The “sharing economy” is typically a term that refers to a peer-to-peer market almost always created by the facilitation of technology. The most notable facilitators in this space are Airbnb and Uber. In international business, there are companies that are leveraging these same principals to help businesses access international markets. International professional services have been helping companies with global expansion for many years. Although within the last five to ten years, a new approach has emerged.
How have sharing economy principles changed international business?
“Employer of Record” is a concept well known in the HR world, but has only recently been applied to international business. Domestically, professional employer organizations (PEO) will serve as the employer of record for outside companies employees so they can provide better-outsourced HR functions. PEOs pool their clients’ employees, so the clients get reduced insurance rates, payroll expense, benefits administration, etc. Global employment service providers or “International PEOs” are using the employer of record model to create a different advantage.
One of the largest hurdles of international business is foreign subsidiary company creation and maintenance. Companies often find themselves maintaining multiple entities globally that eat time and money while providing little business value. The cautionary tales of foreign subsidiary creation are rampant. Certain business models that require physical asset holding in a country such as real estate, manufacturing, banking, etc. are limited to the foreign corporation approach. More often than not, companies are just trying to get a human presence into a target country. Traditional international expansion strategy dictates that you must create a company to employ someone abroad. In a similar vain, five years ago “get a hotel” or “crash at a friend’s house” were your accommodation options, then Airbnb happened…
International PEOs are helping companies get around this hurdle by serving as the employer of record in a target country, as well as doing HR administration. The relationship allows for a client company to “rent” the international PEO’s company in-country.
Here is the basic breakdown of an International PEO relationship:
- The International PEO already has a foreign business entity in the target country the client company wants to access.
- The company signs a service contract with the International PEO.
- The company’s in-country employee signs an employment contract with the International PEO.
- The companies employee is technically employed by International PEO, but by a chain of contract reports to the client company. The employment relationship feels completely normal on a day to day basis.
- The International PEO typically manages the HR functions in-country for that new employee.
The benefits of the International PEO relationship:
- Speed: International PEOs allow for employees to be hired in-country within 72 hours
- Flexibility: International PEOs are service oriented, therefore it can be terminated at any time
- Compliance: Independent contractor relationships in-country are not compliant with employment law and can lead to investigations or even fines, but international PEO eliminates this risk
- Market testing: Companies can get feet on the ground to test a market without the commitments of a foreign corporation
- Import an expat: International PEOs can sponsor work permits for expatriates who need to be relocated
Is this sharing economy model of international expansion working?
Sometimes the best way to gauge if the market is responding to a service offering is to see if the number of service providers is growing. The number of international PEOs in the US alone has jumped from roughly two providers just a couple years ago, to at least eight today.
Something else to consider is how much support government agencies are giving to the sector. Denver, CO-based Velocity Global was recently granted a $1.9 million dollar (USD) tax credit from the Colorado Governor’s office, with an expectation of creating 193+ jobs in the state over 8 years. See the Denver Post article for more details. This type of tax incentive is a large vote of confidence in the model. Velocity Global also opened offices in the international business centers of Boston and San Francisco and received the category award of “2016 PEO of the Year” from the Global Payroll Association.