Understanding the Legal Complications of “Hiring Anywhere”

Of all the changes that the world has undergone over the past 15 months, the abandonment of the traditional office and the mass adoption of work from home is among the most consequential.

The implementation of mass telework is disrupting the former ‘business as usual’ approach for companies around the world and is giving recruiters the ability to look beyond the immediate location of a work site.

“The transition to the work from home model has pushed many companies to realize that it is now possible to reach new layers of potential employees,” said Sebastian Menutti, Argentina-based Industry Principal with the management consulting firm Frost & Sullivan told Nearshore Americas recently.

“They’re using that newly found capability to attract people in multiple locations, because this opens possibilities for the kind of services they can deliver for their clients.”

Compliance Implications of Hiring Abroad

At the height of the pandemic in the US, more than half of the labor force worked remotely, representing a significant increase compared to the pre-pandemic situation when only 8% of employees with office jobs worked from home.

With work from home looking very much like it’s here to stay, in a hybrid form at least, questions regarding technical, legal and taxation matters are surfacing. 

“Companies are now realizing that hiring foreign workers and keeping them abroad is perfectly legal and they’re learning how to do it,” said Gabriela N. Smith, managing attorney at Texas-based The Smith Law Group. 

But there is a number of questions to be considered, Smiths explains.

“Usually companies need to understand the legal implications of having an employee versus a contractor in a foreign country. That distinction creates significant advantages and/or responsibilities. Keeping that in mind allows you to make decisions in terms of protection of confidentiality, intellectual property, contract disputes and areas such as cybersecurity,” she said. 

“We see more BPO firms using remote work platforms to attract talent in various countries, usually through partnerships with local human resources firms” — Sebastian Menutti 

Hiring independent contractors is a widely spread practice across various industries. Usually companies outsource their needs to third parties which offer professional services for a fixed time period or on a project basis. They are considered self-employed workers making a business-to-business arrangement instead of formal employees, who are entitled to a full range of benefits and labor protections. 

“If all the services delivered by the worker occur outside of the US, and the company hiring does not control working hours or specific activities, then the contractor category applies. Having a contractor facilitates the management of various aspects when it comes to US law, including taxes, retention of social security and insurance,” Smith explained. 

“However, you could have someone that under US law is considered a contractor but under local law could be an employee. Usually if the worker is considered an employee by the local government, the person will probably have to file an income tax statement in the recipient country. This alters the responsibilities the company hiring assumes under local authorities,” she added. 

In spite of the growth in interest, the remote work-powered international labor market still faces significant challenges. 

“Even the BPO industry, which has transitioned fairly well to remote working conditions, had to readjust some of its practices. Now we see more BPO firms using remote work platforms to attract talent in various countries, usually through partnerships with local human resources firms,” said Menutti.

The use of local human resources firms, which allows foreign companies without legal representation to hire workers in the recipient country facilitates otherwise very complicated processes related to contracts, insurance and disputes between the parties. 

“Insurance in the US probably won’t cover your business’ intention to hire in a foreign country. Actually you have to make sure your firm’s insurance is not impacted or invalidated when hiring an overseas remote worker. The most likely scenario is that you’ll have to find other coverage,” said Smith.

A Remotely-Powered Labor Market

Remote work has stress-tested many national labor legislations in Latin America & Caribbean. While countries such as Chile, Colombia, Costa Rica and Panama had guidelines and regulations to accommodate telework before the pandemic, many other jurisdictions still struggle to offer the flexibility that companies are looking for. Mexico has moved to outlaw outsourcing of a business’ ‘core activities’.

“We were prepared ahead of the pandemic,” said Miguel Lopez Abarca, Managing Partner at Costa Rica-based Recluta Talenthunter, an executive search and talent management firm. “Thanks to that we’re seeing an all-time high in demand for talent in Costa Rica from many US companies looking to hire, particularly in the knowledge sector.” 

Costa Rica’s success is built on a legal and tax system that offers many incentives to foreign companies looking to hire locally. The Central American nation is also betting on the adoption of new technologies. Just in 2019, ICT services reached $4.7 billion in exports. “We want to be a main technological hub in the region. There is a clear understanding around the importance of digital competences to make our workforce and country more attractive,” added Lopez Abarca. 

According to Menutti, companies are increasingly looking for workers within jurisdictions with the digital capabilities needed to support their operations. This is consistent with the 2021 Kearney Global Services Location Index, which identified ‘digital resonance’ qualities as a top factor affecting outsourcing trends. “We’ve seen a focus on digital platforms to enable remote work and with that new concerns regarding security and data protection,” said Menutti. 

“We’ve seen a focus on digital platforms to enable remote work and with that new concerns regarding security and data protection” — Sebastian Menutti

But hiring overseas remote workers creates a whole host of data protection issues that employers must grapple with. There may also be issues with the transfer of personal data which trigger the rules about cross border data transfer and whether the host country has adequate levels of protection. Under specific circumstances, a company could be accused of transferring data internationally, in breach of data protection laws. 

“As part of any employment agreement, which is always recommended, there is need for a clause to determine the appropriate way to manage data. This issue could expose the operation to various disputes and although international hiring is a win-win situation in most cases, dispute resolution is a tricky part of it,” said Smith. 

The lack of mechanisms for international dispute resolution is a major shortcoming in labor legislations across the Latin America & Caribbean region. In many countries local law would apply independently of agreements or arbitration clauses between employer and employee. Even workers, who benefit greatly from this type of employment, often stay unprotected in front of any rights violations. “Often you’ll end up with two potential jurisdictions adjudicating the dispute. But it’ll be very challenging to properly notify each other of any procedures,” concluded Smith.