Is it legal for a US company to hire full-time employees in India?[toc=Is it Legal to Hire in India]
Yes, it is fully legal for a US company to hire full-time employees in India, provided the hiring structure adheres to Indian corporate and labor laws. A US entity cannot directly employ an individual in India on a US payroll (W-2 status) without a local legal presence. Instead, companies must utilize specific legal frameworks to classify and pay these workers compliantly. Based on our extensive experience helping hundreds of US firms expand into India, we typically see companies choose between two primary models: utilizing an Employer of Record (EOR) or incorporating a local subsidiary.
Compliant Methods for Hiring in India
1) Using an Employer of Record (EOR)
Partnering with an EOR is the standard approach for US startups and SMBs looking to hire quickly without administrative overhead. The EOR acts as the legal employer in India, similar to a PEO (Professional Employer Organization) in the US but with full liability coverage. The EOR handles:
- Employment contracts compliant with local labor laws.
- Payroll processing and tax withholding (TDS) remittance to the Indian government.
- Statutory benefits administration, including Provident Fund (comparable to US Social Security) and health insurance.
- Risk mitigation regarding Permanent Establishment (PE) exposure.
The US company retains full functional control over the employee's day-to-day activities, projects, and management, while the EOR manages the backend compliance.
2) Establishing a Local Subsidiary
For companies planning to hire more than 15 to 20 employees or those requiring a physical office presence, establishing a subsidiary (often a Private Limited Company) is a viable option. This is the Indian equivalent of a US C-Corp. This route allows for direct employment and complete operational autonomy. However, our analysis of the regulatory landscape consistently shows that this process is capital-intensive and slow, often taking 3 to 6 months to fully operationalize. It requires appointing local directors, filing annual returns with the Ministry of Corporate Affairs, and managing complex transfer pricing regulations between the US parent and the Indian entity.
3) Engaging Independent Contractors
While a US company can hire Indian workers as independent contractors (similar to 1099 workers in the US), this model is legally precarious for full-time roles. If a contractor works exclusively for your company, follows your working hours, and uses your equipment, Indian tax authorities may view this as "disguised employment." This can lead to misclassification penalties and back taxes. Furthermore, IP assignment is weaker with contractors compared to full-time employees under an EOR or subsidiary.
Critical Legal and Tax Considerations
1. Permanent Establishment (PE) Risk
The most significant risk for a US CFO to consider is creating a Permanent Establishment. If a US company hires employees directly in India without an EOR or subsidiary, the Indian Income Tax Department may deem the US company to have a taxable presence in India. This subjects the US parent company's global income to Indian corporate tax rates. Using an EOR effectively creates a firewall against this risk.
2. Statutory Benefits and Withholdings
Unlike the "at-will" employment nature often found in the US, Indian labor law mandates specific benefits.
- Provident Fund (EPF): A mandatory retirement savings scheme where both employer and employee contribute 12% of the basic salary. This functions similarly to a 401(k) or Social Security contribution.
- Gratuity: A defined benefit plan paid to employees who depart after five years of continuous service.
- TDS (Tax Deducted at Source): Employers must withhold income tax from salaries and remit it to the government, similar to IRS withholding requirements.
3. Intellectual Property Protection
The "work made for hire" doctrine in the US automatically assigns IP rights to the employer. In India, while similar concepts exist, it is vital to have robust, jurisdiction-specific IP assignment clauses in the employment agreement. When using an EOR, the chain of title moves from the Employee to the EOR, and then immediately to the US company via a Master Services Agreement, ensuring your proprietary technology remains secure.
How Wisemonk Facilitates Compliant Hiring
Wisemonk eliminates the legal friction of cross-border hiring by serving as your Employer of Record in India. We enable US companies to onboard full-time Indian talent in as little as 48 hours without setting up a local entity. Our platform handles the complexities of Indian labor laws, from drafting compliant contracts and managing Provident Fund contributions to executing watertight IP transfer agreements. This allows your team to focus on product and growth while we ensure you remain 100% compliant with both Indian authorities and US internal revenue standards.