Legal considerations in remote work employment agreements
You’re familiar with the benefits of remote work by now. You know talent is not limited to a 50 km radius around your office, and that you can often source talent affordably in neighbouring timezones. Perhaps you’ve already made a few remote hires, in your own country or abroad?
In most - but certainly not all - cases well-intentioned employers are matched with trustworthy remote workers through social networks like LinkedIn or digital job boards like Wellfound. The same way employees have adapted to delivering remotely, employers have made strides in sourcing and vetting candidates from afar. But the reality for many SMEs is that they don’t have adequate onboarding protocols and reporting structures to ensure frictionless fully-remote work. Random drop-in calls. Distrust. Over-reporting.
But trust and performance remind us of only a few of the obstacles of hiring someone abroad. This is largely a managerial way of thinking. Looking more broadly around the business and its support functions; Operations, perhaps Finance, Legal and HR teams, are presented with edge-cases. Hiring remotely presents a new set of challenges that requires quite specialised knowledge, new processes, and proper teamwork. Teams at capacity? Opting for an EOR (Employer of Record) can take out a lot of the liability and headache. It is essentially a middleman that takes on the burden of hiring the remote worker on your behalf, and you pay a monthly fee in order to do so. This largely exonerates you from dealing with hairy tax obligations and reporting, which might be just what you need! We provide a list of our favourite ones at the end of this article.
But, more fees. More middlemen. More layers of separation. Does that always equate to less headache? Is it always necessary? Especially if you are based in a country within the EU, making a foreign hire that is based in another member state. For simplicity sake, we will assume this to be the case. As such, this article specifically covers the key considerations for those EU companies looking to make a foreign hire within the EU, outside of an EOR.
Five key legal considerations in remote work employment agreements
Worker classification: employee vs. independent contractor
This is where it begins for most, as the decision-tree branches from here with significant downstream effect on your tax and legal obligations. Misclassification can lead to penalties and increased complexity. According to EU law, the applicable legislation for employment law is the employee’s local legislation. For many businesses, this is not desirable and truly quite complex. The default recommendation, therefore, is to opt for an independent contractor agreement when possible.
By treating the worker as an independent contractor, you're entering a business-to-business agreement. This means the worker will invoice you each month for their services, and you handle it like any other business expense you have with a supplier. This approach simplifies things on your end because it limits your exposure to employment laws or administrative tasks of the worker's country.
Do make sure the worker truly operates independently and meets the criteria for a contractor under local laws. In a lot of cases this comes down to autonomy and independence. If an employer controls where, how, and when a worker’s tasks are performed, they’re usually considered an employee. Contractors perform their work independently, use their own equipment, and can provide their services to multiple companies.
Compliance with local employment laws
Even when hiring contractors, businesses need to be aware of the labour laws in the worker's country. While you might not have to manage local taxes or benefits directly, this responsibility is essentially offloaded to the worker. They must handle their own taxes, healthcare, and pension contributions. This can be a hassle, as they may need to register as self-employed or even set up a small business. At the end of the day, working for your company should not be a source of stress or hassle for any employee or contractor!
By understanding these local requirements, you can support your workers by providing guidance or resources to help them navigate their obligations.
Taxation and permanent establishment risks
A permanent establishment is a tax concept used to determine when a company has a sufficient presence in a foreign country to be subject to its tax laws. It essentially asks whether your business activities in that country are substantial enough—like having a fixed place of business or significant operations—to warrant taxation there. This idea aligns with what's known as the substance requirement, where the focus is on the actual economic activity rather than just formal arrangements.
This actually feeds into another reason to hire remotely as contractors over employees, as you run less risk of creating a permanent establishment in foreign countries. Overall, this simplifies the project.
Termination and severance
This point is largely intended to bring the topic of termination and severance to your attention, recognising it will be difficult to make very insightful blanketed statements about it here. The truth is, it depends on how you’re hiring and from where. That said, we recommend that you research the mandatory notice periods and provisions of the relevant country and actually spell them out in your own agreement, so as to not leave any confusion later on. Be sure to plan ahead for potential costs and gauge the risk you’re willing to take with a potential mutual probation period
Data Privacy Considerations
When handling personal data of employees in the EU, you must comply with the General Data Protection Regulation (GDPR). This is perhaps more a point on general data privacy and security hygiene, as it should be standard practice in any EU business regardless of where the hire is made. This includes collecting only necessary data, using secure systems to store personal data and preventing unauthorised access. It goes without saying: personal data-breach fines harm your employees (and their trust) and eat your profit margins!
Summary and next steps
Perhaps you read this article and sigh (that’s okay!). Some business owners simply want to get ahead with building out their product or service and don’t want to faff around with complex tax overhead. It could be smart to look into the following EOR solutions that can hire remotely on your behalf. Do remember the potential implications (including severance, benefits, pensions) of hiring as an employee as opposed to contractor, aside from high fees and onboarding:
Or maybe you’ve hired remote before, with great success. Whilst a contract lifecycle management (CLM) solution might seem like an unconventional player in this space, it can do much of the heavy-lifting for you. A solution like Docfield provides you with the legal backbone to take on more complex and cross-border operations. Keeping track of your preferred clause libraries, storing key contract data, and quickly involving stakeholders to prevent bottlenecks can make the hiring process a breeze. We’re happy to chat if you want to brainstorm about how we’ve helped other customers attain success in this area.
