Employing foreign workers abroad is a complex area which has significant implications in terms of employment law, immigration and taxation.
We outline below the different ways in which you can engage foreign workers abroad and the issues that need to be carefully considered.
Ways to engage foreign workers abroad
As a general rule, UK businesses cannot formally employ foreign workers in another country unless they have a registered business presence in that country.
If a UK business were to issue a foreign worker abroad with a UK employment contract, the worker would most likely be deemed ‘self-employed’ for tax purposes and have no employment rights.
The UK business could pay the worker their gross salary through payroll on a No Tax code.
However, this a very risky and uncertain approach and could incur tax and national insurance liability for the UK business in both the UK and the country in which the foreign worker is based.
1) Self-employed individual
You can engage a foreign worker to work for you from abroad as an independent self-employed individual.
The contract/agreement you use can make the individual responsible for paying tax in their resident country.
However, the country in which they are based may use a different employment status test to the UK and consider that the individual is actually an employee.
There is a risk that this will create a ‘permanent establishment’, whereby you will be liable in that country for income and/or value-added tax.
This approach also creates jurisdictional issues.
If the contract is signed under UK law, the individual will have no local right to redress, but equally it will be difficult and costly for you to enforce the contractual terms, particularly regarding intellectual property and confidentiality where an injunction is the best remedy.
Branch office employee
You can formally engage a foreign worker abroad by setting up a branch office in the relevant country.
This allows you to register a local presence without incorporating a company, however not all countries allow branch offices.
You must register the branch office with the local tax authority and the foreign worker will be employed by the branch office under local law.
Businesses who opt for this route often use local accountants to operate payroll for the branch office and deal with the business’s tax liability.
It is important that you have a good understanding of the local employment law as many countries grant additional rights to employees that are far more extensive than the UK.
Employee of a subsidiary
It is also possible to employ a foreign worker abroad through a local subsidiary company and this employment will be subject to local law.
This option allows the UK business to maintain a greater degree of control, but it also involves the greatest administrative cost and burden in terms of running the local subsidiary.
Employee of their own business
You could engage foreign workers abroad through a business agreement if the workers created and operated through their own business.
This removes your administrative burden, as the employees themselves would be responsible for dealing with tax obligations, but administrative costs would likely be passed back to you and it also takes away your operational control.
Employee of an umbrella company
Finally, foreign employees abroad can be engaged via a local umbrella company, which acts as an intermediary between the UK business and the foreign workers.
The umbrella company is responsible for operating payroll and invoices the UK business for their services as well as a percentage of the worker’s salary.
The UK business has very little control over the workers in this situation as their employment rests with the umbrella company.
It is important to note that some countries do not allow the use of umbrella companies for this purpose and such companies can be shut down as a form of tax avoidance.
If you engage a foreign worker to work exclusively abroad, there is no legal obligation to conduct a right to work check, as they will not be subject to UK immigration control.
However, if the foreign worker is required to travel to the UK as part of their job, you should carry out a right to work check before they begin any work in the UK.
The employee may need a business visitor visa to temporarily visit the UK.
However, such visas are restrictive, and the employee would not be able to carry out any kind of productive work, they would only be able to attend a business meeting or sign a contract etc.
Illegal working can result in severe penalties for both you and the worker, so it is important that you understand the relevant immigration requirements.
Employment law issues
Local employment law
If you engage foreign workers through a local branch office or subsidiary company, their employment will be in accordance with local law.
Even if you engage foreign workers as self-employed individuals in their resident country, there is a risk that they will amass employment rights under local law.
Many jurisdictions have certain basic employment rights that cannot be circumvented.
Therefore, it is important that you are aware of your obligations and responsibilities under the relevant country’s employment law, which may be more extensive than the UK.
Which employment law applies?
When determining which employment law jurisdiction applies to a foreign worker engaged by a UK business, the courts will consider whether the employment relationship has a stronger connection with the UK or the foreign country.
Generally, the employment law of the country in which the worker is based will apply.
However, a range of factors may suggest that there is in fact a closer connection to the UK, such as:
- The employment contract is governed by UK law.
- The worker frequently travels to the UK for work.
- The employment relationship originated in the UK.
Tax is an important issue to consider when employing foreign workers abroad, therefore we highly recommend that you seek advice from HMRC and also enquire about tax liabilities in the other country.
You will be liable for UK corporation tax in respect of profits made from the foreign worker’s contributions.
The worker’s resident country will also seek to recover tax, although they will not be able to pursue you as a UK business.
You may be subject to a withholding tax which is an alternative to a corporation tax – this will be a flat rate of tax on money paid to the foreign worker.
If the worker is employed under local law, they will be liable for income tax and national insurance in the relevant country and if you have a local subsidiary there, it will mostly likely be liable for VAT.
A local subsidiary would also be liable for social taxes in respect of each foreign worker it employs, which can be considerably more costly in other countries compared to the UK where employer national insurance contributions are fairly low.
There are likely to be data protection implications when engaging foreign workers abroad, as this will involve the transfer of data between the UK and the worker’s resident country.
Since the UK is no longer in the EU, it is considered a third-party regarding data transfer to and from the EU, therefore UK businesses will now be subject to more restrictions.
It is extremely difficult for a UK business to exert any control over a foreign worker they have engaged abroad.
Technological developments have helped employers to introduce control systems so that they can monitor remote workers.
However, these are limited and the priorities of the UK business and the worker or the local entity employing them may not always align.
Furthermore, a foreign remote worker is unlikely to be properly integrated into the UK business and consequently their dedication and commitment to the business may be low.
In the absence of a real employment relationship, the foreign worker is likely to be less reliable and dependable than an employee who is based at the company’s workplace.
It may also be difficult to protect important business interests through contractual intellectual property and confidentiality clauses, which are standard practice in the UK, as this will depend upon the local law.