Today, businesses realize that to compete, they must expand into international markets. In fact, 76% of U.S. and UK tech firms plan to expand into more than three international markets by the end of 2024—quadrupling 2019’s numbers.
Traditionally, companies set up legal entities in foreign countries in order to expand into new markets; however, the process of setting up an entity is costly, complex, and time-consuming. Additionally, it takes valuable internal time and resources, and limits the flexibility companies need to adapt to new markets and scale their teams.
Moving a business into international markets does not have to be a complicated legal and logistical process. Find out how using a global Employer of Record simplifies global expansion.
How Does a Global Employer of Record Work?
An Employer of Record (EOR), often referred to as an International PEO, is an organization that legally hires another firm’s employees on its behalf. Firms utilize an Employer of Record with an established global infrastructure to legally hire employees in markets all over the world through local and compliant employment contracts. An Employer of Record will handle all risk mitigation, compliance, payroll, and benefits associated with each employee, and ensures compliance through the labyrinth of ever-changing local labor laws. Meanwhile, the company maintains management of their day-to-day responsibilities.
These EOR organizations are particularly helpful with global expansion for many reasons. The Employer of Record manages all HR and employee integration responsibilities, including:
- Global hiring and onboarding
- Timely and accurate payroll processing
- Ongoing compliance with local labor laws
- Additional HR-related tasks
An Employer of Record allows companies to focus on managing their employees, and continue executing their day-to-day responsibilities—without the hurdles of HR-related tasks when operating in multiple markets. In order for companies to integrate into a new market themselves, they must determine international entity structures, manage tax requirements, and set up processes to address compliance and risk management. Now, with an Employer of Record, businesses can streamline the global expansion process.
The Employer of Record is responsible for all compliance, payroll, and helps mitigate risks associated with hiring an employee, allowing companies to enter into new markets with peace of mind.
What Are the Benefits of Using a Global Employer of Record?
There are numerous benefits to using a global Employer of Record to expand into international markets; however, compliance management is the most crucial. Global Employers of Record are masters of the markets in which they have established a presence. They have a thorough understanding of the regulatory hurdles that are unique to each country, and can confidently navigate strict employment laws.
In addition to compliance, EORs take on the following responsibilities, leading to a smooth transition into a new market:
- Ensuring a quick entry or exit from international markets
- Cost savings compared to entity setup
- Ability to hire top talent quickly
- Drafting and maintaining compliant employment contracts
- Managing all payroll and tax withholdings
- Staying updated on local labor laws and regulations
- Providing ongoing HR support
What Are Common Alternatives to a Global Employer of Record?
Using a global Employer of Record is often the quickest and most efficient way to expand into new international markets. However, there are alternative options to this solution. The two most common alternatives are hiring foreign independent contractors or setting up a legal entity in a foreign market—both of which come with their own risks and challenges.
Foreign Independent Contractor Considerations
Companies commonly use foreign independent contractors to quickly enter markets across the globe. However, if a contractor is found to be misclassified, potential dangers include:
- Significant fines and penalties
- Reputational damage
- Potential forced market exit
There is no single set of guidelines that distinguishes a foreign independent contractor from an employee across the world. Even among the top 20 most-promising markets, each has its own strict employee and independent contractor definitions, test(s) for determining each, and penalties for misclassification—whether the misclassification is intentional or not.
Instances of misclassification are common, expensive, and come with long-term repercussions. In 2017, UK courts ruled that a foreign independent contractor had, in fact, performed employee responsibilities for several years, entitling him to years of holiday pay after termination. The employer ultimately paid the plaintiff holiday pay for each year of employment. Using an Employer of Record in place of an independent contractor helps eliminate these types of risks.
Entity Setup Considerations
Conversely, some companies take a more formal and laborious path to global expansion through entity setup. To completely establish a legal entity, businesses must navigate the following requirements in order to do business compliantly in new global markets:
- Local tax registration and withholdings
- VAT/GST taxes
- Payroll taxes
- Entity registration
- Employment contracts
- Bank account setup
- Physical presence requirements, like registered office space and registered directors
- Labor audits
- Payroll taxes
- Quarterly and annual tax and compliance filings
- Insurance requirements
- Pension requirements
- Initial capital requirements
- Immigration considerations
The setup and ongoing maintenance of an entity requires a deep understanding of cultural and linguistic nuances, local tax and employment law, and other legal and operational considerations—knowledge that companies are often unable to efficiently leverage on their own. This can significantly drain time from a company’s human resources and finance departments.
Cost and time are additional limiting factors of setting up a foreign legal entity. Businesses should expect to spend between $15-$20K to set up an entity with an additional $40K per year to maintain it. Entity setup takes an average of three to four months to complete, which is up to 90% longer than the time it takes to set up an employee in a new market with an Employer of Record solution.
Additionally, if a company is testing a new market and the business conditions are not favorable, then dissolving the entity is a difficult process that can take 9-12 months and cost between $45,000 – $60,000.
How to Identify the Right Global Employer of Record for Your International Expansion
Exploring a new market by setting up an entity or hiring foreign independent contractors is a risky process, but it is not the only way forward. The right global expansion partner provides a stress-free, compliant, and quick entry into new markets. And while most global Employers of Record provide a similar set of services, that does not mean all are equal.
When selecting a partner organization, consider the following:
- Vet multiple firms and different options to find the right fit for your business.
- Find a global Employer of Record that has extensive in-country knowledge and established expertise in your target markets.
- Ensure the EOR offers services that best suit your expansion, with no long-term contracts.
- Gain a solid understanding of the payment structure and process, including any hidden fees.
- Partner with an organization that will offer real-time support through the entire global expansion lifecycle—no matter your country, time-zone, or language.
- Understand there is no “one size fits all” solution to global expansion— each expansion is a unique mix of challenges that requires a custom approach.
An experienced global Employer of Record recognizes that the last point is crucial. An organization that views all global expansion endeavors as the same will not benefit companies in the long run. Like markets, global expansion strategies share similarities, but it is the nuances that distinguish them from cookie-cutter solutions. Experienced Employers of Record hone in on these nuances and use them to help navigate the complexities of your global expansion with ease and efficiency.
Rely on an Experienced Global Employer of Record
Velocity Global’s Employer of Record solution, also called International PEO (Professional Employer Organization), enables firms to quickly and compliantly establish a presence in 185 countries and counting—without having to set up a foreign legal entity or hire foreign independent contractors. We become your supported employees’ Employer of Record, utilizing locally-compliant employment contracts to hire the brightest talent to fuel your global growth.
Want to learn more about how Velocity Global’s Employer of Record solution can help you compliantly hire in new international markets in as few as 48 hours? Reach out to us today. Let us help you move your business forward—which is the most important advantage of all.