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What are International Employment Vehicles?

By August 26, 2016 January 5th, 2018 No Comments
What are International Employment Vehicles?

If you’ve decided to kick-start your global expansion plans, many times your next question is, “How can we hire employees in our target country?”  But first, you must consider your individual international expansion strategy, employment liability, tax implications, and protecting your Intellectual property (IP). Depending on your needs, you have a few different options on how you can operate and compliantly build human capital overseas.  After you align all of the points you can then choose the method that you want to employ internationally; the correct ‘vehicle.’

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Let’s look at the different international employment vehicles:

Non-resident employer (NRE)

If a company is located and registered in the EU they can file certain forms that allow you to employ people in other EU countries without setting up an entity. All EU countries have an agreement that is part of an EU charter, allowing only EU companies to use this service.  Granted, that since BREXIT there are talks of how long this arrangement will be in place for the UK, as well as other countries.

If a company decides to go this route, we advise working with an accounting firm, an international consultant, and potentially an attorney that has experience with non-residential foreign employers. This is a difficult process and needs to be done compliantly. 

Creating your own Foreign Subsidiary

A foreign subsidiary is the establishment of a legal entity in a foreign country that’s controlled by another company (“Parent”) through ownership of over 50% of the voting stock.  If your company is committed to a country’s local market for the long-term, has the time and financial resources, and plans to hire a large headcount setting up a foreign subsidiary could make sense.  Also if your company deals with holding large amounts of physical assets (manufacturing, real estate, etc.) then a foreign subsidiary may be your only option. 

However, in today’s volatile environment, creating a foreign subsidiary simply does not make sense for most companies.  In most cases, the risks trump rewards. On average, it costs approximately $15k-$20k to set up and 3-4 months. Plus, if your new hire doesn’t work out or business strategy changes, take both startup time and costs and multiply each by a factor of 3.  Many companies find that they value flexibility over the rigid structure of a foreign subsidiary and look to international PEO/FSaaS. 

For more detail here are 10 headaches you can expect when creating, maintaining, and dismantling a foreign subsidiary.

Foreign independent contractors

A foreign independent contractor is an individual who lives in a foreign country and works for a domestic company under contract; think 1099 worker in USA.  Many companies think this is an employment vehicle, but it is not.  The company typically has no recourse for anything in the contract, because they do not have a legal presence there.  Essentially the contract you put in place has no enforceability across country lines. This is the root reason on why contractors are risky, especially when it comes to IP matters and whether or not the country even legally allows contractors.

We want to be very clear when we state, that creating a contractor relationship between two countries is not employment.  In fact referring to the person as an employee can trigger a workplace audit, where your company may be held liable for taxes, contributions, fines and more.  To understand the differences between an employee and contractor, in an international setting, in more detail please look at this post.

 

International PEO and FSaaS

International Professional Employer Organization (PEO) and Foreign Subsidiary as a Service (FSaaS) are “employer of record solutions.”  An employer of record EOR) solution means a third-party company hires your employees in the target country to allow for contractual enforceability and compliance.  This relationship essentially piggy-backs on the existing EOR’s company to enable true employment.  EOR is one component of International PEO and FSaaS, they also typically handle all HR functions such as international payroll, benefits administration, employment contracts, terminations, etc.  Employee liabilities and day-to-day management responsibilities remain with the client (your) company.

Working with contractors can be risky, be safe and use FSaaS to establish a legal presence in a country by way of EOR. This will ensure enforceability regarding IP protection and autonomy.

If you’re looking to hire employees in a target country there are only three real options that we would consider actual “employment vehicles” and those are:

  1. Create a foreign subsidiary
  2. Be an NRE (only if your country has a relationship with the target country)
  3. OR use International PEO // FSaaS

If you need help deciding which foreign employment vehicle is most suitable for your company, give us a call. With capabilities in over 185 countries, we are the leading experts in international expansion and would love to help.