Top 6 global compliance mistakes and how to avoid them

Global compliance is when international organizations adhere to all the rules, laws, and regulations that apply in all the markets where they conduct business. It also encompasses respecting international laws and cross-border legal frameworks for taxation, employment, and more.

However, knowing about and respecting all the different rules isn’t easy. Especially when they first go global, business leaders and decision-makers often make compliance mistakes because they aren’t familiar with the different regulations yet. 

Complying with the law in all aspects of business is an imperative for organizations, and compliance issues should not be taken light-heartedly. Since non-compliance can lead to hefty fines and financial penalties, businesses often have an expensive learning curve. But it doesn’t have to be like that.

Read on as we take you through a list of the most common compliance mistakes businesses make when expanding internationally and learn how to avoid falling into the different global compliance traps.

Employee misclassification is high up on the list of global compliance mistakes businesses make when hiring employees overseas. Misclassifying an employee as an independent contractor in order to reduce payroll and employment costs is a severe violation of the law in many countries. As misclassification means losing out on payroll taxes for the government, they often impose heavy fines.

But even without bad intentions, it’s an easy mistake to make when classifying employees because the rules that govern employee classification differ from one country to the next. Although there are some common principles businesses can use as guidance, it's necessary to really get down to the minute details of employee classification for every single country. The best way to avoid any issues is to get access to an employee classification checklist and carry out a thorough assessment for each new hire.

Payroll and taxation are highly regulated, and it’s in every business’ interest to avoid mistakes here. What makes payroll and tax compliance so complicated for organizations with global teams is that they not only have to respect local payroll and tax rules, but also adhere to the provisions of international tax treaties and regulatory mechanisms regarding payroll.

For instance, when employees are sent on an international assignment while still being employed and paid by their home-country entity, it’s necessary to set up a shadow payroll to make sure payroll taxes are calculated and withheld correctly in both the home and the host country.

Setting up a local payroll for employees in a new target market is equally challenging. Employee compensation, payroll tax withholding, employee registration with local authorities, and income tax calculation are just some of the things where businesses can go wrong. In order to avoid any compliance management mistakes on the payroll and tax front, businesses should consider outsourcing payroll to local payroll providers that have the necessary expertise to guarantee compliance from start to finish.

Working with a global workforce comes with numerous benefits, but it also has its challenges, one of them being the risk of violating local employment laws. Every country has different rules that regulate the employer-employee relationship, from overtime limits to sick leave entitlement to employee termination. Employment law changes constantly and businesses need to stay up to date in order not to jeopardize global compliance.

For example, terminating employees abroad without a sound understanding of local termination rules can lead to expensive severance claims and even land the business in a lawsuit for wrongful termination. The easiest way to avoid HR compliance mistakes related to international employment is to hire employees abroad through a so-called Employer of Record.

An Employer of Record (EOR) is an employment outsourcing provider that has a legal entity in the employee’s country of residence. The employee is then officially hired under the legal entity of the EOR who handles all things payroll and employment for the client business, from legal onboarding to payroll processing to employee termination.

Hiring international employees not only puts businesses at risk of committing compliance mistakes with regard to payroll and employment, but it can also lead to severe corporate tax implications for the business. When organizations engage in revenue-generating business activities in a foreign market and hire local employees for this purpose, they often (unwillingly) create a permanent establishment (PE).

Having a permanent establishment in another country makes a business liable for paying corporate income tax to local authorities. The problem is that expanding businesses often don’t realize that they have created a PE, which means the amount of income tax they owe adds up over time. As soon as the authorities discover  the business has a PE on their territory, the company needs to pay back taxes, interest, and possibly also a hefty fine.

Creating a PE is a common compliance mistake many businesses make and avoiding it is not always easy. The safest route to take is to get advice from a legal expert and, if there is a PE risk associated with the planned business activities in the new market, establish a foreign legal entity. This way, the legal status is clear from the beginning. Depending on the activities of the local employees, it might also be possible to mitigate PE risks with an Employer of Record.

In today’s world where data beaches are becoming increasingly commonplace, data privacy and protection play an important role for businesses. Given the sheer number of data protection frameworks and requirements that have been implemented by countries all over the world, it should come as no surprise that data security and protection has turned into a vital part of global compliance.

Whether it’s payroll data or customer information, organizations need to make sure that their data is protected and used exclusively for purposes that are authorized by law. Yet many companies fail to adhere to the data privacy and protection requirements imposed by the countries where they conduct business. In geographic regions like the European Union, non-compliance regarding data privacy can lead to steep fines.

The General Data Protection Regulation (GDPR), which is the EU’s comprehensive data protection framework, provides for fines of up to 4% of a company’s worldwide revenue (or 20 million euros, whichever is higher) for serious infringements. In order to avoid fines, businesses should use a GDPR-compliant global payroll solution that also offers high payroll security standards. As for personal data from customers, the best approach is to appoint a Data Protection Officer or get advice from an external data privacy expert.

Global mobility creates both chances and challenges for businesses. One of the challenges is meeting visa and immigration requirements. Whether it’s for an extended workation or for an international assignment, employees need to have the right visa and work permit if they want to enter a different country and intend to work from there.

Failing to arrange the necessary visas and work permits for employees that travel for work purposes is another common compliance mistake businesses should try to avoid. If key stakeholders in global expansion are stopped at the border and refused entry to the country, the consequences for the expansion project can be severe.

There are different ways to ensure global compliance in terms of visa and immigration requirements. Depending on the context, businesses can either work with an Employer of Record who offers visa and immigration support or consult a global mobility specialist.