Companies looking to expand their workforce have options today that didn’t exist for companies in earlier eras. Hiring abroad was seen as either too risky, too expensive, or simply too complicated to navigate through all of the bureaucratic steps needed for full legal compliance. The only real option was to open a legal entity in each country, a process that took time and money, and if the venture proved unsuccessful, took more time and money to close.
No wonder hiring a global workforce was seen as a luxury only the largest and richest multinational corporations could afford. That’s no longer the situation. Companies of all sizes can hire employees with full compliance anywhere across the globe, with or without an entity. They can get a global team up and running with unprecedented speed if they want to test the viability of their product in a foreign market.
Many factors have come together to create the new reality. There is the emergence of a gig economy, which has created a whole class of people who choose contract work over full employment. Gig workers are taking advantage of great advances in telecommunications technology that allow them to perform many office functions from any remote location. In parallel, the emergence of automated global workforce management software has allowed companies to hire and pay workers across the globe in full compliance.
For companies seeking to take advantage of the burgeoning global economy, there are three primary employment options:
Opening an Entity
If a company has a long-term strategy for business in a foreign market and plans to hire a substantial number of employees, the best and most stable option is to open an entity in the foreign country, This gives the company the strongest base, the best tax advantages, and the greatest flexibility in entering contractual agreements with other entities in that country.
It is, however, the most expensive and the slowest option. It takes time to set up an entity, open files with all the relevant tax authorities and third-party benefits providers, and research all of the salary expectations for every relevant position. It is also expensive and costly to close. So if a company is looking for a short-term solution in response to a specific opportunity or to experiment with a product that may or may not be suitable for new market, the company may be better off starting with one of the other options and moving to an entity when it is ready to fully commit to the project
With a legal entity, the company assumes all legal liability for its employees. It is the solution best suited for long-term growth but may not be the ideal starting point for many companies.
Employer of Record
For companies that are not ready to tackle the challenges of a local entity but still want to take advantage of the global economy, the employer of record (EoR) option may be the best starting point. Under an employer of record model, a company partners with a local provider. The local entity is the official employer of record for the employees and handles their payroll and workforce management. The hiring company, however, directs the employee on day-to-day tasks. In other words, the company looking to hire oversees essentially outsources its HR service in the foreign market to a local provider. Companies that offer global employer of record assume the legal liability for the employees but the original company controls the employees’ activities.
The EoR option is ideal for companies looking to break into a new market quickly with a small team of employees, address a specific, short-term opportunity, or test the viability of a product or service in a foreign market. There is little risk involved since the EoR assumes the liability for the employees and handles the payroll compliance. However, for most companies, it is a short-to-medium term solution. If the business appears viable, companies usually tend to move on to opening entities to establish a more permanent presence.
Having an EoR option, however, gives every company the option of hiring abroad without having to open an entity. It allows companies to think globally in a way that was not possible in the recent past.
Contract Workers
The quickest and easiest way to acquire a workforce abroad is to hire contract workers. These are independents who are essentially self-employed. That means the company that hires them is not responsible for many of the standard payroll functions such as withholding taxes, and the contractors do not benefit from legislation aimed at protecting employee rights, such as minimum wage or overtime pay. Employers are not responsible for paying employer taxes on them or contributing to their pensions.
The contractor model can be a good solution for short-term tasks, but it is not, on its own, a replacement for a regular workforce. Excessive reliance on contract workers carries a risk of misclassification. Put another way, if a company treats contractors as employees, it has to pay them like employees, with overtime, paid time off, and other worker protection laws in place in the local country. Perhaps equally important, it has to withhold their taxes and pay employer tax.
The IRS defines an employee as someone who performs services for an entity that has the right to control what work is done and how it is done. Contractors are great for projects, but companies need to be careful about treating them as employees. If they do, there could be fines and bills for back taxes. Contractors are best employed alongside regular employees.
The Automation Advantage
What all of these employment options have in common is the need to pay people who live in foreign countries and operate under a range of employment laws, tax codes, and reporting styles. They need payslips in their local language and payments in their currency. Making sense of a local payroll can be challenging. But a global payroll could be three times as challenging because of the foreign elements.
All of these challenges can be conquered by choosing automated global payroll software that covers all of the different types of employees. A payroll solution that covers the full range of functions, from hiring to managing to termination, in the regions you need can take all the stress out of legal compliance.
In today’s world, there is no reason to limit hiring to those people who are in commuting distance. Today, the whole world is available for hire, and with the right employment strategy and software, any company become a multi-national powerhouse in no time.
