Compliant hiring strategies for global workforce expansion
In today's business landscape, expanding globally is a crucial step for growth and success. But many companies freeze up when tackling the threshold question: How do we compliantly hire people around the world?
Small firms can be hesitant to go global because they're overwhelmed by the complexities of managing a global team. Meanwhile, more mature multinational organizations often shudder at the potential exposure to the employment and tax laws of another country and the operational complexity of adding yet another siloed system. The perceived complexities of global expansion can unnecessarily paralyze organizations, delay expansion efforts, and give the competition a clear opening. But there are clear solutions on the market to help you manage these risks and compliantly hire, no matter the size or stage of your company.
In this article, I explore the advantages and risks associated with the three most common strategies for expanding your global workforce: hiring personnel as international contractors, hiring personnel as employees of an Employer of Record (EOR) service provider, and hiring personnel as direct employees of a local legal entity. Because the benefits and risk profiles of these global hiring strategies shift with a company's maturity in a particular location, understanding the compliance implications behind each of these methods is critical.
Hiring international contractors
In this model, a company typically hires international personnel as contractors, consultants, or freelancers of its parent entity.
Hiring international contractors offers an efficient and flexible method for scaling up an international workforce because contractors can be onboarded faster than full-time employees, do not have the operational complexity associated with managing employees, and can save the company money depending on the local market wages and tax regimes.
A company can typically hire an international contractor by following a few simple steps: identifying the scope of work for the desired arrangement and memorializing these terms into a consulting agreement (including a description of deliverables, payment terms, and contract duration), collecting compliance documentation such as identification and tax documents (if necessary), and setting up a way to pay your international contractor.
However, while this option provides more flexibility for employers that may not be ready to bring on permanent international employees or that only need select help on a temporary basis, companies that hire international contractors should be prepared for a set of unique compliance challenges and considerations, primarily centering on the risk of misclassifying full-time employees as contractors and the potential of permanent establishment risk.
Benefits of hiring international contractors
Engaging international contractors offers a cost-efficient and flexible method to augment one's workforce around the globe. When hiring contractors, companies do not, in most cases, take on the obligation to provide benefits, set up and manage payroll taxes, provide training and equipment, or develop compliance programs to manage numerous local labor laws governing employees, such as collective bargaining arrangements (France), modern wage awards (Australia), specific pension entitlements (UK), or tax-advantaged housing and meal allowances (India).
Additionally, by hiring personnel as international contractors, companies avoid the overhead of compliance with minimum wage, payroll tax withholdings and related filings, sick leave and other leave type management, and numerous other administrative items associated with compliantly hiring employees. Rather, in the contractor model, it is the contractor who manages how they deliver the project scope, including, in most cases, managing their own hours and other compliance and tax obligations.
As a result, hiring workers on a contract basis can enable companies to hire personnel quickly and affords businesses with an opportunity to evaluate their fit within the local market and assess a worker's long-term value potential without making a permanent commitment. For these reasons, hiring international contractors is frequently seen as a low-risk, short-term solution for companies looking to get started in a new jurisdiction and test out a local market before making deeper commitments to a jurisdiction.
Challenges of hiring international contractors
Misclassifying employees as contractors can be a major legal issue, with potential consequences including back taxes to both the contractor and the company, penalties, and fines (especially concerning in jurisdictions with active labor regulators, such as California), legal disputes, and reputational damage.
In cases where companies seek to eliminate the risk of misclassifying their workers, they should consider an alternative global employment strategy that will enable them to hire personnel as employees, such as hiring personnel through an EOR service provider or as a direct employee of a foreign subsidiary. Often, when a company has a few contractors in a foreign jurisdiction for a certain period, it is time to consider whether a conversion makes sense with its business priorities.
Hiring employees through an EOR service provider
Hiring full-time employees by partnering with an EOR service provider can be an effective strategy where efficiency and compliance are top priorities, enabling companies to stay abreast of local labor laws without investing in an extensive due diligence process.
An EOR is a specialized entity that undertakes employment responsibilities on behalf of another company. Under the EOR model, companies identify personnel that they would like to hire and then work with the EOR to hire these individuals as direct employees of the EOR, and not the company itself.
Through this arrangement, companies are able to offer personnel all the benefits associated with full-time employment. This also avoids the misclassification risk involved with engaging international contractors and the investment needed to establish a local legal entity to hire employees directly.
As a result, working with an EOR service provider significantly reduces the barriers of entry for new markets, offering a compliant and often cost-effective strategy for hiring international employees.
EOR partners often have extensive experience in understanding and following foreign labor laws related to worker classification, employment contracts, working hours, and other regulations. EOR partners also act on the company's behalf to issue employee payroll compliantly, calculating and filing taxes according to local rates and requirements, and even can assist companies in offering benefits packages compliant with statutory benefits.
Benefits of using an EOR service provider
Many companies turn to EORs to compliantly and efficiently hire full-time employees by outsourcing all of the financial, legal, and operational aspects of hiring employees abroad (including compliance, payroll, and taxes) to the EOR. The EOR essentially helps businesses hire international employees without the startup time and costs associated with establishing a local entity, developing compliant employment documentation, and setting up local payroll and benefits.
Meanwhile, by using an EOR, companies avoid misclassification risk since their personnel will be hired as full-time employees. Global employees often prefer this model because they will receive consistent paychecks, which unlocks various benefits such as the ability to obtain home mortgages, receive statutorily required health and pension benefits, and even in some circumstances, get access to various immigration services.
Challenges of using an EOR service provider
Partnering with an EOR means forgoing a degree of operational control and placing trust in a third-party service provider, as the EOR service provider employs workers on the company's behalf.
This can be challenging when seeking to establish (or enforce) full chain of title over one's intellectual property. This can also be challenging in performance discussions leading to involuntary terminations. Some EOR providers may be less reputable than others. It's important to conduct due diligence on the EOR provider you work with to ensure that they take compliance seriously and have obtained any requisite licenses to offer their EOR services in all of their advertised countries.
The EOR model may also not offer the ideal support for a business looking to establish long-term employee commitments in certain countries or scale its headcount dramatically. Some countries pose limits on the duration of EOR engagements. In Germany, for example, a company may manage an employee through an EOR for 18 months at a time, with a three-month reset period in between engagements.
And while the EOR model solves for misclassification risk, the risk that local tax authorities deem your operations to trigger tax obligations (permanent establishment risk) will remain under this global hiring model.
As a result, the EOR model may be particularly attractive for a company that is focused on compliance and efficiency but lacks the resources to navigate local labor laws by ensuring that such companies can focus on core market expansion operations without the added burden of mastering jurisdiction-specific regulations. However, as permanent establishment risk and cost considerations increase, it may be time to consider establishing a permanent entity and hiring global personnel as direct employees.
Hiring direct employees by creating a legal entity
Hiring global employees of your own legal entity remains the traditional model for global expansion. Under this model, companies typically will obtain legal, tax, and financial advisors to evaluate the benefits and costs associated with establishing a foreign entity; will form a local subsidiary; and will engage with employment counsel and HR advisors to establish locally compliant employment agreements and policies, as well as set up local payroll. Some countries will also require that a company establish local bank accounts, obtain office space, complete various business registrations, and even reach minimum personnel requirements in order to obtain reasonable rates on supplemental benefits.
Establishing a legal entity in a foreign country and hiring employees directly represents the most intricate and labor-intensive model for hiring international employees. This complexity underscores the need for meticulous compliance planning and deep familiarity with the local regulatory landscape.
As a result, today's companies typically consider this option only when their presence in a certain market outgrows the cost-effectiveness and practicality of hiring international contractors or hiring through an EOR service provider.
Benefits of creating a legal entity for direct hiring
The cost and work involved with establishing a legal entity can pay off in a company's ability to make a name for itself in new markets. Local recruiting and customer acquisition becomes easier when a company has established its presence. Unlike an EOR, creating a legal entity gives the company direct access to its employees and full control over their intellectual property as well as their performance standards.
In addition, by establishing a local entity, the company is assuming control over its tax position in the local jurisdiction and reducing the permanent establishment risks associated with hiring international contractors or employees via an EOR provider.
Challenges of creating a legal entity for direct hiring
Establishing a local entity for the purposes of global expansion is a complex and costly undertaking that requires vigilant management of corporate, tax, and employment compliance.
In many countries, there are various corporate and capital requirements that must be met in order to establish a local entity, including unique documentation, notarization, and legalization requirements, as well as share and financial capital requirements. Furthermore, most countries impose corporate compliance obligations on local entities, requiring various business registrations, corporate tax filings, and governance and accounting requirements.
Additionally, countries such as Ireland, Australia, China, and Singapore require foreign companies to hire local directors who are residents and nationals. Other countries like Brazil require local office space.
From an employment perspective, while a local entity enables a company to hire direct full-time employees, it also means expending resources to compliantly hire and manage those direct hires, which often involves engaging local legal counsel and HR professionals to ensure the use of compliant employment agreements and policies, the setup of an appropriate payroll system, and management of leave, pension, and other entitlements.
Accordingly, the costs of hiring internationally through a legal entity can quickly accumulate, and unlike the EOR model, the lack of resourcing or experienced professionals to effectively manage personnel can expose the company to employment and other compliance risks.
Multiple models may be right for your business
A business expanding its global workforce must weigh its hiring strategies against a backdrop of complicated legal, financial, and operational considerations. Some companies may ultimately utilize all three models as their hiring needs mature. It is increasingly common to see young companies begin their global expansion journey by hiring international contractors in select markets, only to later transition them to full-time employees through an EOR provider, and then eventually decide to establish a legal entity once critical mass has been achieved.
Other companies may pursue different models in different countries to maximize their investments against the local employment regulatory landscape—for example, hiring international contractors in Romania where such practices are more common, partnering with an EOR service provider in Australia where misclassification is higher risk, and forming a legal entity in India where the company has chosen to establish a second headquarters.
Whether opting for the flexibility of hiring remote contractors, the compliance ease of an EOR service provider, or the authority of a legal entity, a company must align its approach with long-term strategic goals and the target markets’ regulatory environments.
Copyright 2024 Bloomberg Industry Group, Inc. (800-372-1033) Compliant Hiring Strategies for Global Workforce Expansion.
Reproduced with permission.
Disclaimer: Rippling and its affiliates do not provide tax, accounting, or legal advice. This material has been prepared for informational purposes only, and is not intended to provide or be relied on for tax, accounting, or legal advice. You should consult your own tax, accounting, and legal advisors before engaging in any related activities or transactions.
