In parts one and two of our Ultimate Guide to Global Expansion series, we discussed global expansion benefits and how to create a flexible, scalable globalization strategy. Another critical piece to a successful global expansion plan is a compliant international hiring process.
Navigating global hiring options is complicated—most countries have different employment laws and regulations, and there are severe fines and penalties for noncompliance. Depending on your international growth goals and expectations, certain foreign hiring options are more beneficial to your company than others.
To help you make these critical hiring decisions, we compiled the different pros and cons of four common global employment options:
Option 1: Foreign Independent Contractors
Companies often hire foreign independent contractors thinking that it is a quick and straightforward global hiring solution. There are some benefits of working with foreign independent contractors in certain instances. These benefits include:
- Cost savings: Companies only have to pay contractors an hourly wage. This saves a firm money, compared to hiring permanent employees who receive healthcare, paid time off, and other benefits depending on their market.
- Qualified, flexible workers: Many foreign independent contractors are experts in their fields, which allows companies access to critical skillsets and the ability to grow in a new market. Contactors typically have flexible schedules, so they can adapt to meet your needs and work in different timezones.
Using foreign independent contractors is a viable option for some companies who have a short-term project they need to finish quickly. However, noncompliance due to contractor misclassification is exceedingly common.
Potential downsides of foreign independent contractors include:
- Penalties for misclassified employment: Foreign independent contractors cannot operate as full-time employees for your company. When your company is investigated and found to be noncompliant, there are serious monetary fines.
- International contract confusion: You must adjust employment contracts you use in your headquarters’ country to ensure compliance in a new market.
- Lack of in-country presence: Hiring foreign independent contractors does not give companies a local tax ID. Companies who work with foreign independent contractors cannot register and remit required payments for social security, income tax, health, pension, workman's comp, etc.
- Inability to sponsor work permits: Companies can only apply for work permits if they have a local entity.
When companies work with foreign independent contractors, they must have internal HR and legal resources in place to properly manage workers and mitigate risks.
Businesses need to ensure that each global independent contractor has a locally-compliant agreement signed and that it regularly monitors the relationship and the contractor’s performance. If your firm does not have these resources, consider other employment options to ensure compliance.
Option 2: Non-Resident Employer (NRE)
Registering as a Non-Resident Employer (NRE) is an option that gives companies an in-country tax ID. With a tax ID, companies can legally onboard and pay local workers, and fulfill the necessary tax requirements. NREs are most common in the European Union, but the exact name varies from country to country.
Registering as an NRE offers some flexibility to get a business set up in a foreign country quickly without establishing a legal entity.
Other benefits of registering as an NRE include:
- Fewer regulatory and reporting requirements than entity setup: An NRE is not a full legal entity, so the regulatory reporting requirements (such as annual tax filing requirements) are typically less than an entity.
- More cost-effective: NREs are typically less expensive and allow for faster market entry when compared to setting up a legal entity.
Unfortunately, NRE registration is not widely available, so depending on where companies hire, they must seek other options.
Some other downsides of an NRE include:
- Compliance risk: NREs are often scrutinized for tax avoidance and noncompliance, which makes them easy targets for tax auditors.
- Limited time frames: Companies can only legally employ workers under an NRE for a maximum of six months, but this time frame varies depending on the country.
There are hurdles that companies must go through before they can register as NREs. For example, most governments require a local bank account, an office address, and a local resident director.
Option 3: Foreign Subsidiary Establishment
A foreign subsidiary is a legal entity based in a different country that the parent company controls through ownership of more than 50% of the voting stock.
Establishing a foreign entity is the traditional way to launch a compliant global presence. Entity establishment is still the best and most compliant option for companies that are ready to commit to a specific market long-term and hire a large headcount.
More benefits of a foreign legal entity include:
- Mitigates noncompliance risk: Taking the time to establish an entity ensures your company meets all tax requirements.
- Physical asset acquisition: Foreign subsidiaries enable physical asset holding, which is critical for manufacturing or real estate companies.
Even though foreign entity establishment ensures the highest level of compliance, it is the least adaptable global expansion option. If a business decides that a new market is not profitable, tearing down a legal entity is expensive and could take years.
Other downsides of legal entity establishment include:
- Large initial investment: On average, it costs $15,000-$20,000 USD to set up a foreign subsidiary.
- Extended set-up time: Setting up a foreign entity takes an average of three to four months.
- Difficult teardown if market exit is necessary: Tearing down an entity is difficult because it can cost you up to three times the money and time you spent setting up the entity.
Entity establishment is the right answer for some companies; however, it is critical that you and your teams understand how lengthy, time-consuming, and expensive the process is before you commit.
Option 4: International PEO (Professional Employer Organization)
Another global employment option is partnering with an International Professional Employer Organization (PEO). International PEO is an innovative solution that helps companies hire employees anywhere in the world quickly, compliantly, and without the burden of establishing a foreign legal entity.
Some benefits of International PEO include:
- Quick market entry: International PEO gets employees up and running in a new market in as few as 48 hours.
- Cost savings: International PEO is up to 60% cheaper when compared to creating a foreign subsidiary.
- Risk mitigation: This solution utilizes in-country expertise to help mitigate liability and employment-based risks.
- Highly flexible: International PEO is ideal for companies testing new markets’ viability or short- to mid-term projects in a country because it is easy to exit a country when needed.
International PEO is an excellent option for companies looking to move into new markets quickly and maintain the flexibility to leave if necessary, without incurring the time and money required to tear down a legal entity.
Unfortunately, International PEO is not the right option for every business. Some downsides of International PEO include:
- No physical asset acquisitions: This employment model may not be an option for real estate or manufacturing companies because you cannot hold physical assets in-country.
- Permanent establishment requirements: If your foreign presence grows, you may be legally required to establish an entity in the future.
Before you choose international PEO, your company should consider its long-term business goals. If you need to hold physical assets in a new country, or plan to hire a large headcount, entity establishment is the best option. But if your business needs flexibility, International PEO gets you set up quickly and compliantly in a new market.
The key to successful global expansion is finding the right partner. When you choose an International PEO provider whose benefits align best with your global growth goals, you streamline your expansion into new markets.
Execute a Successful Global Hiring and Expansion Plan
Throughout our Ultimate Guide to Global Expansion series, we revealed globalization benefits, how to create a successful global expansion strategy, and international hiring options. No matter what hiring method you choose, global expansion is quickly becoming a necessity for companies.
Global expansion opens the door to many different new and exciting business opportunities. But before you get started, there are important things to remember. Your business must study target countries, bring together the right internal and external resources, and maintain a flexible, agile approach throughout the entire process.
To learn more details about the best hiring methods when expanding globally, get in touch.
