Today, hiring is not limited by boundaries. Global talent has become easily accessible, thanks to remote culture, motivating big companies to think big while building a high-performance team. The impact is visible in business revenue, as 81% of companies pursuing mobile talent (remote professionals) surpass their financial goals.
However, the most crucial step towards building a global talent pool is complying with a plethora of labor regulations. To solve the jigsaw of global hiring, you must rely on an international employment contract.
What is an international employment contract?
An international employment contract, as per the Global Payment Management Institute, is “the legal statement of record and arbiter between your business and your employees in overseas locations.” Simply put, it is a formal employment contract that establishes a working relationship between you and your global employee. Furthermore, the contract outlines and protects the legal interests of both parties, and offers guidelines to resolve disputes.
You always need an employment contract while hiring any employee – that goes without saying. However, you need an international employment contract specifically to hire professionals from a foreign country.
3 reasons why international employment contract is important for you
Global hiring adds layers of complexity to employment and increases legal risks. An international employment contract is important in such a situation for the following reasons:
Helps in hiring compliantly
Compliance is the most important aspect of hiring anyone from anywhere. The labor laws vary for each country and, in some cases, each state. You must comply with all the necessary provisions (minimum wage, working hours, probation period, termination process, and a lot more) required by the labor laws applicable to the foreign professional. An international employment contract covers all the necessary segments to hire your desired candidate and ensures a fully compliant process.
Mandatory in many countries
Many countries, like the U.K., China, and New Zealand, require employers to offer employment contracts before hiring local and global employees. Aside from legal reasons, you require the contract while applying for a work permit on behalf of your employee.
The employment contract is the most important document to resolve disputes between an employer and an employee. As a neutral entity, the contract guides both parties in resolving their issues without visiting a court of law.
A local contract will not cover enough ground to protect the interests of both parties; you need an international employment contract in such situations.
Essential elements of an international employment contract
To prepare the right international employment contract template, you must include the following elements:
The contract begins with basic details about both parties and the job roles. These include:
- Employee’s personal information (Full name, residence address, tax identification number)
- Employer’s basic information (Name of the employer, office address, contact information)
- Starting and ending dates of employment
- Job role and responsibilities
Type of contract
There are two categories of contracts based on the work and length of employment:
- Fixed-term or indefinite
- Full-time or part-time
In some countries, fixed-term contracts become indefinite if both parties continue to uphold the employment and do not renew the contract. In such cases, it is in the best interest of both the employer and employee to include a clause that determines the status of the fixed-term contract after the last working date.
Working hours and overtime pay
The labor laws of the global employee’s country have provisions for mandated working hours and acceptable overtime rules. In the European Union, for example, the following regulations are applicable:
- Maximum working hours of 48 hours per week
- Uninterrupted rest of 24 hours every week
- Minimum 11 hours of rest per day
Benefits and compensation
Employee compensation covers the gross salary, deductions, in-hand salary, and taxes. The benefits, on the other hand, include paid time off, health insurance, 13th-month pay, worker’s compensation, and much more. Keep in mind that these details vary from country to country; hence, you must research this provision very deeply before including them in the contract.
Domestic labor laws determine the length of the probationary period. During this period, both parties decide how well the working relationship can flourish and if they are willing to commit for a longer time. The employer must offer a new contract to the employee once the probation period is over and they want to extend the length of employment.
It is important to note that some countries, like Belgium, do not legalize the probation period. On the other hand, some countries allow probation periods as long as six months, like the United Arab Emirates.
Termination policy and notice periods
You must have a valid reason before terminating an employment contract. Most countries accept misconduct, unsatisfactory performance, or mutual consent as reasonable grounds for termination. However, few countries prohibit termination in the following scenarios:
- The employee is on maternity leave
- The employee has filed a complaint against you
- The employee is on sick leave with a valid reason
After agreeing upon the termination of the contract, many countries mandate a paid notice period that ends on the last date of employment. Depending on the country, this period may range from two weeks to two months. The notice period must always be agreed upon in writing.
Many countries also require employers to pay severance to their outgoing employees. The pay can vary based on the length of service. For instance, local Irish employees get severance pay if they have worked for a minimum of two years and got terminated due to redundancy.
Intellectual property rights
Your Intellectual Property (I.P.) is of utmost importance, and without a reliable employment contract, you may lose it to a competitor. A data protection policy is good, but an international employment contract legally prohibits your employee from leaking sensitive data. The I.P. is always the employer’s right, including the designs, knowledge gained from the I.P., copyright permissions, and trade secrets. Anything created by the employee, different from the copyrighted I.P., is theirs to own.
Include the following provisions to protect your I.P. and larger interests:
- Non-compete agreements
- Non-disclosure agreements (NDAs)
- Employee non-solicits
- Customer non-solicits
The length and validity of these provisions vary between countries. For example, Mexican labor laws do not allow employers to enforce customer non-solicits on their outgoing employees.
Many countries ask employers to include unique provisions in employment contracts. For instance, an E.U. regulation called Rome 1 oversees all the contracts signed in the E.U. countries within 17th December 2009, except Denmark. Both parties in Denmark can choose which labor law they want to follow and draft a relevant employment contract. In case both parties cannot choose a particular law, the contract must be based on the employee’s home country.
Common questions regarding international employment contracts
International employment contracts are inevitable while hiring global talent. However, you may have a few questions while preparing a sample international employment contract, such as:
What are tax treaties?
Tax treaties are agreements between countries that help businesses and employees avoid double taxation. When you hire a global employee, you must check if your country has a tax treaty with the employee’s country. U.S. has tax treaties with 60+ countries, which means that U.S. employees working abroad get credits for the international tax paid on foreign income. The employees also get tax exemptions on the income tax they owe to the U.S.
Are fixed-term contracts a good option?
A fixed-term contract can be risky if you continue to employ the professional for a significant period. In Japan and the U.K., a fixed-term employee can automatically become a permanent employee after 4-5 years of continuous employment. Furthermore, fixed-term contracts are legal in only a few countries. Hence, you must understand the labor law regulations well before drafting such a contract.
What are Collective Bargaining Agreements (CBAs)?
France mandates at least 30 days of paid annual leave for its local employees. However, SHRM reveals that employees can negotiate for more vacation days using a collective bargaining agreement. This looks like a jackpot from an employee’s perspective, but the agreement can complicate the employment contract and add another legal hurdle for the employer. If you are hiring from a country that accommodates CBAs, it is better to work with unions instead of drafting your contract.
How to address the payroll concerns of remote employees?
Common payroll challenges for remote employees include minimum wage inaccuracies, calculating overtime pay, mandatory increments, and accrued leaves. The best practice is to refer to the labor laws applicable to the employee and the provisions that cover the points above. Always include these details in the employment contract to ensure zero legal hassles.
The CBAs often cover mandatory increments, and the labor laws may require you to increase an employee’s salary every year on an ad-hoc basis. Your internal systems must have accurate data regarding the timely increments of the right employee. Instead, you can rely on an EOR provider that manages all these aspects and gives you an organized break of your total cost at the end of the billing cycle.
How is an offer letter different from an employment contract?
In the U.S., an offer letter details the general terms and conditions of the employment, while an employment contract covers all the provisions extensively. Another significant point is that an offer letter is not a legal guarantee of hiring, so it will not protect the candidate’s rights if the employer stops the hiring process midway.
On the other hand, companies outside the U.S. must be cautious while presenting offer letters, as many labor laws consider them equivalent to an employment contract. This can lead to major legal troubles, as formal contracts presented after the accepted offer letter will not hold any value.
Avoid international compliance risks with Multiplier
You can hire global employees in two ways –
Traditional: Open a local entity, register your company, set up a local team for each department, gather legal and H.R. counsel, and finally, offer an employment contract.
Smarter: Partner with an EOR, offer a legally compliant contract, and onboard within days.
An Employer of Record, like Multiplier, simplifies the way you onboard talent across the globe. Our platform helps you in drafting a compliant international employment contract in multiple languages, allocate mandatory benefits, release payroll on time, and pay the right taxes. We support onboarding global employees across 150+ countries and assist in efficient human resource management.
Connect with us to know more about our services.