De-Risking Your Global Contract Workforce: The Why and How for American Businesses

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While protectionist rhetoric has taken over the current political climate, penetrating new markets and otherwise operating in foreign countries will remain a business reality for U.S. companies. Correspondingly, many companies will engage foreign workforce in different countries on a contract basis — especially when establishing foreign legal entities does not make economic sense. However, simply engaging contract workers in foreign countries — each with different business practices and customs, labor laws and compliance requirements for social benefits and taxation — can be risky business if mitigation measures are not adopted.

For organizations that are expanding or operating in other countries, contract workforce can be talent that is critical to a business.

  • Some types of businesses depend strategically on the use of contract workforce around the world. For example, oil and gas companies routinely utilize engineers and other types of workers at drilling sites. Or they even contract with workers from one country where there is available expertise and deploy them in another country where extraction activity is occurring. These types of businesses, which have relied on contract workforce for many years, understand that using contract workforce in different countries requires compliance with local labor laws. But they may wish to outsource non-core compliance and payrolling activities to a third party.
  • Some types of businesses — say a new software business — may have grown rapidly and suddenly find themselves with a contract workforce in a number of countries and are just beginning to understand the risks and requirements, but do not have the experience, knowledge and capabilities to address them.
  • Other types of businesses may be just starting to enter markets and operate in foreign countries. Many U.S. businesses — from small to large — have been established and have grown serving the large North American market. But eventually they start to expand into new countries or regions and must engage contract workers abroad, while having little if any understanding of the risks and requirements.

In effect, there are different types of businesses that will utilize contract workforce in different countries and will face and need to address compliance and others risks from different positions. Many of these businesses will also lack the capabilities to address or even understand these risks.

In every country, there will be different systems of workforce regulation and legal compliance requirements related to employee classification, compensation and benefits and worker rights. Several countries — China, Japan and Brazil, for instance — construct the contract employee relationship differently from the United States. Instead of employing workers “at will” as companies do in the U.S., companies operating in China may only fire workers in cases with just cause such as redundancy, misconduct or incapability, and then only if certain stringent procedures are followed and appropriate notice is given.

Serious risks related to contract workforce classification and compliance bring possible consequences of unexpected taxes, fines and interest, plus the exposure to a wider audit of your entire workforce. The costs can be high and can cripple or bring a full stop to market expansion initiatives.

“Many American companies, that have operated very successfully in U.S. markets, seriously underestimate the risks and requirements of establishing and managing a contract workforce in other countries,” said Andrew Karpie, research director for services and labor procurement at Spend Matters. “In fact, some companies are not in a position to recognize the challenges and pit-falls.”

“Few businesses have the scale, knowledge and capability to address the challenges and risks of engaging a contract workforce in foreign countries, which is why businesses either look to outsource to a specialized service provider or — sometimes out of lack of basic awareness —ignore the challenge and do nothing at all. Unfortunately, American companies that can have the most to gain and the most to lose can be very vulnerable after being highly successful in home markets.”

“Having the understanding and capabilities to understand and deal with these issues,” Karpie said, “is not a reasonable expectation of these companies. What they really need is a specialized service provider that operates a global network of offices and agents. Such a provider would be able to ensure and support compliance and payments to a company's foreign-based workers and provide support in market expansion planning with regard to workforce compliance, risks and costs.”

“Finding the right provider,” Karpie noted, “requires consideration of several key criteria. A service provider must have a global footprint. Scope is important, but the provider must also have a deep presence in different countries know how to interact successfully with the legal and accounting communities in order to know the laws and regulations and how to apply them correctly.”

“Longevity is another consideration,” Karpie continued. “Having a history in the region can also enhance a service provider’s reputation and level of service to assist with your short- and long-term planning. Providers with decades of experience operating in global markets can not only speak to a foreign market’s customs and attitudes toward its workforce but also advise a client on how to best expand their business in that market.”

“American companies that are already engaging contract workforce abroad or are planning to do so must make contract workforce 'de-risking' through an appropriate service provider a part of their international business initiatives. The costs of not doing so can be as high as complete failure and lost opportunity.”

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