Global HR compliance pitfalls and how to overcome them

Compliance is a top priority for businesses. Failure to comply with applicable rules and regulations can not only lead to fines and other financial penalties, but can also have negative repercussions on a business’s reputation.

There are many different compliance aspects organizations need to manage and monitor, one of them being HR compliance. HR compliance is linked to several other areas of corporate compliance, which makes it a complex process to oversee.

The complexities and difficulties increase even further when organizations work with a globally distributed team. Managing compliance on both the in-country and the international level requires constant adjustment of policies and processes as new laws and regulations enter into force.

Read on as we dive deep into the HR compliance challenges faced by multinational organizations and explain what global businesses can do to overcome these challenges.

HR compliance is what is needed to ensure that an organization’s HR policies, processes, and procedures are compliant with employment laws, compensation rules, and any other regulations that affect Human Resources. This includes laws and regulations that apply on the federal, state, and local level as well as rules imposed by internal company directives.

Global HR compliance is what must happen in international organizations that operate across a range of different countries and geographies. What makes global HR compliance so challenging is the fact that an organization needs to remain compliant with the applicable rules, regulations, and requirements in every jurisdiction where it employs workers.

HR compliance is a vast field that encompasses a multitude of different aspects. This means that there are many issues businesses might face in the process of making their HR policies and processes fully compliant with local and international regulations. Here is an overview of the most common compliance challenges global HR teams must overcome.

Employment law violations

Adhering to country-specific employment laws is one of the biggest HR compliance challenges faced by international organizations. Rules and regulations surrounding working hours, overtime, workplace safety, and more differ from country to country. The more countries a multinational organization covers with its workforce, the more complex it gets to ensure compliance and the higher the likelihood of employment law violations.

Employment contracts

Drafting compliant employment contracts is another hurdle faced by international HR teams. The requirements regarding employment agreements vary between jurisdictions. This includes anything from mandatory contract elements to admissible clauses and contract terms. Also, employment contracts that are concluded between two parties that are based in different jurisdictions are subject to additional international regulations that must be observed.

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Employee misclassification

Employee misclassification, also known as disguised employment, is a common HR compliance challenge that global organizations need to navigate. The rules surrounding employee classification differ between countries, making it hard for HR teams to develop effective checklists to properly classify their workers.

Independent contractors and full-time employees need to be treated differently in terms of payroll taxes, statutory benefits, and more. This creates a variety of compliance implications the HR department needs to navigate.

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Taxation and compensation

Payroll and everything related to it is what one might call a compliance minefield. There are so many rules and regulations that govern payroll that it is hard for businesses to not fall into one of the numerous pitfalls surrounding payroll management, employee compensation, and more.

Global payroll compliance is even more complex to manage because it involves compliance with country-specific requirements and local compensation laws. For instance, international businesses need to comply with minimum wage laws around the world and adhere to additional industry-specific compensation requirements wherever needed.

Working hours and different time zones

Effectively collaborating across different time zones is a problem that is commonly faced by organizations with globally distributed teams. Managing projects and collaborating on tasks is difficult when team members are working at different times. During intense project phases, it is often necessary to have meetings with all team members, which might mean that some employees will be required to start work very early or to get back to work late at night. This can pose issues with regulations surrounding working hours, overtime, and more.

Employee termination

Mismanaging employee termination is an important HR compliance pitfall multinationals must avoid at all costs. There are many different legal regulations and restrictions to observe, from respecting statutory notice periods to presenting a valid reason for terminating the employee to calculating severance pay correctly. What makes termination management even harder for international businesses is the fact that the rules surrounding employment termination differ between countries.

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Permanent establishment risks

Permanent establishment (PE) is when a country’s statutory authorities consider a foreign entity to have an ongoing presence in their jurisdiction. Factors that can trigger PE include revenue-generating business activities and a substantial number of local employees working for the foreign corporation.

Permanent establishment risk is hence where HR compliance and corporate compliance overlap. Since permanent establishment can have severe financial and legal implications for the organization as a whole, mitigating this risk is a top priority.

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Changing regulations

The rules and laws surrounding labor and employment are constantly changing. For multinationals, keeping up to date with employment law changes is particularly difficult because they have to monitor several jurisdictions at once. Plus, implementation typically needs to happen soon after legal changes are announced, which increases the pressure on HR and compliance teams.

Employee relocation

Employee relocation poses several challenges for HR teams, especially when employees need or want to relocate to a different country. Whether it’s for the purpose of an international assignment or for better work-life balance, employees who relocate to a different jurisdiction cause additional work for the HR department.

For one thing, missing visas and work permits can lead to a premature ending of international assignments. For another thing, employees in high positions who are directly involved in revenue-generating business activities might trigger PE risks for the business when relocating to a country where the company doesn’t have a local legal entity.

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Lack of data security

Much of the data that is handled by HR is employee personal information. Personal data is highly sensitive and therefore needs to be protected according to the highest security standards and in full compliance with applicable data protection laws. Requirements surrounding data privacy in HR vary from country to country, making it hard for global businesses to remain compliant when transferring data between different systems and across different countries.

Non-compliance can cost businesses a lot of money. For instance, the American multinational financial institution J.P. Morgan was fined USD 200 million for failure to comply with different recordkeeping requirements. Another example is the record-breaking GDPR fine levied on Amazon in 2021, which reached a total amount of USD 886.6 million.

Stats like these illustrate that multinational businesses cannot afford any mistakes when it comes to compliance, no matter whether it’s data privacy regulations, payroll compliance, or any other compliance issue that affects HR.

Here are a few helpful tips and best practices for ensuring global HR compliance:

• Use HR software to support compliance: The use of HR software is no longer limited to managing employee information. Modern workforce management tools are also equipped with in-built compliance features that support teams in their daily work of ensuring HR compliance.

• Work with an Employer of Record: An Employer of Record (short: EOR) is an employment outsourcing solution that allows businesses to compliantly hire and manage workers in different countries without having to set up a local legal entity. EOR providers are experts in employment compliance and can help businesses mitigate risks when hiring employees abroad.

• Properly document global HR policies: Good documentation of HR policies and processes is key for ensuring HR compliance. All members of the HR team need to know what the expected code of conduct is, what aspects of their work are relevant for compliance, and how processes need to be handled in order to remain compliant.

• Frequently check for regulatory changes: The legal landscape surrounding employment, payroll, and HR is dynamic and ever-changing. New laws and regulations need to be implemented in a timely manner, which means that global HR teams always need to be on the lookout for legal changes affecting payroll, employment, compensation, data privacy, and more.

• Provide compliance training for HR staff: HR compliance is an integral part of workforce management. Given its crucial importance for businesses (both from a financial and reputational point of view), the members of the HR team need to be well-trained on all the different aspects that relate to compliance in payroll, employment, workplace safety, and more.

• Streamline HR processes across borders: Streamlining processes not only increases HR efficiency, but it also eliminates potential compliance mishaps. Standardized processes leave no room for errors and thereby enhance HR compliance. The only restriction that applies is that country-specific legislation must be observed, which could require an adjustment of workflows and processes for specific countries and jurisdictions.

• Create a detailed global HR compliance checklist: Working with checklists is a good way of enhancing compliance at an organization. This includes global HR compliance. Creating a detailed document that highlights different compliance issues and outlines what must be done in order to prevent these issues provides the necessary guidance for the HR team to fulfill all compliance requirements.

• Globalize HR programs, policies, and benefits: Globalized policies can help the headquarter HR team maintain oversight of processes, workflows, and structures on an international level. This includes international compensation and benefits management, employee onboarding, and more.

• Revisit policies and processes regularly: Given the dynamic nature of HR compliance requirements, global organizations need to review their policies and processes in regular intervals to make sure that they are up to date with the current legal framework. This can be achieved through global HR compliance audits.

There are numerous pitfalls in global HR compliance that businesses need to avoid. Since compliance mistakes can quickly become very costly, businesses have obvious incentives to regularly audit their global HR operations for compliance.

The first step is to create a dedicated project team for the compliance audit. This team should consist of in-house HR staff (both from the headquarters and the different in-country HR teams) and external HR compliance experts.

The next step is to develop an individual global HR compliance audit checklist that details which HR processes, policies, and operations need to be reviewed. Here is an overview of different aspects that are relevant in this context:

• Recruiting and hiring process (including interview practices and candidate selection criteria),

• Employment agreements,

• Compliance with statutory employee benefits requirements,

• Compensation practices (i. e. minimum pay requirements, pay transparency, gender pay gap reporting, and more),

• Compliance with local employment laws and (if applicable) with collective agreements, 

• Compliance with internal policies,

• Compliance with data privacy regulations applicable to HR,

• Compliance with country-specific tax rules, and

• Compliance with statutory reporting obligations.

Additionally, there should be country-specific audit checklists that ensure HR compliance with local laws and regulations.

Once all the different compliance checks are completed, the audit team needs to compose a detailed HR compliance report that summarizes the findings and highlights what actions are needed to overcome identified compliance issues.

International HR compliance is best managed with the help of a modern global workforce management software and local HR compliance experts that can provide advice on difficult HR-related questions surrounding payroll, employment, and more.

With Lano’s global employment solution, multinational organizations can put their HR compliance worries in the rearview mirror. Get access to a global network of pre-vetted Employer of Record partners who can help you to compliantly hire, manage, and pay your global team across a range of over 170 countries. Book a demo with one of our global employment experts to learn more.