Firms find it attractive to employ foreign staff abroad. The Internet makes it easy to find and hire skilled workers from Eastern Europe, South America, and the Far East. These workers are often cheaper than those in the UK. UK firms are interested in paying foreign workers to work from home in cities like Kuala Lumpur, Belgrade, or Bratislava. Firms are particularly interested in finding workers with skills in data processing, IT support, telesales, product support, software, and web technologies.

The same situation occurs when seeking representatives, consultants, and specialists for reasons other than cost.

The question is, how can a British firm gain the services of workers in countries like Indonesia, China, and Romania?

This article discusses employing foreign workers abroad. If you were seeking information on how to employ foreign workers in the UK, follow this link to our associated paper.

Note that employment is a legal term. An employee is under the direction of an employer in return for a wage. This paper discusses how firms can benefit from the services of workers and hence covers all mechanisms under which this benefit might be realised.

As UK Employees

As a summary, UK firms can’t employ foreign workers directly without local registration and presence.

But many think they can. Conceptually, a UK firm could issue a UK employment contract to a worker in Bratislava and call them an employee, despite that being a meaningless concept under UK law.

Since these foreign ‘employees’ won’t visit the UK, there’s possibly no UK tax liability for the company or the ‘employees’ despite the fact that they would likely be earning income for the UK firm.

This arrangement would allow monthly payroll and payment as if they’re employees on an NT (No Tax) code, paid gross. The UK’s HMRC has indeed issued NT codes, but guidance is confusing and ambiguous. HMRC suggests assessing employment under local laws, which is difficult when the ‘employee’ is 5,000km away with no local supervision. This suggests they’d likely be considered self-employed by local authorities.

If a foreign worker were employed this way, they’d lack locally enforceable employment rights. UK tribunals might not hear any case they brought unless there was a substantive connection between the worker and the UK, suggesting UK jurisdiction. The worker wouldn’t be employed in the UK or in their country; they’d be self-employed and likely liable to pay tax for themselves and perhaps their distant ‘employer’.

However, the tax liabilities on the UK firm are unclear. Even with an NT code, there may still be National Insurance liability for both the employer and employee. HMRC suggests consulting on or its International Caseworkers to determine specific liabilities.

This approach is legally unstable and confusing. We don’t recommend it. We discuss how to improve it by local registration below.

As Suppliers/Associates/Contractors/Sole-traders

Many global consulting firms hire consultants for varying contracts in different locations. In such cases, the parties sign associate agreements. Since countries usually require a local employer for work visas, the associates enter the country under short-term visitor visas, not declaring work intentions. Many countries have visa waiver schemes with the UK and allow short-term 'business' visits. Associates are typically self-employed and behave as suppliers. The sole-trader status as supplier is well-defined in the UK but in unclear in other countries so there may sometimes be complications[1].

This approach serves as an example that's commonplace in short-term consulting.

This status also covers workers intending long-term engagement with foreign firms while in their home country. Local laws may dictate the time period and conditions before workers become employees. For example, in Italy, workers become employees if they gain over 80% of their income from one source and this persists for more than eight months.

But if there’s no local employer, the local tax authority may tax the worker personally to recover employer taxes. They may also consider the worker an employee and withhold tax and demand that they submit returns.

If the contract is signed under UK laws, the worker also has no local redress. They can ask a local court or arbiter to hear their plea and, if successful, ask a UK court to enforce the judgment. Alternatively, they can petition a UK court or arbitration service like the LCIA [2]. Arbitration is effective only if it’s built into the contract from the start.

Gaining a decision and enforcement in a foreign court or arbitration tribunal is costly for the UK firm, especially for enforcing contract clauses covering confidentiality and intellectual property.

International conventions aid this, but the EU/EFTA system (Brussels and Lugano Conventions) is the only satisfactory option, and the UK isn’t a member. The Hague Convention isn’t widely accepted. Arbitration is better, with 160 countries ratifying the New York Convention.

Many firms rely on the associate contracts to build trust and the arrangements work until disputes arise. The approach works well when both parties have something the other wants and respect each other.

The associate agreement can point out associate tax liability and require them to make arrangements to pay all liabilities, thereby attempting to protect the UK firm.

Under an associate contract, the UK firm pays against the associate’s invoices, but it’s not an employer-employee relationship; it’s a client-supplier relationship. Associates/contractors/sole-traders are all suppliers. Contractually, they and the UK firm are equals at law.

There are four more legitimate and robust ways to engage foreign workers.

As Liaison/Branch Office Employees

The UK firm can employ foreign workers by opening a branch office, which registers a presence without starting a local company. Some countries allow initial registration as a liaison or representative office. Light registrations are typically time-limited to allow the UK firm to formalise the arrangement and test the market before local investment. Not all countries allow light registration or branch offices.

Setting up a branch office involves lodging documents such as the UK company’s Articles of Association, certificate of good standing, board resolution, power of attorney, and correspondence authorisation with the local in-country authority. UK's HMRC charges a small fee for the certificate of good standing for UK firms.

In some countries, a local representative or sponsor is mandatory, while in others, it’s not.

A local accountant or payroll agency often provides branch office facilities, including a local address. Reporting obligations vary from country to country, ranging from no obligation, to filing accounts and registering money flows.

The branch office registers with local tax authorities and pays local workers from its accounts. The UK company transfers monthly funds, and the branch office settles local tax liabilities, often using a local accountant.

Employees are employed with contracts under the country’s employment laws. Firms employing foreign workers under a foreign country’s employment law should be aware of their obligations, especially regarding dismissal. Local liabilities can be onerous and costly.

See our blog entitled, Choice of Law in Employment Contracts for more on employment contracts and which law applies.

It's typical to have all employment documents in both English and the local language, with the local language supreme in case of dispute.

As Employees of a Subsidiary

The second way is for the UK firm to set up a local subsidiary - either wholly owned or with ownership shared with locals. The worker is then employed by and has an employment contract with that local firm. The local firm trades ‘at arms length’ invoicing the UK firm as if it were its customer – its only customer in that country.

The local firm then employs the local workers. They enjoy employment protection under the laws of the local country.

This is a clean way of employing locals whist retaining operational control but it is possibly carries the biggest administration overhead since someone has to manage the local firm.

And tax authorities in both countries would want to know that the transfer pricing between UK firm and local subsidiary was realistic and not intended to avoid payment of tax.

As Employees in Their Own Company

Alternatively, local workers could form a local firm and enter a business-to-business agreement with the UK firm. This applies even if there was only one worker - depending on local laws, they may be a sole-trader[1]. Trade would be separate, but the local firm would handle administration and reporting to local tax authorities.

The UK company would lose operational control. And local owners would expect profits, so potentially profit would be taken twice.

This route has low administration costs, but taxes and other local costs would be included in the price of goods and services. But overall costs would likely be similar to other approaches.

As Employees of an Umbrella Organisation

The final option is to employ workers through a local firm with a relationship with the UK firm, or to build one for the purpose. This employer is sometimes called an Employer of Record or a Professional Employment Organisation. Since no UK entity is required, this may also be called ‘employment without entity’. These terms disguise employment by a local intermediary, usually an umbrella company.

Many firms offer these services.

‘Umbrella’ companies exist in most countries, like FESCO[3] in China and various portage salarial companies in France. They facilitate employment relationships. The umbrella company employs the worker, assigns them to the UK firm, and invoices the UK firm for costs and profit. The umbrella company typically charges a percentage of the worker’s pay for its services, covering costs, risks, and profit.

Contracting with umbrella companies has issues, especially building commitment and engagement with workers when the UK firm doesn’t control the relationship. There are also legal issues with intellectual property and confidentiality.

In some countries, there are laws against ‘passing off’ - claiming to represent the UK firm while being employed by the umbrella.

Local tax authorities have forced closure of umbrella companies because they obscure profits and are considered tax avoidance mechanisms. For example, the Ministry of Employment and Social Security in Spain blocked the activities of a major umbrella company for breach of the Self Employment Law of 2007.

UK firms may need to consider visa arrangements if foreigners must emigrate to start operations. For instance, Indian workers in the UAE (where 85% of workers are immigrants) exemplifies this. There the umbrella company can’t make the arguments to visa authorities. It must be the UK firm as principal.

Alternatively, the UK firm could collaborate with a friendly company, such as a dealer or agent, or even a client. The worker remains an employee of the friendly company, who invoices the UK firm for services and adds a fee.

This approach is sometimes called a ‘secondment’.

The suitability of this approach depends on the relationship between the UK firm and the umbrella or friendly company. Strained relationships can pose significant risks to the worker’s effort, with limited options for the UK firm.

Each approach has benefits and risks, requiring thorough investigation considering the country involved. The attractiveness depends on the terms and conditions with the umbrella organisation and whether the UK firm must employ locally to build its local reputation.

By using an intermediary, the UK firm loses direct control of its workers.

Employee and employer as one

We noted above that some UK firms have hired ‘employees’ under a UK employment contract and payed them gross (untaxed). This is a poor situation for both the firm and the employee.

Local tax authorities will recover both employee and employer taxes, including social taxes and pension contributions. Some countries also demand separate health service and redundancy insurance payments from employers.

In such cases, the local tax authorities may target the employee since the employer is offshore.

Just as an example, in France, the employer’s employment contribution is 70%, the highest we’ve found. That would be a significant liability for the local employees to pay in addition to their employee liabilities.

But another option is emerging in some countries. It has the same outcome as above.

It’s evidenced by its use in the UK.

If a UK national is ‘employed’ in the UK by an American firm, The UK's HMRC can register the employee as both employer and employee. The tax authority would register the US firm at the employee’s home office or other registered address. The employee would, with their agreement, be liable for both employer and employee taxes.

This approach may satisfy the tax authorities, but many issues remain.

The employee must be employed under local employment law, but the employer is a foreign entity outside the jurisdiction.

The ownership of the employee’s work depends on local laws. The employer may have to seek a separate copyright and invention agreement to own the work. In some countries the employer only get rights to use the work.

And adding a second employee complicates matters.

The biggest issue is that the employee may remain liable for historic employer payments and errors even after leaving the firm.

This route requires careful analysis. It may be favoured by a local accountant due to its tax simplicity, but employment of foreign workers involves more than just payments.

Issues

Before deciding which route to take, there are a number of issues to be considered and upon which a decision about the right approach depends.

Managing Remote Workers

Probably the biggest issue for managers wanting to set up remote working for employees, suppliers (such as sole traders) and workers in umbrella firms is how they will be managed. This topic is too big for complete coverage here. We recommend reading the following:

Leading remote teams
How will work and the workhome change post-Covid?
A manager's guide to homeworking
A concise leadership model for managing day-to-day

We also recommend reading our book entitled Because Your People Matter: a playbook for management excellence.

Meanwhile, we summarise as follows.

Control

Firms form to control their workers’ daily tasks. Many employees now want to work from home, but managers often resist because it weakens control. Home-workers’ quality depends on their skills, knowledge, and tools, not on management supervision. Similar issues apply with foreign workers and many managers will resist having foreign workers because they can't control them.

But modern web-based systems provide ideal control for knowledge-workers like translators, online tutors, and authors. Workers can access assignments online, work on them, and upload them, triggering an invoice for the UK firm. However, this isn’t without problems, especially for less clear-cut contributions.

Firms often transfer technology and methods to subcontractors and demand their use, but control remains an issue. A UK firm’s priority may not align with a remote worker’s or their local employer’s. And firms using remote workers abroad without a legal contractual arrangement can’t close the activity and seize resources if things go awry.

Commitment

Workers with little interest in a firm are unlikely to be committed. They stay for as long as they need the money. It’s an economic arrangement.

Most firms need more than that. They need employees who will go the extra mile, be reliable, and develop with the firm. This requires mutual respect, which comes from an employment contract.

Contracts extend to psychological contracts, with heightened commitment. For foreign workers, this must be with the foreign entity through its local subsidiary or branch office.

Financial arrangements like granting a shareholding in the UK parent firm may further cement commitment. Various arrangements are available to limit shareholders’ power while allowing them to participate in the firm’s success.

Arguably, commitment is independent of the economic contract between worker and UK company. It’s built through trust, which is independent of the monetary contractual arrangements.

Avoiding Local Responsibility

A UK firm entering a business-to-business agreement with a supplier/associate/contractor/sole-trader/umbrella/intermediary aims to avoid local responsibilities. However, this might backfire in areas like health and safety at work liability, and in ensuring that workers have the right to work in the country.

In either case, if local authorities consider that there's a permanent establishment, the firm may face liability.

Intellectual Property

Under UK Copyright, Designs and Patents Act 1988, employees automatically transfer ownership of work to their employers. UK employment contracts often include a ‘transfer of inventions’ clause for information. In other countries there’s often no automatic transfer of rights.

This is significant as work isn’t then necessarily owned by the firm paying for it. Local laws may only grant a license to use the work. In addition some countries exclude software and databases from patent and copyright laws.

Without automatic assignment, workers can claim rights later, causing risks when selling products containing the work. Large payments have had to be made to buy such rights.

Companies should alson review upstream contracts for restrictions on employees. Many contracts prohibit subcontracting or work outside the UK.

Confidentiality

The UK’s Employment Rights Act 1996 grants employers the right to expect confidentiality from employees. Leakage of information can be prevented with an injunction.

This redress isn’t available to local firms, branch offices, or firms asking workers abroad to complete work. Firms doing work abroad must ensure information supplied doesn’t pass to a third party.

It’s common for foreign workers to gather evidence of their capabilities to win future engagements. Firms should be cautious when passing information to foreign workers, as it may end up in another firm’s products.

Tax Liability

UK firms worry about being liable for unknown taxation. They may be liable in the UK for Corporation Tax on profits earned from foreign workers, and there my possibly be a tax liability in the foreign country where the workers are resident. However, local tax authorities may struggle to collect taxes from UK firms.

Some countries use withholding tax, a proxy for corporation tax. Foreign tax authorities know UK firms will make profits from foreign workers and can’t tax them, so they tax monies flowing in at a lower flat rate, like 10%, to simulate or recognise revenue and calculate a tax on the effective net profit of a local firm.

If this arrangement is assumed globally, various tax liabilities associated with employment will exist. Local tax authorities will want workers to pay national insurance, income tax, and possibly value-added tax and profits on the firm.

We recommend firms seeking foreign workers make local enquiries to understand tax liabilities.

The safest approach from a tax perspective is to trade at arms’ length and buy and sell goods and services through a business-to-business agreement. This may involve VAT and tariffs, but it’s well understood and tax liabilities are known by many accountants.

Double Taxation

Countries typically want to collect taxes ‘at source’, rather than chasing taxpayers for payments. This means employment and social taxes are usually collected through local employers. As we've discussed here, to work in a country, a worker must be employed by a registered local entity.

This could mean someone working for a UK firm, being paid from the UK, and posted to a foreign country, working in a branch office for example. This might cause them to be taxed twice. UK's HMRC and the local tax authority would expect their separate tax revenues.

Double taxation agreements between countries address this. For someone employed in the UK but working remotely, it’d be unfair to be taxed in both countries. A treaty allows tax to be taken once.

Employees and their employers should contact tax authorities in each country to use treaty facilities to pay tax in one country only. Not all countries have entered double-taxation agreements with the UK.

Double taxation may also prevent corporation tax on UK profits and withholding tax abroad.

Social Taxes

Social taxes typically consist of an employee and employer contribution.

Any registered entity, such as a subsidiary or branch office, must pay social taxes in the local country for each employee. As we note, some countries may collect the employer’s part from locally engaged workers if there’s no locally registered entity.

Social taxes can be higher than the UK’s 13.8% employer’s National Insurance. In France, for every €1,000 paid gross, the employer pays €700 to social security organisations for basic, national, pension, and health insurance. The employee has a 22% deduction, leaving around €800 net take-home pay. The employer bears a cost of of €1,700.

This highlights the need to determine the legal position of anyone working locally, whether employee or self-employed. Workers employed under a UK contract with an NT code and payroll will likely be subject to social tax liability in the country of employment.

Agreements

When a worker is an employee, they have a ‘contract of service’ under the laws of their country.

When self-employed, a ‘contract for services’ is needed. This differs from business-to-business agreements and focuses a lot on defining the worker’s status. Firms registered with the local Chamber of Commerce[4] and tax authorities often have special status, granting limited liability. Sole traders or self-employed persons signing a ‘contract for services’ have lesser status.

Key clauses for contracts with foreign sole traders include a choice of law clause, an arbitration clause, a clause covering liability and indemnity for tax, and caluses about deliverables and invoicing schedules.

Many UK firms are forbidden from sub-contracting to foreign entities without their clients' or customers permissions. We recommend that UK firms discuss their intended use of foreign branch offices, subsidiaries, intermediaries, and suppliers with their clients and customers.

Liabilities and Insurance

UK firms typically make agreements under English law, agreeing to UK courts or the LCIA as arbiter. They obtain insurance to cover negligence, copyright breach, and product operation. They would also want cover to extend to employee actions.

Firms usually share this liability with suppliers, who purchase their own insurance. For foreign branch offices, subsidiaries, intermediaries, or suppliers, the insurance situation requires understanding and agreement with the firm’s UK insurer.

Pensions

Many countries mandate employees pay pension contributions as they earn. Some schemes, like the UK’s Workplace Pensions, involve both employer and employee payments. Foreign workers manage their arrangements and pay from their accounts. Intermediaries, subsidiaries, and branch offices would also need to pay their contributions to the local authorities.

Pay

As a rule, a company negotiates the exchange of money for deliverables under a supplier contract. The amount is determined by the company’s value for the deliverables, the supplier’s costs, including earnings, and the local or international market price for services. If the supplier is trading properly, the money includes the supplier’s profit.

But this amount is unrelated to what the company might pay an employee locally.

Pay, or salary, is complex. Our paper titled Paying fair across the world explains it in detail. In summary, pay must consider the local standard of living and social taxes. In some cases, companies provide employee accommodation. Pay levels in the UK don’t apply abroad.

Pay differences between UK and foreign employees are always contentious.

Technology

Remote employees in branch offices or suppliers often need access to company ICT systems to process data or communicate effectively with managers and UK staff.

Enabling this access involves various issues, including contractual obligations, local laws, and upstream contracts with clients and customers.

It’s generally advisable to grant only essential access to UK firms' technology systems by remote workers, adhering to laws covering privacy, confidentiality, intellectual property, information security, and quality management. Any technology use should also consider the necessity to build trust, even with suppliers.

Timescales

Some solutions to employment abroad are suitable early on, while others are better suited later. For instance, starting a company where workers might be employed is a significant commitment. Managers may want to build confidence by opening a liaison office before proceeding.

Posted Workers

While this blog focuses on gaining effort from workers abroad, it’s incomplete without mentioning ‘posted workers’. A posted worker is under a UK employment contract. They live and work in the UK. By mutual agreement, they agree to be posted or seconded to a local firm or branch office another country. The posting period and conditions are discussed and agreed, and they remain under their existing UK contract. Posting is temporary, and the terms are typically set in a letter amending the UK contract.

Local legislation often covers posted workers, and there must be an entity to which they’re posted.

Since the cost of living varies globally, workers posted abroad need to discuss salary and benefit changes to maintain their standard of living in the host country.

Workers with a Tier 2 Skilled Worker visa allowing them to stay and work in the UK may sometimes want to return to their home country after a period working here. If they want to maintain a relationship with the UK firm that sponsored their visa, they should do so through one of the above methods, not the posted worker approach.

Many countries require foreign workers to have a visa or work permit and must be employed by a local entity. Some companies cause complexity by having employees sign a host country employment contract while maintaining their UK contract. That’s wrong.

Summary

Securing the effort of workers in countries like China can be very attractive. But it is not as simple as putting them on payroll and paying them monthly as if employed in the UK.

Our advice is clear – if intent on ‘employing’ workers abroad, get specialist advice. What’s best in one country may not be best in another. What's best for one company may likewise not be best for another.

---

1. In the UK it is simple to trade as a sole-trader or to form a company. This is not the case in many developing countries. Often it is impossible to form a company without significant capital, professional qualifications relevant to the business or involvement of a benefactor from an upper caste or class in local society.
2. LCIA - The London Court of International Arbitration.
3. FESCO - Beijing Foreign Enterprise Human Resources Service Co.
4. Abroad, often the local Chamber of Commerce accredits and approves the setting up of a company, branch office or sole-trader. Foreign Chambers of Commerce are quasi-governmental and often take the role of the UK's Companies House.