Many companies, especially US based, are looking at hiring in Europe as a more familiar option for global expansion. The European Union is one of the more stable areas to expand into. It has over 480 million consumers that may need your product or service. Although each state has it’s own specific labor, tax, and business regulations there are many free trade agreements that have been established to help a better flow of goods and services. You can learn more about the details by visiting the European Commission’s website.
If your global strategy has determined that it is time to start hiring in Europe here are your options for formalizing your staffing:
1. Foreign Independent Contractors (Super Lightweight With High Risk)
We consider a foreign independent contractor when a company’s domestic entity has a domestic contract for services from an individual who resides in and whose place of business is in a foreign country. Many companies choose this option because they know it is the lowest amount of investment and low risk. The large risks really pile up when the company hires a contractor as a full-time equivalent and treats them in the same manner, but do not adhere to the local labor laws, tax regulations, withholding policies, etc. This is when local authorities will be far more aggressive about prosecuting the contracting company. Read more about the risks associated with using contractors overseas.
There are a few potentially “fatal” risks of foreign independent contractors that we point out to our clients and prospects:
- Contractors in many countries are not legally obligated to protect your IP. Plus, the concept of “non-disclosure” may not be legally enforceable depending on target country.
- Contractors treated like employees may try to enforce the local termination policies and potentially cause a labor board investigation. We have seen an investigation like this cost a company $375K USD and 11 months in court.
- In many countries, it is illegal to have a Non-Compete agreement for a contractor.
If you want to learn more, we have a full write up about the top 5 international hiring compliance traps.
2. International PEO or Foreign Subsidiary as a Service “FSaaS” (Lightweight, Compliant, and Flexible)
If you feel that your global expansion strategy is more on the Agile/Lean spectrum of things, there is no better option than International PEO or FSaaS. They are both very similar with different levels of service. A company like Velocity Global serves as the employer of record in the target country and creates a locally compliant employment contract with your employee. You would contract with Velocity Global and there is essentially a pass-through process for contracts and pay. Velocity Global also manages compliance, payroll, taxes, benefits, withholdings, bonuses, commissions, etc. very much like a domestic PEO does.
This approach attracts many companies. They can test out a market with a turnkey service versus settling on one more country’s regulatory body. They retain full control of the work duties of their employee without the compliance, time and legal headaches of the foreign subsidiary option. The downside is that International PEO and FSaaS are limited when it comes to helping a company acquire physical assets. There is no reason why a company who has that end goal can’t use this service as an interim solution.
3. Foreign Subsidiary Establishment (Heaviest Investment but Most Secure)
A foreign subsidiary is when you actually create a subsidiary company based in foreign country of your choosing; it’s just like creating an LLC or C-Corp in the US but in a different country.
Creating a foreign subsidiary is the least risky in terms of labor law, taxes and IP. One of the more common errors we see is a smaller company or startup who is trying to expand internationally into their first country and they choose to create a foreign subsidiary not fully comprehending the amount of time and money it takes to create/manage these entities.
If your commitment is going to be long-term and the resources allocated to the project are extensive then a foreign subsidiary is probably your best bet. If you are questioning a foreign subsidiary, check out the ten reasons why you should not create a foreign subsidiary. If foreign subsidiary is your path, you do not have to reinvent the wheel; Radius is a company that helps clients simplify this process down to a science, tell them we sent you!