When hiring workers overseas, the hiring party must be aware that their activities fall under a cross-section of United States and foreign laws related to employment and labor as well as taxation, intellectual property, and business regulation. Although the risks of overseas hiring may be apportioned differently according to the contractual hiring arrangement, these risks remain primarily the result of conducting work in two different countries having conflicting legal systems. 

Contractual Issues with the Hiring Arrangement

The nature of the legal risks in hiring workers overseas will likely depend on the groundwork contractual hiring arrangement. A U.S. hiring party may seek to employ their own workers overseas (for example, by opening a branch office with employees or by engaging independent contractors directly) for which the hiring party remains primarily liable for the complex web of overlapping domestic and foreign laws. In addition to other contractual terms, the hiring party must ensure that an accepted dispute resolution procedure is set out to dictate where a case should be filed should any conflict arise between the hiring party and its overseas worker.

Alternatively, the U.S. hiring party may choose to engage an overseas business to provide outsourcing services, which would in turn have its own workers that perform services for the U.S. party. This scenario permits the employer to shift some of the risk to the overseas business, which will depend upon the terms of the two parties contractual arrangement and foreign county to which the work is being outsourced.  One critical term of any such outsourcing agreement is the requirement that, with respect to the provision of services and the performance of its other contractual obligations, the overseas business will comply with all applicable laws. It is also critical to lay out a dispute resolution procedure and the location where a case should be filed to resolve any conflict between the U.S. party and the overseas business providing foreign workers.

U.S. Statutes that Apply Overseas

In general, U.S. employers remain subject to many U.S. federal laws when they hire workers overseas. As a preliminary matter, a U.S. employer cannot avoid its federal statutory obligations merely by hiring workers overseas to perform the regulated activity. This is especially true regarding data privacy protections, which cannot be avoided by the common practice of having overseas workers as data processors. For example, HIPPA’s business associate agreement requirements will usually apply in a covered entity’s relationships with their overseas employees. Consequently, when deciding to outsource services to a company in a foreign country, covered entities should closely scrutinize the company, its procedures, and its compliance plans.

Some statutes have more specific international application. For example, under the Sarbanes Oxley Act, public companies must report discoveries of malfeasance offshore and private as well as public companies must comply with whistleblower protection provisions with respect to workers overseas. 

Additionally, certain U.S. statutes become applicable only when a company does business overseas. For example, the Foreign Corrupt Practices Act prohibits companies doing business overseas from making certain payments to foreign officials for the purpose of obtaining or keeping business.

Dual Systems of Taxation

The U.S. federal tax system continues to apply to overseas employees, but only mandates tax withholding if the employees are U.S. citizens or residents. Wages paid to a U.S. citizen or resident by a U.S. person for services performed outside the U.S. are subject to federal income tax withholding. Wages earned by nonresident aliens for services performed outside the US are not subject to reporting and withholding of U.S. federal income tax.  In the latter case, however, the worker’s nonresident alien status must be documented. Additionally, the overseas worker’s pay may need to be withheld in order to comply with his or her country’s taxation system, independent from any U.S. tax obligations. To ensure you are complying with local tax laws, consult in-country experts who are familiar with business and regulatory matters in the country you intend to base employees out of.

Diverse Intellectual Property Ownership Laws

Where overseas workers are involved in the creation of intellectual property, the hiring party must confront a potentially very different legal scheme for acquiring ownership of that property. Like in the U.S. system, Australia, Japan and the United Kingdom recognize works made for hire in the employment context by providing for vesting of ownership in an employer for creative works of employees in the scope of their employment. In contrast, countries like France, Germany, and China vest initial ownership of such a work in an employee but provide for methods to license or contractually transfer ownership to the employer based upon an employment agreement. All of these systems have specific requirements and exemptions. Accordingly, a U.S. person or business seeking to hire overseas workers to be involved in the creation of intellectual property should consult an expert in the applicable intellectual property system.

Foreign Employment and Labor Protections

Employee Privacy

Although U.S. law is relatively quiet on the topic of employee privacy, a complex web of rules in Europe and other countries govern privacy issues. They include rules on what sort of information employers can collect from their workers, the rights employees have regarding that data, and how the information can be transferred to other regions of the world.

Time Off Laws

Foreign companies, most notably Europe and Australia, are much more generous in their vacation, sick and maternity leave policies than the United States. Certain countries also extend leave policies to encompass other activities such as building homes or career development.

Termination and Notice

In the U.S., terminations are commonplace and mostly protected by the doctrine of employment “at-will”—a rule that provides an employee or employer may terminate a work relationship at any time, for any (nondiscriminatory) reason, with or without notice. In stark contrast, other countries may not consider employment to be “at-will” and the presumption globally is that employees have a basic right to their employment unless the employer has cause to terminate. Depending on the worker’s country of residence, certain notice or other requirements may apply before an employer can terminate an employee. How much notice an employer is required to give in the event of a lay off or firing also varies overseas.

Union Power

Unions carry additional weight overseas, and employee work conditions may be strongly controlled by the influence of unions. For example, a hiring party may need union approval to change existing employment policies or conditions.

Non-Compete Agreements

Many U.S. employers write non-compete agreements into employee contracts. However, foreign countries generally view these are restrictive covenants that may be prohibited. Restrictive covenant enforceability standards vary widely from country to country, which may lead to a conflict of law problem where the non-compete agreement has applications outside of a single jurisdiction.

In Conclusion

Given the risks that are inherent in hiring employees overseas and thus doing business under two potentially very different legal systems, it is critical to work with attorneys who are experienced with the legal system in the country in which one is hiring employees. Such counsel is necessary to ensure that the overlapping and conflicting laws related to taxation, intellectual property, employment conditions, and other areas of business regulation are complied with in a manner that benefits and protects the hiring party.