AI in Risk Management: Safeguarding Employers in a Global Landscape

Hiring internationally allows companies to tap into global talent with unique perspectives and skill sets that foster sustainable success. Companies can build a presence in different economies, access a wider consumer base, and create additional revenue streams by expanding operations. 

While there’s no doubt that companies experience significant growth by entering new markets, there are also several legal and financial risks associated with hiring internationally that companies must understand before recruiting new talent. Navigating various employment-related rules and regulations becomes difficult when employing workers in multiple different countries. 

Understanding potential pitfalls and the importance of successful risk management helps companies successfully mitigate risks when scaling operations. Luckily, leveraging emerging technologies such as artificial intelligence improves a company’s risk management efforts and reduces any potential negative impact. In fact, implementing technology to inform strategic decision-making is a growing trend in the employment landscape, as the AI Trust, Risk, and Security Management market is projected to be valued at USD 6.02 billion by 2030. This represents a significant growth from the USD 1.8 billion valuation in 2022. 

This guide provides an overview of the legal and financial risks for employers, why risk management is crucial for growing companies, and how artificial intelligence helps companies avoid financial or legal issues. 

Legal and Financial Risks for Employers

Companies that build a global workforce generally incur many legal and financial risks when scaling operations. This is significant for companies because failure to abide by all employment-related rules and regulations leads to harsh penalties for noncompliance, including substantial fines, reputational damage, and criminal charges in severe cases. For example, in 2021, the Canadian value retailer Dollarama was fined $1.25 million for failing to comply with privacy and security policies. Additionally, noncompliance can lead to market access issues, substantial audits, fewer investment opportunities, and business interruption. 

Growing startups assume various risks regarding global employment, with key liabilities including:

Labor Laws

Companies that want to access new markets will need to remain compliant with local labor laws to avoid potential penalties. Navigating local employment legislation is difficult for companies because rules and regulations such as minimum wage requirements, leave entitlements, and more, vary drastically between countries. 

Tax Rules

Like local labor laws, each country has different requirements for taxation, including income tax brackets, deadlines for filing tax returns, requirements for depositing payments, and other employer-related obligations, such as remitting social security contributions. 

Worker Classification

Misclassification is another major risk for global companies. Usually, this occurs when an employer incorrectly classifies an employee as an independent contractor. This is significant because employees and contractors are entitled to different employment rights and protections, and failing to classify workers properly can lead to penalties such as back pay for benefits or wages. 

Data Privacy

Companies must understand data privacy and protection risks when hiring employees. With the rising popularity of technology in the workforce, many countries have passed formal legislation governing how data can be collected, used, and stored. For example, legislation such as the UK’s Data Protection Act 2018 provides clear guidelines regarding personal information usage. 

Startups that employ individuals in multiple jurisdictions may also be subject to additional legal and financial risks. These companies must remain current with changing employment legislation across multiple jurisdictions to maintain compliant regulatory practices while navigating the other challenges of managing a global team. 

What is Risk Management?

Risk management is the process through which companies identify, assess, analyze, and ultimately mitigate potential vulnerabilities or areas of weakness. Risk management impacts every aspect of a company’s core operations, and it allows organizations to quantify potential losses before they occur. Companies should allocate resources for understanding and planning for potential risks. Forrester notes that 41% of companies in 2022 reported three or more critical risk events during the year, and 64% of North American companies saw an increase in risk. 

What are the Risks for Companies?

The six main types of risks businesses are:

• Strategic risks, associated with organizational goals
• Operational risks, associated with liabilities that may interfere with productivity
• Compliance and legal risks
• Reporting risks, associated with data inaccuracy and unavailability
• Safeguarding resources risks
• Personal liability risks, meaning the owner or operator can be held legally or financially responsible for damages

Developing efficient risk management strategies is important for businesses because it allows leaders to consider all possibilities and make more informed decisions. Mitigating risks prevents unforeseen factors or threats from impacting your company’s financial well-being. By identifying and analyzing these risks, businesses can also address issues and implement more effective practices. 

Risk Management Strategies

Generally, companies respond to risks in the following ways:

Mitigation

This is when the company actively works to lower the possibility or impact of the risk. Typically, companies will implement preventive or corrective measures.

Avoidance

This is when a business attempts to reduce risks by eliminating the cause of the risk. Alternatively, companies may change strategic objectives to bypass the risk altogether.

Acceptance

In this instance, a company accepts a certain degree of risk. Companies will have contingency plans in place to deal with any consequences, though this strategy typically works best with low-impact or low-probability risks.

Transferring

Here, a company attempts to shift the risk or any potential fallout to another party. In this case, the other party will assume the liability of the company. 

Sharing

With this method, two or more parties assume joint responsibility for a portion of the risk or impact. For example, a group of multiple investors pooling capital will have limited financial or legal liability individually. 

Plan for Contingencies

Planning for contingencies helps companies mitigate risks by providing alternative routes to avoid or reduce the impact of negative events. 

What are AI Risk Management Frameworks?

AI technologies are disrupting various industries with several companies utilizing AI to streamline operations. This resulting impact on employment practices means companies must keep an eye out for emerging trends in the global employment landscape to remain competitive. 

These major employment trends include leveraging technology to implement more inclusive employment practices, personalizing learning and development for each employee, and using AI to analyze large sums of data faster than human workers. Similar to how AI enhances various administrative duties, utilizing artificial intelligence for risk management helps companies optimize mitigation procedures. 

What Do AI Risk Management Systems Do?

According to the National Institute of Standards and Technology (NIST), AI risk management frameworks refer to a set of guidelines and best practices that are designed to help organizations identify or manage the risks of leveraging AI systems. While traditional areas of risk management are primarily concerned with potentially negative impacts, AI frameworks tend to predict liabilities, address emerging risks, and identify opportunities for positive impact. 

Trustworthy Systems

This framework sets out clear guidelines that define the major characteristics of trustworthy AI systems. Implementing trustworthy systems helps companies further refine risk development standards. Characteristics include:

• Safety: these systems should prevent harm to people, organizations, or ecosystems
• Valid and reliable: a proper system should be able to provide accurate insights based on data
• Secure and resilient: AI systems should prioritize safety and remain functional if any challenges arise
• Privacy-enhanced: Artificial intelligence should keep sensitive information protected
• Accountable and transparent: the system should provide appropriate access to information, and all decisions or insights have a clear “how” process to justify the behavior
• Explainable and interpretable: individuals should be able to understand how the AI system works to address any potential risk-related issues, and the “why” reason for deciding within the context is understandable 
• Fair with Harmful Biases Managed: This ensures equality and equity in AI decisions by addressing biases such as discrimination. AI bias can be systemic, computational and statistical, or human-cognitive. 

However, leaders must consider certain drawbacks when leveraging AI tools. Barriers to trustworthiness in AI systems include potential biases in the data used, imprecise instructions, and inaccurate results. Trustworthiness also varies depending on the usage context, as the requirements for trust have significant differences across industries.

How Can AI Help Contribute to Risk Management with Global Employment?

Companies that leverage artificial intelligence gain rapid and accurate insights based on relevant data in real-time, which enables leaders to effectively manage the risks associated with growing internationally. Implementing artificial intelligence improves a company’s risk management efforts in several significant ways. 

Streamlined Compliance

Growing startups with employees in multiple jurisdictions will be responsible for navigating local labor laws, which can be difficult to manage across borders. Leveraging AI to analyze regulatory practices allows companies to detect potential risks or analyze complicated legal requirements in various regions. Automating these procedures also ensures leaders focus on ensuring ongoing adherence to employment-related rules and regulations. 

Stay Current

AI technology automates legislation monitoring, meaning an AI system can alert companies about any upcoming changes or updates to relevant labor laws and develop proactive strategies to mitigate risks. 

Administrative Support

This technology can draft employment contracts with all necessary terms and conditions quickly. Additionally, natural language processing algorithms quickly analyze text-based documents, such as existing employment agreements, and provide suggestions or identify areas for improvement. In fact, AI is used to manage both internal contracts with employees and external documents related to business operations, such as real estate agreements. 

Analyze Employment Practices

By drafting compliant contracts and delivering essential guidance, these tools mitigate some of the legal risks associated with global employment. These technologies efficiently research legal queries regarding employment practices and labor laws, allowing companies to adjust practices accordingly. 

Gain Insights into Funding Opportunities

Artificial intelligence tools also allow companies to enhance their ability to identify and secure funding opportunities. AI provides insights into how to secure opportunities for gaining capital in various vital markets. For example, artificial intelligence can generate guidelines to access opportunities for New York funding, Massachusetts funding, and California funding, as the local guidelines for businesses vary from state to state. These tools also enable companies to navigate international investment regulations, such as generating compliant agreements with investors to secure Australia funding. 

Companies also use AI technologies to mitigate risks, monitor funding goals, and reach out to potential investors. This is particularly significant for certain digital fundraising strategies, such as equity crowdfunding campaigns. 

More Accurate Payroll

Growing startups can also leverage artificial intelligence to reduce the risks associated with inaccurate or inadequate payroll practices. Payroll refers to paying employees in the correct local currency and providing all necessary benefits, which is complicated when employing a dispersed team. 

Business leaders leverage AI to automate payroll processes, such as entering and collecting accurate data for each worker with greater efficiency. This mitigates the risks associated with taxation and labor laws by ensuring all calculations are accurate, and each employee is paid correctly. Payroll mistakes cause financial losses and an increased likelihood of lawsuits. Additionally, payroll errors have negative impacts on company culture and ultimately decrease employee retention and engagement. 

Navigate Financial Institutions

Automating these practices makes global payroll significantly more efficient while meeting all important cultural standards across regions. For example, some jurisdictions mandate that employees must receive a 13th-month or 14th-month bonus, and an AI-powered payroll solution will adhere to cross-cultural requirements. Other common mistakes, such as inaccurate tracking of employee hours, missing deadlines for reporting financial information, failing to maintain proper records, and misprocessing garnishments are also eliminated through automation, providing companies a safety net for payroll-related issues. 

AI can help you navigate cross-cultural institutions in the banking sector to maintain compliant practices and improve accuracy in financial payroll operations. Artificial intelligence is also used for fraud detection when monitoring international transactions. 

Data-Driven Projections

Companies that utilize AI benefit from generating accurate and informed projections. Algorithms such as machine learning efficiently analyze large sums of unstructured data while utilizing predictive modeling algorithms to consider upcoming potential trends or regulatory changes and derive useful insights. This results in more accurate predictions, allowing leaders to pivot before operations are negatively impacted. These insights and predictions are also generally free from biases and other reporting errors. 

These predictions and forecasts allow companies to mitigate risks and develop more effective growth strategies when entering new markets. For example, the risks associated with hiring in the United States differ from the employment-related liabilities of hiring talent in the United Kingdom. Understanding market-specific risk helps companies strategically plan for future workforce needs. 

Address Staffing Needs

These projections also allow companies to analyze workforce trends and address talent shortages or skills gaps before they impact operations. With these insights, leaders can identify crucial skills and recruit individuals with qualifications that support long-term strategic objectives. 

Alternative Strategies for Risk Management

Implementing trustworthy AI systems enables organizations to streamline monotonous tasks and accurately assess risks at various stages. However, there are alternative methods that can also help companies successfully mitigate the risks of employing a global team.

Consider Financial Services Firms or Other Hiring Solutions

Companies can partner with a global Employer of Record to ease some financial and legal obligations. An Employer of Record is a third-party organization that acts as the legal employer of workers on behalf of a company and assumes full responsibility for HR-related tasks, such as onboarding, distributing benefits, paying employees, and more. Additionally, companies can hire employees from around the world without navigating the bureaucratic procedures of entity registration. This makes hiring through an EOR ideal for growing businesses that want to enter new markets and scale operations without worrying about employment-related risks. 

Build Dedicated Security Teams

Companies may also mitigate risks by prioritizing security and hiring individuals who help improve the organization's cybersecurity efforts. Allocating resources for security teams enables companies to detect or respond to threats and reduce vulnerabilities. Ultimately, prioritizing security allows companies to remain compliant with data protection legislation and maintain a positive reputation among the brand's consumers, stakeholders, and workers. 

AI can also personalize employee experience, allowing companies to ensure employees receive the necessary training to support the company's long-term cybersecurity. For example, AI can provide tailored online learning opportunities, allowing workers to develop the required technical skills or credentials. 

Borderless AI - The Future of Global HR.

Borderless AI redefines global HR by bringing AI agents to every part of the HR stack. We serve as the legal employer of your company’s international teams and will handle administrative tasks including ensuring compliance with local employment laws, tax filing, benefits administration, visa processing, and even managing employment contracts – all while the client company retains day-to-day supervisory control. 

The Borderless Advantage

Borderless AI enables businesses to compliantly hire and manage talent worldwide without establishing a foreign entity. We alleviate the complexities and risks of hiring global employees with zero deposits, dedicated in-house support, and AI-powered global employment law resources. Onboard, manage, and pay your international team in one convenient platform. 

Introducing Alberni - Your Agent for Global HR

Alberni, developed by Borderless AI, is an AI agent for global HR and legal compliance. With Alberni, employers can generate compliant employment agreements for new hires in over 170 countries, mitigate risks within new or existing contracts, answer questions about global labor laws, and provide insights regarding the hiring costs for employees around the world in seconds. 

Contact us today to see how we enable companies to compliantly hire employees and mitigate the risks of global employment. 

_Disclaimer

_{Borderless does not provide legal services or legal advice to customers, contractors, employees, partners, or the general public. We are not lawyers or paralegals. Please read our full disclaimer here.}

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