International businesses have many different options when it comes to global employment solutions. If this topic is new to you, another way to think of it is, if you want to employ in another country, how do you plan on doing so? This may sound like a simple question but the options are actually quite diverse. Each option has a unique value proposition that can make or break a business’s international strategy if chosen incorrectly.
What are the various types of global employment solutions and the benefits of each?
1. Foreign independent contractors
A foreign independent contractor relationship is one where a company contracts with a service provider in a target country but does not have a legal presence there. We wrote an entire feature piece on why you should not do this (even though you can). This solution to “employment” is very risky and not actually employment.
The appealing parts of the foreign independent contractor relationship are:
- Minimal investment
- Many companies use their domestic contractor agreements, so legal fees are minimal.
- Speed to market
- This type of relationship can be executed very quickly.
The underlying risks of this type of employment solution are centered around “contractor misclassification.” The risk of misclassification happens when a country’s labor board decides your contractor is actually an employee. In some countries contractor relationships are actually illegal, furthermore here are some of the other risks:
- Lack of legal enforceability
- If you have not set up a legal presence in your target country, then you will not be able to enforce any of the elements of your employment contract. Essentially your independent contractor agreement is worthless.
- In-country employment audit risk
- If a country believes your contractor is acting as an employee, you can be hit by an employment audit. If the labor board decides your contractor is actually an employee, you may have to create a corporate entity in-country then pay fines and back-taxes.
- Minimal IP protection
- In many countries, it is illegal to have a non-compete for contractors. Make sure you understand the local laws around IP. Also, see “Lack of legal enforceability” above.
2. Foreign subsidiary creation
Foreign subsidiary creation refers to the process of creating a new company presence in your target country, just like when your company incorporated domestically. This is the most traditional and well-known method. The benefits of a foreign subsidiary are:
- Highest level of compliance
- Legal enforceability
- Ability to hold physical assets
The risks of a foreign subsidiary are listed in detail in this feature post we put together, but some of the big ones are:
- Setup / maintenance / teardown cost
- Time on site and executive time expenditure
- Time to set up and teardown
3. International PEO / Foreign Subsidiary as a Service (FSaaS)
International PEO and FSaaS are the most recent and innovative global employment solutions. Much like how domestic PEO providers leverage an employer of record model to decrease HR cost, these solutions do the same but on a global scale. Essentially you contract with the solution provider and they hire your employee(s) in the target country under their company. It allows for instantaneous and compliant access to a new market because all the legwork has already been done.
Furthermore, the benefits are:
- 1-4 Day setup time
- Flexible service-oriented structure (On-demand) – Enter and exit a country when you need to
- Ability to sponsor work permits and visas for expats
- Managed HR, including payroll, contracts, onboarding, and benefits admin