A remote work agreement that simply says “the employee may work from home” hasn’t actually addressed the legal questions remote hiring raises anymore — not in 2026, with India’s Labour Codes rolling out state by state, permanent establishment enforcement tightening globally, and a single misclassified contractor now carrying backdated PF, ESI, and gratuity exposure that can dwarf whatever the arrangement was supposed to save. I’ve watched founders hire their first remote employee in another state, or their first contractor in another country, treating it as a copy-paste exercise from a standard offer letter template. It rarely is anymore, and the gap between “we hired someone remotely” and “we’re actually compliant” has widened considerably as enforcement has caught up with how distributed teams actually work.
This article covers what a remote work agreement needs to address for hiring across Indian states, and separately, what changes entirely once you’re hiring across international borders — including the permanent establishment risk that’s become genuinely aggressive in India specifically, and a recent ruling worth knowing about.
What Is a Remote Work Agreement?
A remote work agreement is the contract (or the remote-specific clauses within a broader employment or contractor agreement) governing where, how, and under what conditions someone performs work outside a traditional employer-provided workplace. It needs to address location, working hours, equipment and expense responsibility, data security obligations, and — critically for cross-state and cross-border arrangements — which state’s or country’s laws actually apply to the relationship. Like any contract, it still needs to satisfy the essential elements of a valid contract before its terms are enforceable at all.
Hiring Across Indian States – Why One Policy Doesn’t Fit All
This is the part employers hiring purely within India most commonly overlook. Employment conditions can be genuinely affected by the state in which an employee actually works, since state Shops and Establishments legislation has historically regulated working hours, leave, holidays, and conditions of service — and these rules vary meaningfully from state to state. An employer with remote employees spread across Karnataka, Maharashtra, and Delhi shouldn’t assume a single national policy document automatically satisfies every state-specific requirement; HR teams need to identify each employee’s actual work location and check the applicable state registrations, leave provisions, and holiday calendars accordingly. This is exactly the kind of detail that gets lost when a remote work agreement is drafted once, centrally, without accounting for genuinely different regional legal obligations underneath it.
The New Labour Codes and What They Change for Remote Employers
India’s four consolidated Labour Codes — the Code on Wages, the Industrial Relations Code, the Code on Social Security, 2020, and the Occupational Safety, Health and Working Conditions (OSH) Code, 2020 — are actively rolling out through 2026, and this is genuinely live, moving regulation rather than settled law. As of March 2026, Gujarat, Arunachal Pradesh, Haryana, Madhya Pradesh, Karnataka, and Maharashtra have notified final rules for all four codes, with at least 17 states having taken significant implementation steps and the remainder expected to finalise through 2026. The Ministry of Labour published draft Central Rules on 30 December 2025, and these have continued being finalised through the year.
For remote employers, several changes carry direct practical weight: the Code on Wages introduces a 50% basic-plus-dearness-allowance wage restructuring requirement, which raises employer PF and gratuity accrual for previously low-basic salary structures by an estimated 10–20%; fixed-term employees must now receive identical wages and benefits — including PF, ESI, medical insurance, and leave — as permanent employees doing comparable work; and the Social Security Code introduces, for the first time, a formal framework for gig and platform workers, requiring contributions to a social security fund for businesses engaging workers outside a traditional employer-employee relationship. A remote work agreement drafted before this rollout, or copied from an older template, is very likely missing terms that need updating as these rules take effect in your specific state.
Hiring Across Borders – Employee, Contractor, or EOR?
Once hiring crosses an international border, the structural options multiply, and each carries a genuinely different risk and compliance profile:
- Direct employment through a local entity — requires setting up an Indian entity (typically a Private Limited Company) to hire formally, the most compliant but most resource-intensive route for a foreign company entering India
- Employer of Record (EOR) — a third party formally employs the worker on your behalf, handling local payroll and statutory compliance, without you needing to establish an entity; increasingly the default choice for companies hiring 1–15 employees in India without existing local infrastructure
- Independent contractor engagement — works legally where the relationship is genuinely independent (multiple clients, self-directed hours, own equipment), but carries real reclassification risk where the actual working relationship resembles employment in substance, a distinction I’ve covered in detail in Independent Contractor Misclassification in India
Permanent Establishment Risk – The Biggest Hidden Danger
This is the risk most founders hiring across borders genuinely don’t see coming, and it deserves the most careful attention in this entire article. A Permanent Establishment (PE) arises when a foreign company’s activities in India — through remote employees, contractors, or an EOR-employed team — create a taxable business presence, exposing a portion of the company’s global profits to Indian corporate tax, typically with penalties and interest attached once discovered.
Three forms of PE matter most for remote hiring arrangements:
- Fixed-place PE — a location genuinely at the employer’s disposal (even continuous use of someone else’s premises, including a coworking space used regularly for core business functions) through which the business is carried on
- Dependent-agent PE (DAPE) — a person in India who habitually exercises authority to conclude contracts on the foreign company’s behalf; this is the form EOR and remote-hiring setups most commonly trip, and keeping contract-signing authority firmly with the home entity is the clearest way to keep this risk low
- Service PE — services rendered in India through personnel beyond a treaty-specified duration threshold; India applies a notably aggressive 90-day service PE threshold under several treaties, reduced to just 30 days for related-party services under the US-India treaty specifically
What makes India a genuinely higher-risk jurisdiction here is that it has explicitly indicated it will not apply the OECD’s November 2025 updated Model Tax Convention guidance as written — including the OECD’s newer 50% working-time safe harbour — meaning international benchmarks that might reduce PE risk elsewhere don’t reliably apply the same way in India. Using an EOR doesn’t automatically eliminate this risk either; hiring through an EOR does not automatically create a PE, but it also doesn’t automatically shield a foreign company from one — the analysis still turns on conduct, particularly whether anyone in India habitually concludes contracts on the foreign company’s behalf.
The Booking.com Case – A Wake-Up Call
If PE risk still sounds abstract, this is worth knowing: in February 2026, an Indian tribunal set aside a ₹3,960 crore (approximately US$475 million) tax demand against Booking.com, in a dispute that turned entirely on whether the company had created a permanent establishment in India. Six Indian rulings across 2025–2026 have specifically tightened the DAPE test, reinforcing that Indian tax authorities are actively and aggressively pursuing PE claims against companies with any meaningful India-based presence, remote or otherwise — this isn’t a theoretical compliance footnote, it’s live enforcement with genuinely enormous numbers attached when it goes wrong.
Contractor Misclassification in Cross-Border Remote Hiring
Many foreign companies engage Indian talent as independent contractors specifically to avoid the complexity of formal employment — paying invoices directly, with no formal employment contract. This works legally only where the contractor is genuinely independent: multiple clients, self-directed hours, their own equipment. It fails, with real consequences, the moment the working relationship looks like employment in substance — exclusive engagement, client-directed hours, client-provided equipment, close day-to-day supervision. Where a contractor is later deemed an employee, the foreign company can owe PF contributions, ESI, gratuity, and TDS backdated to day one, plus penalties — a liability that routinely exceeds whatever the contractor structure was meant to save. I’ve covered the specific red flags that trigger this reclassification in Independent Contractor Misclassification in India, and the same warning signs apply with even more force in a cross-border remote arrangement, where informal engagement feels lower-risk precisely because it’s harder to monitor.
Tax Residency Risk for Remote Employees Working From India
This cuts the other way too, and matters for companies whose foreign employees choose to work remotely from India. An individual present in India for more than 182 days in a financial year can trigger Indian tax residency, potentially subjecting their worldwide income to Indian taxation, in addition to whatever tax obligations apply in their home country. A US citizen working remotely from India, for instance, must continue filing US returns on worldwide income (potentially claiming the Foreign Earned Income Exclusion or foreign tax credits) while separately navigating Indian residency rules — exactly the kind of dual-compliance question a remote work agreement should flag and require the employee to manage proactively, with employer-side guidance rather than silence.
Data Protection in Remote Work Agreements – DPDP Act Considerations
Remote hiring inherently involves extensive digital processing of personal data — candidate and employee names, contact details, identification documents, payroll information, and bank details — much of it now crossing state and international borders as teams distribute. Under India’s Digital Personal Data Protection Act, 2023, cross-border transfer of employee data creates enforceable obligations that a remote work agreement should account for explicitly, including documented data transfer arrangements where an EOR or third-party payroll provider is involved. Weak data-handling language in onboarding templates is a genuinely common gap, particularly where companies focus entirely on wage and classification compliance and treat data protection as an afterthought.
What a Remote Work Agreement Should Include
Pulling all of this together, a properly drafted remote work agreement — whether for cross-state or cross-border hiring — should address:
- Work location and any restrictions on relocating without prior employer approval, given how location changes can quietly shift tax, PE, and applicable labour law obligations
- Applicable state or country law, specified explicitly rather than assumed, alongside a clear jurisdiction clause for any disputes
- Working hours, availability expectations, and overtime treatment, aligned with the applicable state’s Shops and Establishments requirements
- Equipment, expense reimbursement, and home-office arrangements — relevant both operationally and for fixed-place PE risk assessment in cross-border contexts
- Confidentiality and data security obligations, especially where remote access involves sensitive systems, as covered in Confidentiality Agreement vs NDA
- Classification clarity — an explicit statement of whether the relationship is employment or independent contracting, matched to the actual working arrangement, not just the label
- Notice and termination terms, consistent with the Notice Period rules applicable to the employee’s specific location
- Dispute resolution mechanism, ideally arbitration for cross-border relationships, as covered in Arbitration Clause Drafting
Common Mistakes Employers Make with Remote Hiring
I see the same handful of issues repeatedly in remote work agreement structures across both cross-state and cross-border hiring:
- Using one national remote work policy without accounting for state-specific Shops and Establishments variation
- Treating an EOR relationship as automatically PE-proof, without confirming that contract-signing authority genuinely stays with the home entity
- Engaging long-term, exclusive “contractors” across borders without recognising the same misclassification exposure that applies domestically, now compounded by cross-border enforcement
- Not tracking employee work location changes, discovering a tax residency or PE issue only once an audit surfaces months or years of undocumented presence
- Copying an outdated employment template that hasn’t been updated for the Labour Codes rollout already in effect in the employee’s state
- Ignoring cross-border data transfer obligations under the DPDP Act when using foreign payroll or EOR platforms
Frequently Asked Questions
Does hiring remote employees across Indian states require different employment terms for each state? Potentially yes — state Shops and Establishments legislation varies, covering working hours, leave, and conditions of service, so a single national policy may not satisfy every state’s specific requirements.
Can hiring through an Employer of Record eliminate permanent establishment risk in India? No — using an EOR doesn’t automatically create or eliminate PE risk. The determining factor is conduct, particularly whether someone in India habitually concludes contracts on the foreign company’s behalf.
What is the service PE threshold for hiring remote workers in India? India applies a notably aggressive 90-day threshold under many treaties, reduced to just 30 days for related-party services under the US-India tax treaty specifically.
Is it legal to hire Indian talent as independent contractors for a foreign company? Yes, if the contractor is genuinely independent — multiple clients, self-directed hours, their own equipment. It becomes high-risk where the relationship functions like employment in substance.
What happens if a foreign company’s India-based contractor is reclassified as an employee? The company can owe backdated PF contributions, ESI, gratuity, and TDS from day one, plus penalties — a liability that often significantly exceeds the savings the contractor structure was meant to provide.
Does India follow the OECD’s updated permanent establishment guidance? No — India has explicitly indicated it will not apply the OECD’s November 2025 updated Model Tax Convention guidance, including the newer working-time safe harbour, as written.
Can working remotely from India for more than 182 days trigger tax residency for a foreign employee? Yes — presence in India beyond 182 days in a financial year can trigger Indian tax residency, potentially exposing worldwide income to Indian taxation alongside home-country tax obligations.
What are India’s four Labour Codes, and are they fully in effect yet? The Code on Wages, Industrial Relations Code, Code on Social Security 2020, and OSH Code 2020 are rolling out state by state through 2026, with several states having notified final rules and others still finalising implementation.
Do fixed-term employees need to receive the same benefits as permanent employees under the new Labour Codes? Yes — fixed-term employees must receive identical wages and benefits, including PF, ESI, medical insurance, and leave, as permanent employees performing comparable work.
What data protection obligations apply to cross-border remote hiring in India? Cross-border transfer of employee data is governed by the Digital Personal Data Protection Act, 2023, requiring documented data transfer arrangements, particularly where a foreign EOR or payroll provider is processing the data.
Final Takeaway
A remote work agreement written for a single-state, single-country team simply doesn’t hold up once you’re hiring across Indian states or international borders — the legal terrain underneath it has shifted substantially, from the Labour Codes’ state-by-state rollout to genuinely aggressive permanent establishment enforcement that a recent ₹3,960 crore case against Booking.com makes very hard to dismiss as theoretical. Whether you’re hiring your first remote employee in another state or structuring your first cross-border engagement, the classification, location, and compliance details matter considerably more in 2026 than they did even two or three years ago.
Hiring remotely across states or borders and want your agreements structured to actually hold up? Get in touch and let’s make sure your remote work agreements reflect the compliance reality, not just an outdated template. For the broader legal groundwork every growing team needs, see my Business Contracts checklist and Contract Law Glossary.
This article is for general informational purposes and does not constitute legal or tax advice. Remote hiring structures should be reviewed against your specific circumstances by a qualified lawyer and tax advisor.
Written by Parvez Ali.