Employee outsourcing is on the rise not only for local companies but also international operations. This type of hiring allows firms to complete tasks without exhausting all of their financial resources on recruiting and on-boarding their employees. For international companies, employee outsourcing is a great option for small to midsize firms without a legal entity in a country. Certain outsourcing options allow these businesses to work in a new market without taking the time and money to set up a costly subsidiary. Below we explore the employee outsourcing options, along with the risks and rewards associated with this type of employment.
Employee Outsourcing Options for International Businesses
There are many options for companies to choose from when determining the best route to follow for outsourcing team members. These employee outsourcing options including establishing a subsidiary, using independent contractors, Business Process Outsourcing (BPO), and International Professional Employer Organization (PEO).
Foreign Subsidiary
Establishing a foreign subsidiary gives companies the highest level of compliance and shows the local market that the company is committed. It does take an average of $15-20K of initial setup costs and about 3 to 4 months to establish. Plus, the maintenance costs are also steep.
Per our former posts about establishing a foreign subsidiary, if your model of international expansion requires that you hold equipment or physical assets then you do not have an option. You will have to establish a subsidiary. The other types of employment options will not work.
Foreign Independent Contractors
Hiring independent contractors to perform operations for your business is one option for overseas employment. Employers do not have to worry about withholding taxes or other benefits like pensions and insurance for these type of employees, so it’s a cheaper option if done correctly. It also gives employers the option of not setting up a subsidiary, but independent contractors are not free from risks.
If you use a contractor overseas without a legal entity, you face the risk of the contractor being classified as a permanent employee by international labor courts. If this occurs, your company can expect:
- Fines and penalties
- Employment audit
- Conversation about your lack of legal entity
- Tax audit
- Requirement to establish an entity
- Plus fines for non-compliance and back taxes
Read about how to protect yourself from these risks in our post about using international contractors.
Business Process Outsourcing (BPO)
BPO is outsourcing specific business-related processes, such as social media marketing or segments of a company’s supply chain, to third-party contractors.
BPO that is contracted overseas is sometimes called offshore outsourcing or nearshore outsourcing. This type of outsourcing is often divided into two categories, which include back office and front office operations. The back office BPO includes internal business processes such as billing and purchasing, while front office BPO includes customer-related services like marketing and IT.
Similar to other outsourcing options, BPO has risks and benefits. The positives including increased flexibility for international operations and fee-for-service costs, which can transform a firm’s fixed costs into variable costs.
The largest risk associated with BPO is security threats. When sharing private information across the paths between your company and a third-party operator, information can be misunderstood, and data can be intercepted. An active management system should be set into place before ultimately entrusting your company’s imperative data with a BPO.
International PEO/Foreign Subsidiary as a Service (FSaaS)
International PEO (Professional Employer Organization) is a method of hiring employees in other countries with a light footprint without having to establish or maintain a foreign corporate entity. It allows you to outsource work to contractors overseas quickly and reduces your risk of compliance issues if there is a dispute with the employment contract. This service also saves your business money because you can set up operations quickly and efficiently.
FSaaS is a similar model, but this gives you a legal presence in your target market allowing your business to employ locally as if they had a taxable presence in a country without actually creating a corporate entity.
Both options allow you to outsource processes while maintaining a presence in your new market giving you more control of in-country operations and increased leverage to avoid common compliance traps that occur when companies hire overseas contractors.
Employee outsourcing in international markets is complex, but it’s something that your company should consider if you’re considering global expansion. Contact our team of international consultants to discuss your options and learn how you can start using these outsourcing techniques to get up and running in no time!
