Expatriates or TCNs Working Abroad
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Employment laws in foreign countries are often complex, and they are typically designed to protect the employee, not the employer. Extreme care therefore should be taken when hiring or assigning home-country expatriates to work in a foreign country or host country.
An employment contract in the host country's language may be required as well as visas and/or work permits and residence permits. Complying with local social health insurance, disability insurance, pension laws, and other regulations listed below must also be considered. Hiring professional legal experts who are well versed in employment laws of the host country is essential when employing expatriates to work in offices outside the home country.
It is often the case in higher education that employees are not formally "assigned" to a work in a foreign country. Rather, research or other academic responsibilities arise that result in an employee working for a longer period of time (a few months to a few years) in a foreign country.
Tax residence laws vary from country to country, and tax treaties established between the home and foreign country can often dictate these laws. An employee generally may be regarded as a tax resident in a foreign country if he or she is working in the foreign country for 90 to 183 days in a 12-month rolling period. (While most countries follow the 183-day rule, the 90-day rule applies in certain countries.) Some countries also determine tax residency for employees who reside or work in the foreign country for 183 days straddling over two calendar years even though the number of days is less than 183 days in the arrival or departure year (two years residency concession).
The employee may be required to pay tax on foreign-sourced income for even one day's work performed in a foreign location if no treaty exists between the U.S. and host location or if the employee doesn't qualify under the treaty.
Special note for U.S. institutions
U.S. payroll compliance for expatriates and TCNs on home payroll has been under increased scrutiny in recent years. The IRS has focused efforts on employment tax compliance, and payroll audits now specifically target compliance in relation to international employees.
There are two areas of compliance concern for U.S. citizens or residents working in a host country who remain on the U.S. payroll: the correct application of U.S. Federal Income Tax (FIT) withholding and the Federal Unemployment Tax (FUTA).
Further, the IRS provides recent guidance for when a Social Security totalization agreement between the United States and a foreign country requires the institution/employer to pay U.S. rather than foreign Social Security taxes but the U.S. employer mistakenly pays the foreign taxes. The employer may still required to pay the applicable U.S. FICA taxes.
It is therefore important to research if a totalization agreement exists and apply for the exemption. This can usually be completed online on the Social Security Administration's Web site.
Classifications for employees working abroad
These are provided to define the nature of relationships with individuals in foreign countries. This section is intended to cover guidance for hiring expatriates and third-country nationals only. Links are provided to other sections within each classification not covered in this section.
- Local-hire employees (local hires) are citizens or permanent residents of the country where the position is based. Local-hire staff fall into one of the following categories:
- Full time: an employee who works a standard work week (for example, 40 hours a week) on a regular basis in accordance with local standards or local labor laws.
- Part time: an employee who works less than a standard work week on a regular or irregular basis. Employee benefits may apply on a pro-rated basis or depend on the service time and mutual agreement at the time of employment.
See further discussion about hiring local employees abroad.
- Expatriates and third-country nationals (TCNs) are generally hired and paid out of the home country and are assigned to work at a foreign location. For U. S. institutions, expatriates refer to U.S. citizens and U.S. permanent residents working for a period of time outside the United States. Third-country nationals refer to employees who are citizens of another country and not U.S. citizens or U.S. permanent residents or residents of the project country. Expatriates and TCNs are typically governed by the home country's human resources policies. Due to the prohibitive cost involved with expatriates, many entities look to localize their expatriates after a certain amount of time in the host location. Some countries may require expatriates to be paid from a local payroll, or it may be easier to pay expatriates or TCNs from local payroll due to withholding requirements in the host location.
- Temporary employees (also known as casual employees) are individuals hired for a specific and limited period, often on an as-needed basis. They may be either home-country hires or local hires. These individuals are typically not entitled to all the benefits provided to regular staff. Whatever benefits the individuals receive must be stated explicitly in their hire letters.
Temporary employees are often hired for one of the following reasons:
- To replace an employee who is on vacation, leave, or another short-term absence.
- To assist during peak work periods or with special projects.
- To fill a regular staff vacancy while recruiting a replacement permanent hire.
See further discussion about hiring temporary employees in hiring local employees abroad.
- A consultant or independent contractor is an individual retained by a project or activity for his or her specialized technical, program, or administrative expertise to work on a fee-for-service basis. Consultants are hired on a daily basis for a specific task and for a specific duration. For legal reasons, they must not be confused with staff-for example, they must not be charged with performing duties within an established job classification, and they cannot supervise staff. The terms of the consultancy should be defined in a consulting agreement in accordance with the guidelines established by the local country. Consultants are not entitled to benefits.
See further discussion about hiring independent contractors abroad.
There are many steps involved in the process of hiring and expatriate or TCN in a country abroad. The steps below help illustrate the steps and responsibilities that may be required for expatriates in the U.S.:
Steps for Hiring an Expatriate (may also apply in some circumstances for TCNs)
(Note: This section addresses hiring permanent expatriate employees, not independent contractors. Hiring independent contractors is addressed in a separate section.)