Once you’ve decided to take your business international, you must take a look at the different international employment vehicle options you have for hiring overseas. Depending on your company’s needs, there are four major international employment vehicle options. Let’s take a look at each of these options:
Non-resident employer (NRE)
This is a term that is primarily used in the EU. All EU countries share an agreement that is part of the EU charter which allows them to employ in any EU country without the hassle of establishing a subsidiary. However, this agreement allows only EU companies to use this service. It is important to note that since BREXIT, there have been discussions about how long this arrangement will be in place for not only the UK but other countries as well.
Working with a non-resident employer can be a strenuous process. We advise working with an international consultant, accounting firm, or EU-based law firm with experience in dealing with non-resident employers if your company decides to go this route.
International PEO and FSaaS
Both International PEO and Foreign Subsidiary as a Service (FSaaS) are employer of record (EOR) solutions. An Employer of Record solution basically means a third-party company hires your employees in your new country. This service manages the intricacies associated with benefits, withholdings, payroll, and taxes. International PEO and FSaaS help to ensure your company stays compliant while you remain responsible for day-to-day management of employee liabilities and responsibilities.
Both International PEO and FSaaS are great options for companies looking to reduce costs and risks while testing out a new target market.
If you’re hiring your own international employees, this option has the lowest risks and lowest costs.
Creating your own Foreign Subsidiary
A foreign subsidiary is the establishment of a legal entity in a foreign country that is controlled by another company through ownership of over 50% of the voting stock. Make sure creating a foreign subsidiary is in your long-term plans, as creating a foreign subsidiary is a big commitment.
If your company has the financial resources, is looking to hire a large headcount, and is committed to a country’s local market for the long-term, then creating a foreign subsidiary could make sense.
However, in today’s unpredictable environment, creating a foreign subsidiary does not make sense for most companies. To create a foreign subsidiary it will cost an average of $15k-$20k and take 3-4 months. After all this time and money, what if your new hire doesn’t work out or business strategy changes? Take both the cost and startup time and multiply each by a factor of 3.
Foreign Independent contractors
First and foremost, working with foreign independent contractors is very risky. Essentially, a foreign independent contractor is an individual who lives in a foreign country and works for a domestic company under a contract that isn’t an employment agreement. The biggest risk associated with contractors is the lack of safety around your employment agreement. If a contractor stops working with you for any reason and believes they were working more as an employee than a contractor, they can dispute their agreement in labor courts. Typically, in this scenario, international labor courts will side with the contractor.
Although independent contractors are associated with hefty risks, in some cases they can be extremely beneficial to your company. For example, the overall payroll savings can be around 20% when using contractors for international work. This is because unlike permanent employees, which you contribute to social security, unemployment, workers’ comp, Medicare, and more, you pay contractors their wages and tax withholding is their responsibility.
To view more risks vs. rewards associated with independent contractors, check out this post.
Ultimately, if you plan to hire employees in a target country we would only consider three options actual “employment vehicles” and those are:
- Be an NRE
- Create a foreign subsidiary
- OR use FSaaS // International PEO
If you need help deciding which employment vehicle is the best option for your company, give us a call.