A growing middle class and rising economy makes hiring in South America an attractive option for American businesses. In addition to a large employee pool, Latin America has over 600 million citizens and its middle class is maturing. These factors create a satisfactory market for companies interested in their next global expansion opportunity.
This all sounds great but put on the brakes before you start hiring in South America. You cannot simply hire an employee under a US employment contract. Below we list the options you have for beginning operations with in-country contractors in your target market.
Setting Up a Foreign Subsidiary in South America
Before hiring an employee in a foreign country, a company needs to establish itself through a subsidiary or branch. Creating a subsidiary used to be the only option in the past. If a company decides to go this route, it’s a capital investment and can take months to complete. Despite its downfalls, companies must be legally incorporated in the country if they want to hire local employees.
In Colombia, companies do not have to establish a subsidiary to perform business in the country. But, they must put in place a branch under the rules of the Commercial Code of Colombia. A branch is an extension of the company’s home office. Per the code, “The basic difference between a branch and a subsidiary is that the branch is the same legal person as its home office, (although the branch is considered as a legal entity which for purposes of its activity has to comply with all Colombian regulations).” If a company chooses to establish a subsidiary instead, it’s incorporated and considered a Colombian business.
Opening a branch or a subsidiary in Brazil is complicated and very costly. The first step is for a new business to receive authorization from the Brazilian Ministry of Development, Industry and Foreign Trade. Once you receive authorization, there are other requirements surrounding your company’s name, taxpayer ID number and the Brazilian Board of Trade. All these steps require a substantial amount of time and money, which may damage relationships with prospective employees.
The Grey Line of Employee Relationships in South America
According to the Society for Human Resource Management, nearly every nation in South America believes that an employment relationship exists when a person performs a service in exchange for money. This becomes an issue for employers if a conflict exists with a non-permanent employee, such as a person working part-time or as an independent contractor, because labor courts will ignore the contract language and classify the person as a permanent employee.
SHRM states that “labor courts in Argentina, Brazil, Colombia, and Venezuela generally treat the hiring of an independent contractor as the hiring of an employee.” This impacts employers because permanent employees receive benefits including social security, pensions, health care and termination security.
Why is an employee’s status important?
It’s a common misconception that companies can hire independent contractor overseas without an established entity. As mentioned above, that’s not the case. In South America, if conflicts arise independence contractors are considered permanent employees. Even if there isn’t a conflict, you still cannot hire employees in South America without a subsidiary or branch.
Also, in-country employees receive special benefits like social security. If you’re not paying into these funds, there are consequences including fines, required payment for past-due liabilities dating to the employee’s first day and an overall employment audit. In a previous post, we laid out the full explanation of why you cannot hire overseas/internationally without an established entity or using something like the next option.
Foreign Subsidiary as a Service Makes Hiring in South America a Breeze
Velocity Global’s Foreign Subsidiary as a Service removes the burdens and compliance traps associated with expanding your business into South America. This works by combining services that allow you to employ locally without establishing an entity in your target market. You stay compliant and can hire in a fraction of time compared to what it takes to establish a subsidiary. FSaaS is also substantially less expensive.
Hiring international employees is difficult. You need to understand the country’s tax laws, payroll withholdings and customs. If you make an error, consequences could be detrimental to your business. It becomes even more difficult when operating in several countries because each one has different labor laws. For example, Brazil has strict holiday pay requirements for employees, which include the 13th-month salary.
Using FSaaS takes those responsibilities off your plate and allows you to focus on strategy for continued growth. To learn more about this service that is available in 185 countries, give us a call!