Traditionally in order for a company to have a human presence in the United Kingdom, you would have to create a UK subsidiary to do so with any security. Many companies would invest the large amounts of time, resources, and capital to establish then maintain a UK subsidiary so they could do business there. It might take them three to six months to go through this process before they can even hire their first employee in the UK. That is fine if you are 100% sure that your international strategy will always include the United Kingdom and you have those resources to burn. There are great companies that can help you create a UK subsidiary with a very consistent approach if you are set on the traditional method of international expansion.
What if you are a smaller company looking to “test” the UK as an option? What if you want to see if the assumptions of your international business plan are correct before you invest heavily in another liability? How valuable would it be to get a trusted human presence in the market who can report back to confirm the opportunity? What if there is a possibility that this opportunity may dry up in a year or two, and now you have to tear down a foreign company? If these questions are ringing true with questions/fears you have, then there are alternatives to the “All-in” approach. One of them is Lean, compliant, and turn-key… Let’s take a look.
The Two Alternatives to UK Subsidiary Company Establishment:
Foreign Independent Contractors
A foreign independent contractor is someone who resides and does business in another country, but you contract them using a domestic contractor agreement. At face value, this seems like the easiest way to get someone working for you in a country, but there are many risks that can expose themselves in this relationship that usually outweigh the initial easiness.
Many times companies treat these contractors like they are employees in every way except contractually and in terms of labor law. This is called “contractor misclassification” and it raises many red flags for the labor regulatory bodies in almost every country. We witnessed a company spend almost $375K USD and 11 months working out one of these disputes in order to keep the right to do business in their target country. We recently wrote a whole post on why you can’t just hire a foreign contractor to your domestic entity.
Some other compliance traps that international employers don’t think of when using foreign independent contractors are:
- IP protection is very difficult because in many countries it is illegal to have confidentiality agreements or non-competes both during and after the contract is complete
- If the contractor realizes they are a misclassified employee they can report you to the labor board and demand termination pay, paid holidays, etc.
- Your ability to enforce anything contractually is minimal considering you do not have an actual company presence in that country
Global Employer of Record or FSaaS
Global Employer of Record (also known as International PEO) and Foreign Subsidiary as a Service “FSaaS” allow third party companies to hire your employees on your behalf in the target country and HR functions are passed through.
Although this solution does not allow you to acquire large volumes of physical assets in country, it does solve the liability risk and employment-based risk. You can comply with local labor law and have enforceability. When Velocity Global manages FSaaS and Employer of Record, we create very strong, locally compliant employment contracts and also manage all HR functions like withholdings, PTO, 13th month, etc. Our local entity becomes the employer of record for your employee but you retain control; essentially our entities serve as a passthrough for all the nuts and bolts employment matters, but they directly report to you. This allows you to have the control of hiring an FTE without having the headache, cost, or rigidity of managing a foreign subsidiary corporation.
Many companies consider this option because of the following factors:
- Speed – You can hire your candidate in the UK within 48-72 hours, not 3-6 months
- Flexibility – There are no commitments (other than the statutory termination period of the country)
- Set up and Takedown Costs – Subsidiary companies are very expensive in these regards; this solution is minimal to null
- Proactive Compliance – The compliance methodology of this solution is proactive, meaning we will warn you of any compliance risks and avoid them
Employer of Record and FSaaS truly are “Global Expansion 2.0.” Please do not hesitate to reach out if you need more information on all of your options when it comes to expanding your business in the UK, we are happy to point you in the right direction.