The Best Way to Hire Offshore Employees: A Legal and Practical Guide

Key Takeaways

• The 50% “Temporal Test”: Under the 2026 OECD updated commentary, a remote home office generally does not create a taxable Permanent Establishment if the employee spends less than 50% of their time there and is abroad for personal convenience rather than a specific commercial purpose.
• Warm Bodies vs. Strategic Hires: Successful offshoring fails when treated as “filling seats.” It succeeds when companies first define the deliverable, then hire the best person regardless of geography.
• The “Hybrid” Compliance Burden: Hiring offshore doesn’t exempt you from home-country obligations. U.S. employers must still withhold Social Security/Medicare, and UK employers must maintain PAYE deductions unless specific tax relief is documented.
• The “Partner” Distinction: In 2026, the difference between an EOR “platform” (software only) and a “partner” (Hypercare support) is the difference between a high-retention team and a failed experiment.
• Cultural Mediation: 96% retention rates (like those seen at Penbrothers) are achieved not just through payroll, but through “Hypercare”—active cultural mediation during the first 180 days to resolve misalignments before they lead to turnover.

Somewhere in your company, right now, a role has been open for months. The recruiter is tired. The hiring manager is frustrated. The work is piling up on someone else’s desk. 

This situation is now very common.

ManpowerGroup’s 2025 Talent Shortage survey reports that roughly 74% of employers across 42 countries cannot find enough skilled workers. In Singapore, the figure is 83%. In Australia and the UK, 76%. In the United States, 71%.

So companies look further. They explore offshoring, hiring people based outside their home country, and the logic is sound: bigger talent pools, around-the-clock productivity, cost efficiencies that compound over time. But the execution is where things get complicated. Tax obligations, employee classification, benefits, data privacy, the quiet risk of creating a taxable presence in a country you’ve never even visited.

Penbrothers co-founder Nicolas Bivero cautions that offshore hiring is not simply about filling seats. “I think outsourcing/offshoring doesn’t work, or is difficult to make it work, when you look at it only like, ‘I need a warm body,'” he explained in a recent interview. 

Instead, companies should first determine what they need and what the person is supposed to do, then fill that position with the best person regardless of location. With clear expectations and careful selection, offshoring is far more likely to succeed.

This article explains how to hire offshore employees safely and legally, comparing three primary models, providing actionable frameworks to avoid permanent establishment pitfalls and classification risks, and walking through the tax, payroll, and compliance obligations that most guides gloss over.

Understanding Offshore Hiring Models

Choosing the right structure is the foundation of any offshoring strategy. Each model offers different levels of control, risk, and cost. The goal is to deliver the work while respecting labour laws and tax obligations.

Set Up a Local Entity: Pros, Cons, and Compliance

Establishing a subsidiary or branch in the target country gives you full control over hiring, payroll, and culture. It is also the most resource-intensive option. You will need to register a company, comply with local corporate and employment law, and run your own payroll. Importantly, a local entity is more likely to create a permanent establishment, a taxable presence in the host country.

Under the OECD’s updated guidance, remote work does not create a PE if employees spend less than half their working time in a home office abroad and are there mostly for personal convenience. Once working abroad exceeds 50% of the time or has a commercial purpose, the home office may become a fixed place of business, triggering corporate tax obligations and local reporting requirements.

Other compliance considerations include payroll and social contributions. HMRC requires UK employers to continue Pay As You Earn (PAYE) deductions and National Insurance contributions when employees work abroad, even if tax relief may apply later. Similarly, the IRS obliges U.S. employers to withhold federal income tax, Social Security, and Medicare taxes for employees, regardless of where work is performed. A local entity must also provide statutory benefits and holiday entitlement, register for value-added tax where applicable, and handle visa sponsorship. High upfront cost and regulatory complexity make this model suitable for companies with long-term growth plans in a particular country.

Partner with an Employer of Record (EOR)

An Employer of Record is a third-party organization that legally employs workers on your behalf. You oversee day-to-day activities while the EOR handles payroll, benefits, taxes, and compliance. This approach enables quick market entry and avoids the need to incorporate locally. 

KPMG notes that a home office used purely for employee convenience does not constitute a fixed place of business, so using an EOR often reduces PE risk. 

Nevertheless, under the OECD’s 50% rule, if your employees spend more than half their time working from abroad and their presence serves a commercial purpose, such as serving local clients or generating revenue, authorities may still deem you to have a PE.

EOR contracts typically include service fees, which vary by country and role seniority. You should evaluate the EOR’s ability to protect data, manage benefits, and maintain compliance with local regulations. Some EOR providers publish case studies that double as marketing content; treat such material cautiously and rely on independent legal sources for decisions. Always review the terms carefully and ensure they align with your data privacy obligations.

Hire Independent Contractors Carefully

Using independent contractors may appear cost-effective because you only pay for services rendered. But misclassification can be costly.

In the United States, both the Department of Labor and the IRS apply multi-factor tests to determine whether a worker is truly independent. The DOL’s 2024 final rule outlines a six-factor economic realities test, examining degree of control, opportunity for profit or loss, and permanency of the relationship, to decide if someone is an employee. The IRS likewise considers behavioural control, financial control, and the type of relationship. If you misclassify a worker, you may owe back taxes, penalties, and unpaid overtime.

Contractors working exclusively for you, receiving training, or performing core business functions could be reclassified as employees. Some countries look beyond contract terms and examine the actual working relationship. Contractors usually handle their own tax filings and insurance, so you must ensure they have the right to work in the host country and issue proper 1099 or local equivalent forms. When in doubt, consult a lawyer or use an EOR to mitigate risk.

Tax, Permanent Establishment, and Payroll

Once you select a hiring model, you must navigate tax and payroll obligations to avoid unexpected liabilities.

Navigating the OECD 50% Rule and Commercial Purpose

The OECD’s 2025 commentary introduced a two-stage test to evaluate if home-office arrangements create a PE. First, the home office must be fixed and regularly used for business. Second, there must be a commercial reason for working there. If employees work abroad for fewer than 50% of their total working days and use the home office mainly for personal convenience, it generally does not constitute a PE. However, if they exceed the 50% threshold or their presence serves the company’s commercial interests, such as meeting clients or conducting sales, the home office could be deemed a fixed place of business.

RSM UK underscores that cross-border remote working can create corporate tax and payroll obligations, though remote work for less than 50% of working time generally does not create a PE. 

Once the 50% threshold is exceeded, businesses must assess whether the home office is a fixed place of business used for a commercial purpose, and that payroll withholding, social security contributions, and corporate tax obligations may apply. Employers should document each employee’s days abroad and the purpose of travel to support their position.

Country-Specific Tax Obligations

United Kingdom: According to the Low Incomes Tax Reform Group (LITRG), if employees work abroad for short periods (less than six months), they remain taxable only in the UK. Medium-term arrangements (over six months) can be taxed in both the UK and host country. Long-term assignments (over one tax year) may result in full tax residency abroad. Spending more than 183 days abroad in any 12-month period increases the likelihood of becoming tax resident in the host country. Employers must continue PAYE deductions and National Insurance contributions and may need to provide documentation (e.g., form P85) if employees leave the UK for at least one full tax year.

United States: The IRS requires employers to withhold federal income tax, Social Security, and Medicare for employees. Workers classified as employees must also be covered by federal and state unemployment insurance. Failure to withhold payroll taxes can lead to liability for unpaid amounts plus penalties. The DOL’s six-factor test helps determine whether a worker is an employee or independent contractor.

Singapore: The Inland Revenue Authority of Singapore (IRAS) states that if an employee is contracted to work wholly outside Singapore, their income is sourced overseas and not taxable in Singapore. If they render services partially in Singapore, the portion attributable to days worked in Singapore is taxable: income is exempt if the employee stays less than 60 days, taxed at non-resident rates for 61 to 182 days, and taxed at resident rates for stays of at least 183 days. Generally, overseas income received in Singapore is not taxable unless certain conditions (such as remittance into Singapore) apply.

Australia: The Australian Taxation Office (ATO) notes that Australian residents working on certain approved overseas projects may be exempt from income tax. Employers may obtain a PAYG withholding variation for employees engaged in official development assistance or disaster relief. However, foreign resident employers paying Australian residents may need to operate PAYG withholding and fringe benefits tax (FBT) obligations. Superannuation contributions remain mandatory for most employees.

Payroll and Social Security Considerations

Employers must comply with each country’s payroll and social security regulations:

UK: Deduct PAYE and National Insurance contributions, consider reciprocal social security agreements to avoid double contributions.

US: Withhold federal and state taxes, Social Security, and Medicare, and issue W-2 forms. Contractors receive 1099 forms if they meet independence criteria.

Singapore: No Central Provident Fund (CPF) contributions for non-resident employees; CPF is mandatory for Singapore citizens and permanent residents. You must also withhold tax on income attributable to days worked in Singapore.

Australia: Apply PAYG withholding and FBT where applicable; consider superannuation and check tax relief eligibility for approved overseas projects.

Employment Law and Worker Rights

Respecting labour standards is not only ethical but also essential for compliance.

Worker Classification and Misclassification Risks

Worker classification determines whether a worker is entitled to minimum wage, overtime pay, and social benefits. The DOL’s six-factor test examines the degree of control and permanence of the relationship. The IRS uses common-law control factors. If a worker is misclassified, the employer may owe back taxes, unpaid wages, and penalties. Consider a scenario: a contractor who works only for one company, uses its equipment, and receives ongoing training. Authorities are likely to deem them an employee. To minimise risk, define roles clearly in contracts, limit exclusivity, and document the worker’s independent status.

Labour Standards and Equal Treatment

Offshore workers should receive fair pay and benefits comparable to those provided to in-country staff. The Philippines’ Telecommuting Act requires employers to offer remote employees the same pay, benefits, workload, and training as their on-site counterparts and mandates that participation in telecommuting programmes be voluntary. While this law applies to Philippine employers, it underscores a broader principle: equal treatment matters everywhere.

Nicolas Bivero has been clear that Penbrothers will not compromise on fairness. “We want to create great jobs with fair wages, not take advantage of people. We actually walk away from potential clients who want to pay below minimum wage because it’s unethical and lacks a focus on quality,” he said in an interview about Penbrothers’ transparent cost-plus model. He added that providing comprehensive health coverage is now a baseline requirement; the company’s HMO plan includes private insurance for employees and, in many cases, their dependents. Such commitments help attract and retain talent and align with the requirement for equal treatment.

Employers should also consider statutory obligations in each country, such as statutory holiday pay in the UK, overtime rules under the U.S. Fair Labor Standards Act (FLSA), CPF contributions in Singapore, and superannuation in Australia. Offering equitable benefits helps retain talent and aligns with Penbrothers’ Hypercare philosophy.

Data Privacy and Security Obligations

Cross-border hiring involves transferring personal data across jurisdictions, and that triggers data protection requirements you cannot afford to overlook.

Singapore: Section 26 of the Personal Data Protection Act (PDPA) prohibits organisations from transferring personal data outside Singapore unless the receiving country provides comparable data protection. You may need to implement contractual clauses or other safeguards.

Philippines: The Data Privacy Act has extraterritorial scope. It applies to personal data about Philippine citizens or residents processed abroad when there is a link to the Philippines, such as a contract executed in the country or where the company has operations. Employers must ensure compliance with the National Privacy Commission’s guidelines and protect data even when processed abroad.

Telecommuting Act: Employers must ensure the security and confidentiality of data used in telecommuting.

Best practices include using encrypted networks, virtual private networks (VPNs), two-factor authentication, and restricting access on a need-to-know basis. Bivero emphasized that Penbrothers built its service “compliant from day one and doing things correctly, so that our clients can rest comfortably and focus on their thing, we will take care of all the annoying part here in the Philippines.” That includes navigating data privacy laws and local labour requirements. He also noted that the Philippines is not an employment-at-will jurisdiction, so employers must implement performance improvement plans and proper documentation before termination, further highlighting the need for reliable HR partners.

Distinguishing between remote workers (employees bound by an employer-employee relationship) and digital nomads (independent workers moving across borders) is essential. The Tech For Good Institute clarifies this distinction and notes that cross-border remote work affects taxation, worker protection, and local economies, urging governments to implement clear regulatory frameworks. Different policies may apply depending on which category your workers fall into.

Choosing the Right Offshore Location

Selecting where to hire offshore employees involves balancing talent availability, costs, legal complexity, and cultural fit. There is no universally correct answer. Only the right answer for your specific needs.

Evaluating Talent and Market Factors

The global talent shortage means that companies must look beyond their home markets. Regions like the Philippines and Singapore have large, English-speaking talent pools, while Central and Eastern Europe, Latin America, and South Asia offer growing numbers of skilled professionals. 

The International Labour Organization estimates that in advanced economies one in four jobs can be done from home, illustrating the potential scale of remote work. Meanwhile, employers in Singapore and Australia report talent shortages of 83% and 76%, respectively. When evaluating locations, consider language proficiency, education levels, time-zone overlap, and economic stability.

Legal and Data Compliance Landscape

For each prospective location, examine labour regulations and data protection laws. Singapore’s PDPA transfer limitation and the Philippines’ Data Privacy Act both impose specific obligations on companies hiring offshore. Consider whether the country has a double taxation agreement with your home jurisdiction, which can prevent being taxed twice on the same income. The LITRG advises checking these agreements to mitigate double taxation. 

Also, verify visa and work-permit requirements; some countries offer remote work or digital nomad visas, but these may not allow employment for a foreign entity and could require local registration. Always consult local counsel.

Cultural and Operational Considerations

Cultural alignment and operational readiness influence offshore success more than most companies expect. Time-zone overlap affects collaboration: the Philippines and Singapore share similar time zones with Australia, for example. Reliable internet, stable power supply, and modern infrastructure are essential to support virtual employees. Cultural differences, communication styles, hierarchy, approaches to problem-solving, all of these should inform your onboarding and management practices.

Bivero warned that imposing your own cultural norms on an offshore team is a recipe for failure. “If you go in there with your mindset like, ‘Oh we’re going to do this the German way,’ then you’re going to fail. I mean that’s not going to happen. You can’t go with your culture and try to impose that on different cultures,” he said. He also noted that Filipinos are generally friendly and non-confrontational, so managers must learn to read subtle cues and encourage open feedback to avoid misunderstandings. Providing cross-cultural training and encouraging inclusive communication can mitigate these risks and foster team cohesion.

Implementing Your Offshore Hiring Strategy

A structured hiring process reduces risk and ensures effective integration of offshore talent. Use the following decision framework:

1. Identify the need and role suitability. Assess whether the task can be performed remotely. About one-sixth of occupations globally, and one-quarter in advanced economies, are conducive to remote work.
2. Select the hiring model. Choose between a local entity, EOR, or contractor based on time horizon, control, cost, and PE risk. 
3. Assess tax and legal obligations. Consult country-specific rules from HMRC, IRS, IRAS, and ATO; track days abroad and document business purpose.
4. Draft compliant contracts. Define roles, compensation, benefits, applicable law, confidentiality, and intellectual property ownership. Ensure telecommuting agreements are voluntary and preserve equal treatment.
5. Onboard and train. Provide orientation and training that addresses company culture, communication tools, and data security protocols. Align with local holidays and working hours.
6. Monitor compliance and performance. Track remote employees’ days in the host country, update global mobility policies, review classification regularly, and schedule data privacy audits.

Onboarding and Integration: Hypercare Framework

This is the part where most offshore arrangements quietly fail. Not because the hire was wrong, not because the role was unclear, but because nobody managed the space between “signed the contract” and “fully productive team member.” That gap, those first 180 days, is where alignment breaks down, misunderstandings calcify, and the whole thing starts to feel like a mistake.

Penbrothers’ Hypercare Framework addresses this directly through four stages: pre-hire alignment, personalised onboarding, continuous communication, and performance monitoring. Pre-hire alignment ensures that client expectations and role definitions are clear before anyone starts. Onboarding includes providing equipment, training on tools, and cross-cultural orientation. Continuous communication involves regular check-ins and structured feedback loops. Performance monitoring uses key performance indicators and coaching to keep things on track.

As Bivero explained, Penbrothers “really work very closely with every new client for the first three months so that we make sure any problem or misunderstanding or misalignment gets fixed immediately and that we can also be the HR business partner in the Philippines between the client and the employee.” He emphasised that Hypercare includes cultural onboarding and regular feedback loops so clients unfamiliar with Philippine work culture learn how to collaborate effectively. This intensive support helps prevent early failure, and a free replacement guarantee mitigates the risk of mis-hires.

What Stays True After the Paperwork Is Done

You can get the tax right, the classification right, the contracts and the data privacy and the payroll withholding all buttoned up, and still watch an offshore hire fail. Because the paperwork was never the hard part. The hard part is building something that works across borders, across time zones, across the thousand small cultural assumptions that nobody thinks to name until they’ve already caused damage.

That is the real work. Understanding the differences between local entity, EOR, and contractor models matters. Adhering to the OECD’s 50% rule matters. Respecting worker classification tests and complying with labour standards, all of it matters. But none of it is sufficient on its own.

Bivero noted that Penbrothers’ retention rate is around 96%, a testament to thorough vetting, fair compensation, and ongoing support. When a hire does not work out, the company “creates an action plan to replace them while carefully managing the expectations of the remaining team members.” That kind of follow-through, the willingness to stay in the room when things get difficult, is what separates companies that offshore successfully from companies that simply offshore.

If you are serious about building an offshore team that actually performs, that integrates into your operations and grows with you, we should talk.

Frequently Asked Questions