Most companies think they’re “hiring globally” when they’re really just picking a vendor. This article reframes that assumption: the way a company chooses to engage talent abroad, whether through direct hire, contractor agreements, an Employer of Record, or other routes, shapes what it’s legally responsible for, how much control it holds, and what risks it takes on.
Without a clear understanding of how cost, control, and local law interact, even a well-intentioned setup can unravel.
This article breaks down those global employment models, shows where they typically fail, and outlines how experienced employers assess model fit long before a contract is signed.
What Global HR Compliance Involves
Labour law is not harmonised across borders. Each jurisdiction sets its own rules on who qualifies as an employee, how contracts must be structured, what statutory benefits apply, and under what conditions a working relationship is legally valid. What makes a hiring model viable in one market may create exposure in another.
Compliance, in this context, means ensuring that every aspect of the working relationship is legally valid under local rules.
This includes:
- Whether the individual is classified as an employee or contractor;
- Whether a written contract is required, in what language, and with which clauses;
- How pay, taxes, and social contributions must be calculated and reported;
- Whether the person has the legal right to work, and whether the employer has the legal right to engage them;
- What is required for termination, including notice, cause, and compensation;
- How statutory employee benefits, confidentiality, and IP rights are handled and enforced locally.
But compliance is not only determined by jurisdiction. It also depends on the capacity in which the person is engaged and the nature of the role.
A contractor performing routine tasks under supervision may be treated as an employee, regardless of contract wording. A country manager with hiring authority may be seen as a permanent extension of the foreign parent company, triggering local employer obligations or tax registration. A sales lead who negotiates or signs deals may inadvertently create taxable presence, even if formally hired as a remote employee.
In practice, regulatory authorities assess risk based on how work is performed, not how it’s labelled. Labour law, tax enforcement, and immigration control each examine different aspects of the working relationship, and the thresholds vary significantly from country to country.
Getting this right is not simply about documentation. It requires a clear understanding of local rules, the individual’s legal status, and the real-world function they perform. That is the basis of global employment compliance.
Where Compliance Risk Is Commonly Triggered
Most compliance failures in international hiring don’t begin with deliberate shortcuts. They arise from assumptions, often based on domestic practice or internal policy.
- A role is classified the way it would be at headquarters.
- A contract template is reused.
- Payroll is arranged informally, or immigration steps are delayed until after onboarding.
These decisions are usually made under pressure to hire quickly.
In global employment, risk builds over time. It may go unnoticed until a local authority conducts an audit, a contractor files a claim, or a work permit is denied due to inconsistencies in the employment record.
Common points of exposure include:
- A worker is treated as a contractor despite meeting the legal conditions for employment.
- The contract issued lacks mandatory clauses or does not meet language and format requirements under local law.
- The company pays the individual outside the formal payroll system and fails to register or withhold taxes.
- A foreign national starts work before the correct visa or employment authorisation is secured.
- The employer terminates the contract without following local procedures for notice, cause, or compensation.
- Equity or bonus payments are made without accounting for local tax treatment or reporting obligations.
- The employee is granted authority to hire, supervise, or sign contracts, creating potential tax presence or triggering permanent establishment.
What happens as a result depends on the jurisdiction. Some governments enforce these issues through audits and administrative penalties. Others take a slower route: disputes raised by workers, tax mismatches across borders, or immigration checks that reveal inconsistencies.
The outcome is the same: time spent fixing what could have been set up correctly from the start, often at far greater cost.
Comparing Global Employment Models Through a Compliance Lens
Companies hiring internationally without a local entity have several engagement models available, including contractor arrangements, agency placements, umbrella companies, or formal employment through an Employer of Record.
Each model interacts with local law in different ways, particularly in areas such as payroll compliance, tax registration, immigration eligibility, and liability in the event of a dispute.
The engagement structure determines who carries legal responsibility, how much control the client can exercise without triggering compliance issues, and whether the arrangement can stand up to local scrutiny.
Two dimensions are especially relevant when assessing risk:
- Legal responsibility: who is recognised under law as the employer, who signs the contract, and who is accountable for employment compliance, tax, and social security or formal termination.
- Operational control: who supervises the worker, assigns tasks, directs performance, etc.
Where these two aspects are misaligned, for example, when a company exerts employer-level control over a contractor or outsourced worker, exposure increases.
Below are the most commonly used models, framed according to legal risk and functional control.
Independent Contractor: Direct or via Platform
A contractor is typically engaged through a services agreement, either directly by the client or through a freelance platform. The contractor invoices for services, is paid gross, and is responsible for their own tax filings, social contributions, and insurance.
This hiring model offers flexibility and speed, and is widely used, especially in software development, creative industries, and short-term project work.
However, in many jurisdictions, labour and tax authorities do not rely solely on contract labels. If the working relationship resembles that of an employee, particularly in cases involving:
- Exclusive service to one client
- Fixed working hours or supervision
- Use of client systems or resources
- Inability to subcontract or delegate the work
…then the contractor may be reclassified as an employee. This is especially true in countries with statutory worker protection, collective bargaining regimes, or sector-specific employment tests.
In such cases, authorities may treat the client as the de facto employer and impose retroactive tax assessments, social security payments, and statutory entitlements, including holiday pay, severance, and protections against dismissal.
The risk is elevated when:
- Contractors are hired for long-term engagements with no functional independence
- Contracts are extended repeatedly without role or scope change
- The contractor is based in a jurisdiction where labour courts regularly override contract terms in favour of the worker
Common risks: Misclassification, backdated employer liabilities, unpaid benefits, tax penalties, reputational harm, and employment disputes.
Jurisdictional Examples: How Worker Misclassification is Determined
France – Subordination Test
French labour courts assess whether the contractor is under a relationship of subordination, defined by hierarchical control, reporting obligations, or integration into the client’s operations. If so, the relationship is likely reclassified as employment, with retroactive contributions due to URSSAF (social security body).
Germany – Scheinselbstständigkeit (False Self-Employment)
Germany has strict criteria to identify “scheinselbstständige” ( false self-employed). Risk indicators include working exclusively for one client, using client infrastructure, and being subject to instructions. Clients face retroactive tax and pension liabilities, and contractors may claim full employment rights.
United States – IRS and DOL Control Tests
In the US, contractor status is assessed using multiple tests. The IRS focuses on behavioural, financial, and relationship control. The Department of Labor uses a broader “economic reality” test, especially in wage and hour claims. If control is excessive, reclassification can trigger federal and state-level back taxes and penalties.
Spain – TRADE Contractors and Falsos Autónomos
Spain recognises a special contractor category (TRADE) for economically dependent self-employed workers. However, where control, exclusivity, and client integration exist, courts may reclassify the contractor as an employee (“falso autónomo”), exposing the client to significant liabilities.
UK – Employment Status and IR35
UK law distinguishes between employees, workers, and the self-employed. Status is determined case-by-case, based on control, substitution rights, and mutuality of obligation. Misclassification may result in PAYE tax obligations, penalties, and breach of employment rights. The CEST tool is often used but not legally definitive.
Employment Agency
The worker is hired by an agency and deployed to the client. In some jurisdictions, this is a regulated arrangement; in others, it may trigger co-employment or joint liability. The longer the assignment and the greater the control exercised by the client, the more likely the worker may claim entitlements equal to those of direct employees.
Common risks: Shared or unclear liability, statutory co-employment, limits on duration or renewals under local labour codes.
Umbrella Companies and Jurisdiction-Specific Use Cases
Umbrella companies are commonly used in jurisdictions where tax or employment law limits the use of direct contracting. They sit between the worker and the end-client (or recruitment agency), offering a compliant employment structure without requiring the contractor to operate through a limited company.
The umbrella company becomes the worker’s legal employer, issuing a local contract, processing payroll, withholding taxes, and administering statutory benefits. The client supervises the day-to-day work but holds no formal employment relationship.
Regulatory Focus: The United Kingdom
The UK offers one of the clearest and most heavily enforced frameworks for both employment status and umbrella company oversight. The key driver is IR35, the off-payroll working legislation designed to prevent companies from misclassifying employees as contractors to avoid tax and employer obligations.
Under IR35, a contractor who operates like an employee, receiving supervision, direction, and working exclusively for a single client, must be taxed as an employee. Umbrella companies are frequently used in this context, particularly in agency-led placements, to ensure tax compliance and provide PAYE payroll and statutory benefits.
However, UK regulators are increasingly focused on the legitimacy of these arrangements. A valid umbrella company must function as a genuine employer, not just a payroll conduit. HMRC scrutiny focuses on whether employment rights, taxes, and control structures reflect the true nature of the working relationship.
Key government guidance includes:
- Understanding off-payroll working (IR35) – Explains the scope of IR35, applicable scenarios, and implications for umbrella use.
- Spotlight 60: Warning for agency workers and contractors – Alerts workers to disguised remuneration schemes and tax avoidance risk.
- Check Employment Status for Tax (CEST) – A tool to assess whether a worker is legally employed or self-employed.
- Government response to umbrella company consultation – Outlines planned reforms to improve transparency and accountability in the umbrella market.
These materials demonstrate how a well-developed compliance authorities evaluate employment status, tax exposure, and intermediary structures. The UK’s approach shows that risk lies not only in how a worker is paid, but in how their role is structured and managed.
Direct Hire via Local Entity
Establishing a local entity, such as a subsidiary, branch, or representative office, enables a company to hire talent directly under its own name. This provides full legal and operational control over employment, payroll, and HR functions. It is often the preferred model for long-term presence, large headcounts, or situations where control over brand, workflow, and liability cannot be shared.
However, the decision to incorporate brings multi-dimensional obligations beyond employment:
- Corporate taxation and financial reporting.
- Registration with local labour, tax, and social security bodies.
- Ongoing compliance with sector-specific and general corporate regulations.
- Setup costs and administrative maintenance, including audits, director appointments, and statutory filings.
The entity must be registered before any employment contracts are signed. In most countries, you cannot backdate employment or retroactively register payroll. Entry delays, such as bank account setup, tax ID processing, or notary delays, often slow down hiring timelines.
Exit can be equally complex. Terminating the entity may involve:
- Settling outstanding liabilities (e.g. tax, severance, benefits)
- Notifying relevant authorities and deregistering
- In some countries, formal liquidation or audits before closure is permitted
Common risks:
- Risk of non-compliance if local advisors, accountants, or legal teams are poorly coordinated;
- Long lead time to hire due to legal and operational setup;
- Exposure to corporate and employment regulation beyond workforce management;
- Difficulty exiting cleanly if employment disputes or tax liabilities are unresolved.
Professional Employer Organisation (PEO)
A PEO enters into a co-employment arrangement with the client company. The worker is technically employed by both parties: the PEO handles payroll, benefits, and HR compliance, while the client retains control over work assignments, performance, and management.
This model is primarily used in jurisdictions where co-employment is legally defined and accepted, most notably the United States. The PEO registers under state and federal frameworks (such as IRS Certified PEO status) and shares liability with the client.
Unlike an EOR, which is the sole legal employer, a PEO does not replace the client in the employment relationship, it supplements it. Therefore, the client must already have a legal entity in the country of employment to use this model.
Common risks:
- Not usable without a local entity, not suitable for international expansion.
- Shared responsibility means liability is not fully offloaded.
- Potential for regulatory gaps if roles between client and PEO are not clearly defined.
- In some jurisdictions, PEO arrangements are not legally recognised or may be interpreted as labour leasing or subcontracting.
Employer of Record (EOR)
An Employer of Record becomes the formal, legal employer of a worker in their country of residence. The EOR is responsible for issuing a compliant employment contract, registering the worker with local authorities, running payroll, administering statutory benefits, and ensuring adherence to national labour, tax, and social security laws. The client company defines the role and manages the worker’s tasks but does not appear as the legal employer.
The model is primarily used when the client does not have a local entity and does not plan to establish one. It offers a mechanism to employ legally without triggering local registration or permanent establishment, provided it is used within the boundaries of local law.
In some jurisdictions, particularly within the EU (e.g. Spain, Czech Republic, France, Germany), Employer of Record arrangements are constrained by laws governing labour leasing, temporary staffing, or subcontracting of core business activities. In these markets, use of an Employer of Record (EOR) may only be lawful if:
- The EOR is licensed as a temporary employment agency;
- The client has an established legal presence in-country;
- The role does not fall within prohibited categories (e.g. core business functions that cannot be outsourced).
Where these conditions are not met, EOR arrangements may be challenged as unlawful subcontracting or hidden agency work, potentially exposing both EOR and client to fines, joint liability, and forced reclassification of the employment relationship.
Common risks: Legal exposure in jurisdictions with EOR restrictions, liability from using unlicensed intermediaries, improper outsourcing of core roles, breach of temporary work laws, and challenges to the employment relationship by labour authorities or courts.
Choosing the Right Hiring Model: Matching Tactics to Strategy
Selecting an employment model is not only a compliance decision, it’s a strategic one. The right approach depends on how the company balances speed, control, cost, and legal risk at each stage of international expansion.
Rather than starting with the model and fitting the business around it, companies should assess:
- Where the role sits in the business lifecycle;
- What level of control is required over day-to-day operations;
- What compliance risks exist based on local laws;
- Whether a local entity exists or is planned;
- Who should carry employer responsibility legally and functionally.
These decisions should be revisited at every point of the global employment journey, from market entry and setup to long-term talent retention.
The visual framework above helps map the compliance considerations across each stage, and shows how decisions in one phase (e.g. market entry mode) constrain or enable options in the next (e.g. employee onboarding or benefits provision).
Example applications:
- In early market testing, a Contractor model may seem attractive for speed, but introduces significant classification and PE risks if oversight is not limited.
- Where entity setup is not feasible, Employer of Record (EOR) provides full employment coverage, but must be legally permissible in-country and carefully vetted.
- For mature operations with sustained headcount, Direct Hire via a local entity gives maximum control, but requires commitment to ongoing corporate governance and investment.
Planning for Cost and Compliance in Global Hiring
Acumen International has structured its core expertise in cross-border employment, legal risk mitigation, and payroll architecture into two precision tools designed for use by global HR, finance, and legal teams. These tools help organisations assess the real-world viability of international hires, beyond surface-level salary benchmarks or general market data.
Global Payroll Calculator
The Global Payroll Calculator helps determine total employer cost in 190+ counries, including gross salary, social contributions, statutory benefits, and taxes — all localised by role type, currency, and law.
- Total Cost per Hire: Salary, taxes, employer contributions, statutory benefits, and overheads.
- Cross-country Comparison: Cross-country employment cost benchmarking and budgeting decisions.
- Payroll Rules: Thresholds, payment cycles, and contribution caps.
- Holiday Accruals: Statutory paid leave obligations by location.
- Statutory Benefits: Severance, bonuses, allowances, and leave entitlements.
- Forecast Modelling: Projects costs across geographies, roles, and contract types.
- Compliance Flag: Local tax treatments and legal triggers affecting cost.
Used at pre-hire and budgeting stages, the tool helps avoid surprises and enables fully informed employment planning.
Global Compliance Guide
Acumen’s Global Compliance Guide is a curated legal intelligence tool covering labour regulations across 190+ countries. Built for global HR, legal, and expansion teams, it provides jurisdiction-specific insight into:
- Employment norms: statutory benefits, contract types, and working hours;
- Hiring conditions: what’s required to legally engage workers in each country;
- Termination rules: notice periods, severance obligations, and documentation standards;
- Tax and social security: employer contribution requirements and reporting obligations;
- Immigration frameworks: basic pathways for sponsoring work permits for foreign nationals;.
The Guide allows teams to assess whether a workforce plan is legally viable in a given market before entering into risk-prone contracts or employment structures.
When the Compliance Questions Are Clear, the Right Partner Matters
For companies serious about getting international hiring right, compliance isn’t an afterthought. It shapes the employment model, informs cost and control decisions, and protects the business long after contracts are signed.
At Acumen, this isn’t theory. The expertise reflected in this article comes from direct experience.
From assessing how to enter a market to navigating compliance, cost, and risk, our role is to help companies engage the right talent, in the right place, on the right terms. Every employment decision carries weight, not just for the business, but for the individual stepping into the role, often in a new country, under new rules.
We support that relationship with clarity and care, combining infrastructure and insight across 190+ countries, including the jurisdictions where the decisions are hardest, and getting it right matters most.
When you’re ready to move forward with the right model, in the right market, on solid ground, Acumen Internatioanl is ready to deliver.