With summer time upon us and remote/hybrid working established in the games industry, are you starting to receive requests from employees at your games studio who want to work somewhere sunny for the next few months?
Are you struggling to find the talent you need, especially if you’re in the UK with staff shortages exacerbated by Brexit? Have you been considering using an employer of record or other solution advertised to employ people abroad permanently, but not sure of the legal position?
Recruiting talent from overseas is growing in popularity amongst games studios and others in the entertainment industry. Much of the great success of the games industry relies on the ability to access highly skilled workers. We are writing in the UK and here, in a post-Brexit world of UK skill shortages, and a (not quite) post-COVID-19 world of remote and hybrid working, that talent pool is increasingly found overseas.
The UK games industry is suffering from a real labour shortage with many studios’ job advertisements continuing to go unfilled. We understand that the same is true in many other jurisdictions around the world.
The UK games industry is suffering from a real labour shortage with many studios’ job advertisements continuing to go unfilled
But the laws around your company hiring overseas aren’t always straightforward. Some studios engage with overseas workers as freelancers, but this can be problematic — especially where the individual is a de facto employee. Employer-of-record organizations and others are also increasingly popping up and advertising that they offer a one-stop-shop solution, but their offering is not without legal risk either.
In the light of this, some games studios are now turning to employing individuals remotely direct overseas, even without a local place of business, which can be a solution for some employment situations.
In this article we highlight the main legal pitfalls and offer our top tips for making your direct hire of a remote employee a success.
As we are English lawyers, we have written this from the perspective of a UK-based games studio looking to hire talent overseas and local law is likely to vary if your games studio is based elsewhere; nevertheless, the principles set out below may have some general application if your games studio is based in another territory, but do always take local legal advice before proceeding with any overseas hires.
- Hiring employees overseas: the legal frame
- Tax considerations
- Alternative ways to engage talent overseas
- Top tips
Hiring employees overseas: the legal frame
If you hire someone abroad as an ’employee’ (as opposed to a self-employed consultant), they may be entitled to what’s known as mandatory employment rights in the country in which they are based.
These are minimum statutory rights to which all employees are entitled. Those rights vary from country to country, but generally include:
- rights on termination (such as notice period, termination payments and protection from unfair dismissal)
- rules around working hours and rest breaks
- sick pay
- health and safety protection and potentially extra entitlements under a collective bargaining agreement
These employment rights risk being significantly more generous than rights afforded to employees in the UK. For example, dismissal is often famously difficult in France due to works council involvement. This means it is important to seek local legal advice before you sign any employment agreements.
You also need to think carefully about what benefits you can offer. An employee’s ability to participate in certain UK benefit plans may be affected by them being overseas. For example, private medical insurance under a group policy may not cover them; and they may not be entitled to join your pension scheme. It is particularly important to speak to your benefits providers for clarity on this issue before you make any promises.
Not all IP legal systems automatically assign rights to employers, so be mindful of this — the practical risk of a problem is probably greater with an overseas employee
Aside from employee rights and perks, there are other legal areas to consider.
If your new hire will be producing valuable intellectual property from overseas, as with an artist or engineer, for example, then you will need to ensure your studio’s ownership rights are protected. You can do this by being clear in contractual documentation that your games company owns the IP in works created throughout the world, whether registered or not (such as copyright), and regardless of where the employee is based.
Not all IP legal systems automatically assign rights to employers, so be mindful of this. The practical risk of a problem is probably greater with an overseas employee, so do ensure that your employment contract has robust IP clauses and take local legal advice in case of doubt.
What happens if an employee working overseas leaves or you dismiss them? You will likely want to rely on your usual post-termination restrictions included in your UK contracts, to prevent the person from taking to a competitor your clients, contacts or know-how on your most recent game. However, those restrictions may not be enforceable in the country where the employee actually works.
Getting a court order in the UK to stop an employee doing something overseas may not be enough of a deterrent for the breach, and the person may argue an action should be brought in their own country. You may, therefore, wish to reserve the express right in the employment contracts of those working overseas to bring a claim in the particular country, if you need to.
On the softer side, have you thought about cultural fit and how having employees overseas will work in practice? It is entirely possible for employees to work together remotely from different locations. However, you may need to pay extra attention to issues such as supervision (how will this work at a distance?), working hours (is there a time difference?), and whether or not you require them to visit the UK for work (are there any immigration considerations?).
It is also important to check whether it is possible for a UK incorporated company to employ individuals in the relevant jurisdiction where the employee is based. China is a good example of somewhere requiring a locally incorporated entity, but this is not an issue in most territories.
As well as getting to grips with the relevant employment rights for each country in which you’re looking to hire, you will also need to consider tax and social security issues. Since the COVID-19 pandemic, increasing numbers of employees have been working remotely overseas. Tax authorities will look closely at where employees are based and whether tax and social security are being handed correctly.
From a tax perspective, the most straightforward scenario is an employee working for your games company, who is 100% based overseas and not a tax resident in your company’s home jurisdiction.
In this case, your games company will most likely have no employment tax obligations (e.g., PAYE in the UK) , although the employee may need to apply to the tax authorities (e.g., HMRC in the UK) for a special code to confirm this.
The employee will be obliged to report their income and account for tax in the country they work in, but your games company as the employer may also have income tax withholding and reporting obligations in that foreign country.
If the employee performs some of their duties in the home jurisdiction, your company will generally have an employment tax obligation at home as well, in addition to any income tax withholding and reporting obligations in the other country abroad.
The social security position depends on the country(ies) in which the employee is physically working. If the employee is 100% based overseas, employee and employer social security will generally arise in that country. In the case of the UK, if the employee is working partly in the UK and partly in an EU country, social security will arise in the country in which the employee is habitually resident if the employee spends more than 25% of their time working in that country.
You also need to consider whether the employee’s presence in the overseas location may create a permanent establishment there. This would mean that any profits attributable to the work the employee does in that location could be subject to corporation tax. This is most likely to arise where an employee has the authority to negotiate and sign contracts on behalf of your company, though the factors each country takes into account will likely differ.
This is a complex area with potentially hefty ramifications for getting it wrong. You should always seek local legal advice first.
Alternative ways to engage talent overseas
If you are having second thoughts about hiring an employee overseas, there are some other options worth considering.
Engaging someone as a self-employed consultant or freelancer is one of them. Many companies in the games industry are already engaging people this way, particularly for project-based work requiring a specific skillset, such as external development.
Genuine consultants do not have the raft of employment rights an employee has, such as paid holiday and national minimum wage, and they are typically required to account for their own tax and social security whether they are based in the UK or abroad.
However, if a freelancer is actually a de facto employee, the tax authorities will look beyond the paper tax arrangement to the substance of what the relationship with the freelancer is and this can result in a tax risk for you, even if you have indemnities with the freelancer.
For example, in the UK, if the freelancer is providing their labour through a personal services company (PSC), and does any part of their work in the UK, a tax law known as IR35 will apply. This requires the UK company to assess whether, ignoring the existence of the PSC, the consultant would actually be an employee of the UK company. If so, there is generally an obligation to deduct income tax and employees’ national insurance contributions, plus account for employer’s national insurance contributions, in relation to the fees paid to the PSC, to the extent these relate to work done in the UK unless an exemption under a relevant double tax treaty or social security agreement applies.
Another option is to engage individuals via an employer of record (EoR), a third-party company that employs the person, accounts for tax and social security and supplies them to your UK company in exchange for a fee. That fee typically covers salary, employer’s social security contributions, the cost of any pension and benefits, and the EoR’s margin.
EoRs offer a convenient option if you’re looking to avoid payroll admin, and the default position is that they, as the employer, are on the hook for any employment claim liabilities. They can also be attractive in the instances where a jurisdiction requires a local entity to be incorporated or where the engagement will only be on a short-term basis.
If it all sounds too good to be true, that’s because it might be. The commercial terms between your company and the EoR may well effectively reverse that liability position, by imposing an indemnity on your company in the EoR’s favour. Typically that means that if, for example, the EoR is sued for an employment claim, your company has to cover their costs — often both legal costs and any damages they are ordered to pay by a court or tribunal.
If you check the terms carefully, you can find that you are required to indemnify the EoR even if the claim is caused by the actions or omissions of the EoR!
An EoR arrangement may also be prohibited in the country you’re hiring in, whether entirely or after a certain period.
Again, in all cases, get proper legal advice before you sign.
If your company is prepared to employ the person itself, you can still outsource the payroll, social security and tax administration to a third-party provider, for a fee. You may find that some EoRs offer this as an alternative service and it allows you to at least keep control of the employment relationship.
Hiring abroad brings its own challenges, but it is entirely possible. Our top tips are as follows:
- Always take local advice before engaging someone overseas. The risks and obligations will vary depending on the country.
- Ensure that any contractual documentation is fit for purpose in the overseas location (e.g. it meets mandatory requirements and offers adequate protection to your company).
- Read the small print when engaging third parties.
- Properly document the arrangement.
If you remember these things when making your hire, the world is your oyster!
Nick Allan is a legal director and the head of interactive entertainment at Lewis Silkin, advising businesses in the games industry on all aspects of commercial, IP and regulatory law. Lee Nair is a partner in Lewis Silkin’s Employment team, specialising in contingent workforce matters and acquisitions. Kayleigh Williams is an associate in Lewis Silkin’s Employment team, advising media and entertainment clients. Both focus on the games industry.