Here is something that is happening right now in hundreds of Indian companies — a founder in Bangalore hires a developer sitting in Toronto. A Delhi-based law firm onboards a paralegal working from Dubai. A Mumbai startup signs up a marketing manager who lives in London.
It sounds simple. But legally? It is a minefield.
Most Indian companies are doing this without understanding the legal risk they are sitting on. And most employees working from abroad do not know whether they are even legally protected.
This guide breaks it all down — clearly, honestly, and without unnecessary legal jargon.
First, Let’s Understand What ‘Hiring’ Really Means Across Borders
When an Indian company pays someone sitting outside India for work, two legal systems get triggered at the same time — Indian law and the law of the country where the worker is physically present.
Most Indian companies think they can just apply the same contract they give to their employees in India. That is where the first mistake happens.
Under Indian employment law, specifically under the new Labour Codes (2025), the employment relationship is defined by where the work is performed, not where the employer is registered. This means if your employee is sitting in Germany, German labour law will govern many of their rights — even if their salary comes from an Indian bank account.
The 3 Biggest Legal Problems Indian Companies Face When Hiring Abroad
1. The Permanent Establishment (PE) Tax Risk
This is the one that can cost you the most — and almost no one talks about it.
When your employee works from, say, the United Kingdom, tax authorities there may consider your Indian company to have a “permanent establishment” (PE) in the UK. Once that tag gets applied, your entire business income linked to that employee can become taxable in the UK.
India has Double Taxation Avoidance Agreements (DTAAs) with many countries, which can provide some relief — but only if your contracts and structures are set up correctly from the start. A generic employment contract will not protect you here.
2. Employee vs. Contractor — Getting This Wrong Is Expensive
Many Indian companies try to sidestep cross-border complexity by labelling overseas workers as “freelancers” or “independent contractors.” This looks clean on paper, but courts in most countries — including India — look at the actual nature of the work relationship, not what the contract says.
If the worker works fixed hours, follows your company’s processes, uses your tools, and works exclusively for you — they are likely an employee in the eyes of the law. Misclassification can lead to back-payment of benefits, penalties, and legal disputes across two jurisdictions at the same time.
3. FEMA Compliance for Salary Payments
Under the Foreign Exchange Management Act (FEMA), paying salary in foreign currency from India requires specific approvals and documentation. Simply transferring money abroad every month without proper FEMA compliance can trigger scrutiny from the Reserve Bank of India (RBI).
The good news is that if you use the right structure — such as through an Employer of Record (EOR) or a proper cross-border employment agreement — these payments can be made legally and smoothly.
What About Employees Working Inside India for a Foreign Company?
This is the flip side of the same coin — and it affects lakhs of Indians working remotely for US, UK, or European employers.
Under the new Labour Codes, if you physically work from India — regardless of where your employer is based — you are entitled to Indian statutory protections. This includes EPF, ESI, minimum wages under the applicable state schedule, and leave entitlements.
The problem is that most foreign employers are unaware of this. They issue contracts governed by US or UK law and stop there. If the employment relationship ends badly, an Indian employee can approach labour authorities here and claim benefits that were never paid — and the foreign employer will have very little ground to stand on.
The Legal Structure That Actually Works
There is no single right answer for every situation — but here are the three structures that employment lawyers most commonly recommend:
- Employer of Record (EOR): An EOR is a third-party company that legally employs your worker in their home country on your behalf. The worker does the actual work for you, but all legal employment obligations — taxes, social security, contracts — are handled by the EOR. This is the cleanest solution for one or two overseas hires.
- Setting Up a Local Entity: If you plan to hire several employees in the same country, it often makes sense to register a subsidiary or branch office there. This is more expensive upfront but gives you full control and clear legal standing.
- Genuine Independent Contractor Agreement: If the work is genuinely project-based and the person works for multiple clients, a proper contractor agreement — reviewed for local law compliance — can work. However, this must be drafted carefully to avoid misclassification risk.
Whichever route you choose, the foundation must be a well-drafted, jurisdiction-specific employment agreement. This is not an area where a generic template from the internet will protect you.
Why You Need Employment Lawyers in Delhi (and Not Just Any Lawyer)
Cross-border employment law is a highly specific area. It sits at the intersection of Indian labour law, international taxation, FEMA regulations, and foreign jurisdiction statutes. Most general legal practitioners are not equipped to handle all of these simultaneously.
Employment lawyers in Delhi who work with corporate clients and startups understand the practical reality of how Indian businesses operate globally. They know how to structure employment agreements that hold up in both India and the foreign country, how to advise on PE risk mitigation, and how to draft contracts that protect both employer and employee.
At Agarwalla & Associates, our employment law practice covers exactly these cross-border situations — from drafting compliant overseas employment contracts to advising on legal structuring for global remote teams.
Quick Employer Checklist Before Hiring Outside India
- Confirm whether the role classifies as employee or independent contractor under both Indian law and the local country’s law
- Assess Permanent Establishment risk for the country of hire
- Ensure FEMA compliance for outward salary payments
- Draft a jurisdiction-specific employment agreement with the help of qualified employment lawyers
- Decide on EOR, local entity, or contractor model based on scale and nature of engagement
- Check DTAA provisions applicable to the employee’s country of residence
Frequently Asked Questions (FAQ)
Q1. Can an Indian company legally pay salary to someone working from abroad?
Yes, it is possible, but it must be done correctly. Outward remittances for employment purposes need to be structured in compliance with FEMA guidelines. Depending on the country of the employee, there may also be local withholding tax obligations. A clean cross-border employment agreement and FEMA-compliant payment route makes this legally sound. Consult qualified employment lawyers in Delhi before setting up recurring overseas payments.
Q2. If an Indian company hires someone abroad, which country’s employment law applies?
Generally, the law of the country where the employee physically works will govern the employment relationship for most purposes — working hours, termination protections, benefits. Indian employment law may still apply for contract formation, IP ownership, and certain statutory compliances. This is why a dual-jurisdiction employment contract is important — it addresses obligations under both legal systems.
Q3. What is the risk of calling an overseas worker a ‘contractor’ when they function like an employee?
The risk is significant. If the actual working relationship resembles employment — fixed hours, dependence on one employer, use of company tools and processes — courts and tax authorities in the worker’s country can reclassify them as an employee. This can trigger back-payment of all statutory entitlements — provident fund equivalents, paid leave, health insurance — along with penalties and interest. Misclassification is one of the most common and costly mistakes Indian companies make when engaging overseas talent.
Q4. Does Indian labour law protect an Indian employee working remotely for a foreign employer?
Yes. If an Indian employee physically works from India, the new Labour Codes apply to their employment regardless of where the employer is based. This means they are entitled to EPF, ESI, statutory minimum wages, and leave benefits under Indian law. Many Indian remote workers employed by foreign companies are unaware of this. If a foreign employer fails to provide these benefits and a dispute arises, the employee can approach Indian labour authorities for redress. Getting proper legal guidance before signing any cross-border remote work contract is always advisable.