4 Reasons Startups Shouldn’t Ignore Hiring Compliance

For many startups, particularly those considered high-growth, one day, you’re a group of four grad school friends working from your kitchen table, and the next, you’re a 2000+ person organization with pockets of remote workers distributed worldwide. 

Sounds amazing, right? 

Don’t celebrate just yet. 

Imagine that you incidentally overlooked your hiring methods during that wild expansion journey. Just as you’re about to become EBITDA positive, the bubble bursts, and you’re making headline news for a misclassification scandal, permanent establishment lawsuit, or undocumented worker violations. 

Overnight, your successful startup suffers enormous financial penalties, reputation damage, and loss of talent, which you could have easily avoided had you practiced complaint hiring from the start. 

This article presents four reasons startup founders shouldn’t overlook hiring compliance and how you can get it sussed with the right support. 

1. Permanent establishment risk

Directly hiring international workers without establishing a foreign subsidiary creates permanent establishment (PE) risk. PE risk occurs when a business has an ongoing and stable presence in a country or state outside its home base but does not pay the local taxes imposed by that jurisdiction. 

Most jurisdictions characterize an ongoing and stable presence as the following:  

• Having employee activity in the host country that directly generates revenue

• Command and control of the employees’ activity by the parent company

• A fixed place of business, address, bank account, or other physical presence

To overcome PE risk, startups have three options:

• Establish a foreign entity

• Hire independent contractors

• Engage international workers through an employer of record (EOR)

Establishing a foreign entity is a long and expensive process, especially for small business owners who only want to test a market. A far more convenient option is to hire contractors or use an EOR solution like Deel. Deel has legal entities in countries worldwide and can compliantly hire employees on your behalf, saving you time and money. 

When you engage an employee or contractor through Deel, we take care of the following: 

2. Misclassification risk

Startups that desire more short-term work arrangements and greater flexibility can hire contractors. However, when using contractor services, a typical compliance risk startups face is misclassification.

Misclassification is when companies classify workers as independent contractors but treat them like employees. Classifying workers is easy to get wrong since the terms and definitions determining worker classification differ from country to country. 

For example, in the US, the company could be penalized for misclassification if the work agreement doesn’t accurately define the relationship, use the correct terminology, or comply with local laws impacting contractors. 

To proactively manage these risks, Deel offers a robust solution through its Compliance Hub. This one-stop shop for all things compliance allows startups to stay ahead of legislative changes and misclassification risks for their entire workforce. Our Compliance Monitor automatically monitors and explains the latest and upcoming regulatory changes across 150 countries, saving you time and money that would otherwise be spent manually researching and interpreting these changes.

Startups can familiarize themselves with misclassification tests or have Deel classify and hire contractors in 150 countries on your behalf, eliminating the risk and liability of misclassification. We’ll assess the correct classification of your worker and advise you on whether they should be a contractor or an employee. We’ll then create localized compliant contracts and collect all necessary documentation.

3. Undocumented workers

Early-stage companies usually get audits when asked to by their investors. When this time comes, your workforce must have the documentation to prove they are legally allowed to work in a particular country. 

Suppose the employee’s nationality and the country they’re working from are different. In that case, you must collect and retain proof of work eligibility, such as a work permit to show that the employee can work in that country.

Similarly, your startup may have hired eligible workers but have failed to collect and retain the necessary compliance documentation. This oversight is also a reg flag for auditing bodies determining whether your startup’s operating according to local standards. 

Startups can do their research to identify the country-specific documents, request them from the employee via email and store them in a password-protected file. Alternatively, startups can use Deel to invite employees to upload the necessary compliance documents via their self-serve dashboard during onboarding.

If the employee requires visa and immigration support, the platform will prompt you to request this here. Our team will get to work procuring the correct visa and running the necessary screenings in line with country requirements to streamline the hiring process.

While hiring independent contractors requires less paperwork, many countries still need the client company to obtain the contractor’s tax identification number, certifications, and specific tax forms for reporting non-employee compensation that is most likely subject to self-employment tax.

Again, startups can collect this documentation manually or use Deel to request and store the correct documentation on our cloud-based platform to the highest data security standards.
 
You’ll also have the functionality to request the signing of the following agreements to protect employee’s sensitive information and prevent them from sharing your startup’s confidential information with competitors or starting a competing business:

• Intellectual property agreement

• Confidentiality or non-disclosure agreement

• Non-compete agreement

• Data privacy and processing agreement (DPA)

4. Breached labor laws

The final aspect of compliant hiring that new businesses trip up on is breaching one of the many labor laws governing an employer and employee relationship. 

Labor laws differ between states, provinces, and territories and are implemented by local governments to protect fundamental employee rights, promote job security, and improve employment terms globally. 

Labor laws govern the following: 

• Minimum wage
• Overtime pay
• Work hours 
• Rest breaks 
• Employment contracts 
• Benefit entitlements such as PTO, parental leave, and pensions
• Probationary periods
• Background checks
• Payment methods
• Payment periods
• Payment schedules
• Payroll taxes
• Payroll records
• Termination

Creating an employment contract helps to lay out the terms and conditions of employment and can be used as a guide to ensure that the company treats new employees in alignment with local employment laws.
Creating employment contracts from scratch can be time-consuming, particularly when hiring team members from multiple countries. Startups can do their own country-specific research to include all the necessary employment requirements or use a template. 

The disadvantage of templates is that you must ensure you’re using the latest versions and that they’re constantly updated and vetted by local legal experts. They can be difficult to customize if you want to add non-standard benefits or clauses, and you’ll need to download, send, and store a new contract every time you want to make an update which is a lot of work for your human resources team - if you have one!

Alternatively, startups can create localized employment contracts on the Deel platform using our contract workflow. The intuitive platform guides you through each aspect of the contract, providing helpful insights and suggestions per country requirements. In addition, every contract you create will be vetted by local legal experts and updated quarterly so you remain compliant. 

Master compliant hiring with Deel

Whether you’re an early-stage startup dipping your toes into the labor market, or a large company making your 500th hire, compliance is a critical factor to the continued success of your business. 

When you engage workers through Deel, compliance is pre-baked into our intuitive hiring platform, making it impossible to get it wrong. Using automation and the best legal teams in countries worldwide, entrepreneurs can rest assured knowing every new hire is legitimate, classified correctly, and has an up-to-date contract that complies with local employment laws, so you can focus on running your business. 

Sound like an ideal solution? Learn more about Deel for startups, or book 30 minutes with a product expert to get your questions answered.