what the employer-employee
relationship looks like. That's the first thing.
The second thing is flexibility, right? The ramp-up to creating an
entity abroad and the ramp-down of taking an entity and
disestablishing it is extreme. Being a non-resident employer is
simple and it's flexible. It means that in sometimes a period
as short as two weeks, you can employ a person abroad, and in as
quick a time you cannot employ a person abroad. And so, it really
creates a huge amount of flexibility for organizations, and
that's great for employers who want to test the market. There
were loads of employers out there who would love to dip their toe
into doing work in Europe, but the cost of entering the
market's just too high. And this creates a really simple
cost-effective solution for those who really want to just test the
waters.
And lastly, what we're seeing is that it really embraces the
remote work trends that you're seeing. There are lots of
employees, really skilled talent, who want to live and work abroad.
And U.S. employers know and find out about them, and they say,
look, we've got this great person, but he's in Romania, and
he doesn't want to leave there. How do we employ him? And now
you can, you can use the non-resident employer option. Romania is a
country where you can actually do it, so that's why I use it as
an example. And you can hire them, they can be your employee.
There's no weird two-step or independent contractor framing you
need to do. They can work remotely, and you can have them as your
employee.
Patty Shapiro: Yeah, that sounds like a much more viable option for a lot of companies. You made an interesting point about the flexibility to extend your equity program to these individuals for your employees via a non-resident employer route. And we're seeing that a lot with our tech companies, as you know, and startups that are incentivizing talent abroad by the prospect of having equity and really benefiting from the growth of the company. And an interesting point about that, I've seen there are still some challenges with that from a tax perspective. So, that is an option, but there's this challenge of making a U.S. equity scheme kind of fit within the tax framework of a foreign country. Have you experienced that, as well? What are your thoughts on that?
Shirin Aboujawde: Yeah. No, it's a great point, Patty,
right? We know that there were some jurisdictions where the equity
framework really doesn't work, right? I mean, everyone knows
you can't really give equity in China, for example. That never
seems to fit. But I think the point is that in some jurisdictions
it'll be fine. In other jurisdictions, it might be an issue.
And in that case, U.S. employers usually kind of supplant or
replace it with some type of LTI scheme, right? A long-term
insensitivity scheme, a cash equivalent scheme that is in lieu of
the equity, that's just not going to be able to work
logistically locally. And the beauty of being a non-resident
employer is that you can still provide that to the employee.
They're your employee.
How many times have you or I advised U.S. employers engaging EORs
not to provide company incentives and equity and the like, because
the EOR can't really be providing that, and that problem
doesn't exist with a non-resident employer.
Patty Shapiro: So, it seems like one of the challenges is understanding kind of these nuances in another country's laws, both from a tax perspective, and then of course that extends also to employment law differences. Can you speak to some of the major downsides of potentially being a non-resident employer?
Shirin Aboujawde: Yeah, absolutely. I mean, look, being a
non-resident employer is not a panacea for all of the problems that
come with employing people abroad. We've talked about the
employment laws that can't be avoided. We've talked about
the establishments and the tax risks that you're never going to
be able to avoid. And the reality is, depending on which
jurisdiction you try and become a non-resident employer in, set up
can sometimes be complicated. In a jurisdiction like Spain,
it's very complicated. There are loads of documents that need
to be notarized and have apostilled and a huge process that you
have to engage in. So, it's not seamless in every
jurisdiction.
And also, it's not a solution to those that don't have the
right to work locally. You're not going to be able to provide
visas or work permit sponsorship as a non-resident employer in most
countries. You're just not going to have that ability. In order
to sponsor employees, you usually have to be set up and registered
as a proper entity. So, unless the employee has the right to work
already in that jurisdiction, you're going to hit up against a
gating issue of essentially immigration and the right to work
locally. So, that's also an issue.
There's also the logistics of just contracting day-to-day with
local parties that might be difficult if you don't have a local
presence or a local physical space. And then obviously as I've
said before, it's not without some administrative burden to set
up a local entity. So, you've got specific documentation
requirements that are due at set up. And then in some
jurisdictions, there's obviously annual documentation
requirements that need to be fulfilled that you sometimes can't
always outsource to your local payroll vendor.
Patty Shapiro: And that's for non-resident employers too, right? I think you mentioned entities, but non-resident employers is what you-
Shirin Aboujawde: Yes. Sorry, no. Yes, that's what I meant. Non-resident employers. Thanks Patty.
Patty Shapiro: Sure, sure. So, talk to me more about how does a company become a non-resident employer? You mentioned Spain. Does it vary country to country? And what's your experience with those processes?
Shirin Aboujawde: Yeah. It varies substantially by jurisdiction.
In a jurisdiction like Spain, the process can take months. It will
involve collecting loads of documentation, getting it all
apostilled, submitting it, getting identification numbers and the
like. In a jurisdiction like Italy, it can take two to three weeks
depending on whether you want to set up a tax position or not, if
you're revenue generating or not. And then in a jurisdiction
like Switzerland, you could literally set it up overnight,
especially if you select the option where the employees are
responsible for their own tax withholdings and insurance. So, it
really depends on, number one, are you generating income or not?
So, will you need to establish a tax position in the local
jurisdiction or not and file corporate taxes? Number one.
And then number two, how much of a burden do you want to put on the
local employee? In some jurisdictions that avail themselves to the
non-resident employer option, you can set up being a non-resident
employer almost overnight, in some cases as quick as overnight. But
that means that the local employee is responsible for doing their
own tax withholdings, their own tax paperwork, and also for making
their own contributions to things like the social funds and
insurances and stuff. And that can sometimes be a recruitment
burden and a recruitment issue as you're trying to get these
employees to work for you. If they've got to do everything
themselves, it's less appetizing, even if it is a 100% remote
role.
Patty Shapiro: Sure. Overall, though, still sounds like a viable option for a lot of companies, and I know that's what you and I have experienced as well, but definitely varies a lot country to country. But overall, a great option for companies that want to employ people abroad but aren't ready to jump into setting up an entity just yet and don't want to employ those other alternatives that may be potentially risky. Thank you so much for sharing your insights with us today.
Shirin Aboujawde: My pleasure. Thanks for having me.
Patty Shapiro: And that's a wrap on this episode of the Cross-Border Catch-Up. Follow us to stay in the know about cutting edge employment issues worldwide.
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