With an ever-changing landscape of employee regulations and requirements, small and midsize businesses (SMBs) must constantly strive to stay compliant. Despite their best intentions, a minor misstep can lead to hefty fines and other penalties.
The landscape becomes especially complex when businesses — especially small and midsize businesses — expand internationally. With global growth on the rise, it is critical for SMBs to understand the top HR compliance risks and reduce their exposure.
Going global — not just for big businesses
Seventy-nine percent of SMB owners said they were focusing their growth strategies on “new geographies.” That focus is becoming a reality: As niche markets grow and technology advances, including AI, SMBs have steadily expanded their reach worldwide.
SMBs can decide to take advantage of expansion opportunities for several reasons, says Crystal Allen, vice president of client delivery at Safeguard Global, an employer of record and global workforce management company.
“Frequently, the driver is a business looking at lower-cost countries to create a more efficient cost model. Another is businesses that are building infrastructure and a global organization,” she explains.
Allen adds that regardless of which drivers spur the expansion, when SMBs grow internationally, they also increase their risk of complying with various HR regulations.
More growth, increased risk for SMBs
Businesses of all sizes encounter compliance risks, but large companies often have entire HR, legal, and finance departments well-versed in entity setup, hiring, and managing both people and financial accounting globally. For SMBs, however, this could be new territory.
They often have small HR departments or finance leaders making HR decisions, where, understandably, they might not have international HR expertise — or the bandwidth to develop the necessary complex knowledge. As a result, SMBs may be more vulnerable when they enter unfamiliar territory.
4 biggest compliance risks for SMBs
When hiring internationally, Allen says the most significant risks small and midsize businesses face include:
- Misclassifying workers. This occurs when a business hires independent contractors, but the workers behave like employees. They may have set hours, be monitored, or sign a noncompete clause. However, although the workers operate as employees, as contractors, they do not receive benefits. In addition, the company does not withhold or remit taxes. “The longer you leave them in that independent contractor status or where you’re not remitting taxes to that local authority, the more you increase that risk,” says Allen. “There is a way to legitimately evaluate if somebody is a contractor or not and remediate for that mistake.”
- Falling behind on regulation changes. Countries have different employment laws and regulations. Not only that, but those rules can also change quickly and without much notice, which can make it easy for an employer to miss important updates. “When you’re setting up your own entity, the risk becomes that you don’t know what you don’t know,” Allen says. She adds that even when a company conducts research to ensure the business is set up to meet all legal requirements, what is compliant today may not be compliant in six months. If you don’t have someone with ongoing expertise in that country, you may not be aware of the changes, how they may affect your business, or how to respond.
- Failing to maintain data privacy. When SMBs consider all the legal steps to set up an entity, such as registering the business, filing taxes, and treating workers fairly and accurately in line with the relevant country’s requirements, they must also ensure that the region’s or country’s data privacy regulations are met. Privacy regulations in the U.S. can differ from those in the European Union and from other parts of the world.
- Using nonstandardized employment documentation. Inconsistency in important onboarding or employment contracts can cause confusion and lead to disputes, penalties, and reduced worker trust. Having the right engagement model avoids risk from mismatched notice periods, missing statutory benefits, or outdated templates.
Ramifications of compliance missteps
Unfortunately, not knowing or not understanding compliance regulations provides little protection for a misstep. Businesses that don’t follow the rules can face numerous ramifications, including government penalties and, in some rare circumstances, individual liability.
Allen adds that reputational damage could hurt businesses the most and for the longest time, noting, “The piece that often gets overlooked is the loss of trust and goodwill from the workers and from negative publicity.”
Global employment done right: Anticipating and addressing compliance gaps
The risks of compliance gaps with international employment can be great. However, Allen explains that SMBs could partner with Safeguard Global to prepare for or mitigate international employment in 187 countries.
“As a global workforce enablement partner, we combine technology with 400+ in-country experts to deliver human support when it matters the most,” Allen adds.
Expanding your SMB internationally? Connect with Safeguard Global to identify and address —or mitigate —risks early so you can grow safely and confidently and stay compliant.