Hiring international talent allows businesses to access a global pool of skilled professionals, driving innovation and growth. However, expanding into foreign markets also introduces a range of legal, tax, and regulatory challenges.
Southeast Asia, in particular, offers dynamic opportunities for employers, but it requires careful attention to each country’s unique legal frameworks. Failure to follow local regulations can lead to costly penalties and reputational damage. Read more and learn how to avoid the mistakes.
Common Compliance Mistakes When Hiring International Talent
Southeast Asia has a variety of complex employment laws that businesses need to manage carefully to avoid serious legal and financial consequences. Below are some common compliance mistakes encountered when hiring in the region:
Failing to Adhere to Local Labour Laws
One of the biggest mistakes businesses make when hiring abroad is not complying with local labour laws. These laws vary widely across Southeast Asia and cover everything from working hours to termination policies.
In Singapore, the Employment Act outlines minimum employment standards for most private-sector workers, including mandatory rest days, limits on working hours, and requirements for overtime pay. Ignoring these regulations can result in fines, disputes, or even lawsuits. Likewise, in Indonesia, the 2020 Omnibus Law on Job Creation introduced several changes to Indonesia’s labour regulations, the overall impact on employee termination rights is complex and subject to interpretation. While some provisions have made it easier for employers to terminate employees under certain circumstances, other changes have introduced additional protections for workers.
For instance, a technology company expanding into Indonesia faced significant financial losses after laying off several employees without following the country’s severance payment requirements. The company had overlooked local laws regarding termination procedures and was later required to pay backdated severance, leading to unplanned expenses and damage to its reputation.
Incorrect Worker Classification
Misclassifying workers as independent contractors rather than employees is another common mistake businesses make when hiring abroad. Southeast Asian countries have strict rules about the classification of workers, and getting it wrong can result in substantial financial and legal repercussions.
In the Philippines, the Labour Code provides clear guidelines on distinguishing between employees and contractors. Misclassification can result in companies being required to retroactively pay for missed benefits such as healthcare, social security, and insurance. A global tech company working with a developer in Vietnam, for example, initially classified the worker as an independent contractor. However, upon review by Vietnamese authorities, it was determined that the worker was operating under conditions more typical of an employee. As a result, the company faced penalties for failing to provide proper benefits, including back payments for insurance and social security contributions.
In Vietnam, authorities closely examine worker classification, and businesses that misclassify employees as contractors to avoid taxes and social security contributions are at risk of substantial fines. Misclassification not only impacts the company financially but can also harm its reputation and relationships with local talent.
Ignoring Tax Obligations
Tax compliance is another area where businesses frequently stumble when hiring internationally. Different countries have distinct tax obligations for foreign employers, and failure to understand these can lead to fines, back payments, or double taxation.
For example, in Thailand, employers are required to withhold and remit taxes on behalf of their employees. If a company fails to do this, it could face penalties from the Revenue Department. Additionally, in Malaysia, companies must comply with income tax obligations and contribute to the Social Security Organisation (SOCSO) for all employees. Ignoring or misunderstanding these tax responsibilities can lead to fines, audits, and legal action.
A global consulting firm hiring remote workers in the Philippines encountered significant tax penalties after failing to withhold the correct amount of personal income tax from their employees’ salaries. The firm had assumed that the employee was solely responsible for their tax obligations, but under Philippine law, employers are required to withhold and remit taxes on behalf of their workers. The company had to pay significant back taxes and penalties, underscoring the importance of understanding local tax laws.
Non-Compliance with Social Security and Insurance Requirements
In Southeast Asia, many countries have mandatory social security and health insurance programs, which employers must contribute to. Ignoring these requirements can lead to financial penalties and, in extreme cases, criminal charges.
In Malaysia, employers are required to contribute to the Employees’ Provident Fund (EPF) and the Social Security Organisation (SOCSO), which provide essential benefits such as retirement savings, disability payments, and accident insurance. Similarly, in Vietnam, businesses must contribute to the national social security program, which covers pensions, health insurance, and work-related injury compensation.
A multinational corporation expanding into Vietnam failed to register its local employees for the country’s mandatory social insurance program. This oversight was discovered during a routine inspection by the Vietnamese Social Security Office, resulting in fines and the requirement to make significant backdated contributions. The company not only faced financial consequences but also damaged its reputation within the local labour market.
How to Avoid Compliance Pitfalls
Avoiding compliance pitfalls requires businesses to take a proactive approach and understand the legal, tax, and regulatory environment in the countries they are hiring from. Below are some practical steps to ensure compliance and reduce risks when hiring international talent:
Conduct Thorough Research on Local Regulations
Before hiring in any Southeast Asian country, it’s essential to research the local employment laws, tax regulations, and social security requirements. This research should include understanding the specific obligations for employers regarding wages, working hours, employee benefits, and termination policies.
Engaging local legal experts or HR professionals familiar with the regulatory environment in Southeast Asia can help businesses address these complex issues. Countries like Singapore, Malaysia, and Indonesia have comprehensive government websites that outline employment regulations, and businesses can also consult international organizations like the International Labour Organization (ILO) for additional guidance.
Ensure Proper Worker Classification
Correctly classifying workers as either employees or contractors is crucial for avoiding penalties and legal disputes. Businesses should review their employment contracts to ensure they comply with local labour laws. In cases where the classification is unclear, consulting with legal experts who understand the nuances of the local market can help.
Adhere to Tax and Social Security Requirements
Ensuring compliance with tax and social security obligations is critical for businesses hiring talent abroad. Working with tax advisors who specialize in international payroll and social security contributions can prevent costly mistakes. Many countries, such as Thailand and Malaysia, also have tax treaties with other nations that help prevent double taxation. Understanding these treaties can further reduce tax burdens for your business.
Establish Clear Employment Contracts
Establishing well-defined employment contracts is another key step in ensuring compliance. Contracts should clearly outline the worker’s role, compensation, benefits, and adherence to local laws. This is particularly important in countries like Vietnam and the Philippines, where labour laws are heavily regulated, and violations can lead to significant fines and penalties.
Using an EOR Service to Simplify International Compliance
One of the most effective ways to manage compliance when hiring abroad is by partnering with an Employer of Record (EOR) service. EOR services take on the legal responsibilities for managing employees in foreign countries, including handling payroll, taxes, and social security contributions.
For instance, an EOR managing employees in Indonesia would ensure compliance with the country’s complex severance pay laws and BPJS social security contributions, while also handling tax withholdings. This allows businesses to focus on growth while ensuring they meet all legal obligations in the country where they hire.
EORs simplify the complexities of international hiring, reducing the risk of compliance errors and helping businesses avoid the common pitfalls outlined above.
Expanding your workforce internationally opens the door to a wealth of opportunities, but it also requires managing complex legal and regulatory environments. To learn more about simplifying global hiring, visit Employer of Record Services from High Five.
