Expanding your business internationally is an exciting prospect, but it comes with numerous complexities, particularly in managing your workforce abroad. When it comes to hiring and managing employees in a foreign country, you have two primary options: using an Employer of Record (EOR) service or establishing a foreign employer entity. Each approach has its advantages and disadvantages, and the choice between them depends on your specific business needs and goals.
In this blog post, we outline the main pros and cons of both options.
Employer of Record (EOR)
An Employer of Record (EOR) is a company or organization that takes on the legal responsibility for employing workers on behalf of another company. EOR services are commonly used in the context of international or global employment when a business wants to hire employees in a foreign country but does not want to establish a legal entity in that country.
- Quick Market Entry: EOR services allow you to enter new markets rapidly. You can start hiring and onboarding employees in a foreign country without the time-consuming process of establishing a legal entity.
- Compliance Assurance: EOR providers specialize in compliance with local labor laws and regulations. They ensure that your employment practices adhere to local standards, reducing the risk of legal issues.
- Risk Mitigation: EOR services take on many of the legal and financial responsibilities, reducing your exposure to risks associated with local employment laws, tax regulations, and HR administration.
- Flexibility: It’s easier to scale your workforce up or down as needed without the complexities of managing a foreign entity.
- Limited Control: While you maintain control over the daily activities of your international employees, certain administrative and compliance aspects are handled by the EOR, potentially limiting your control.
- Higher Costs: Although EOR may be cost-effective initially, if your international operations expand significantly, the long-term costs could outweigh the benefits. The price per employee charged by EOR providers is often relatively high. For instance, Remote’s EOR services start from $599 USD per month, and Omnipresent’s from £499 GBP per month.
Setting Up a Foreign Employer Entity
What is a foreign employer entity?
This is an administrative entity created to directly employ and manage the company’s workforce in the foreign jurisdiction. In practice, this means that the parent company registers the foreign entity as an employer in the new international market, thereby assuming full legal responsibility as an employer in that foreign market.
- Full Control: Establishing a foreign employer entity gives you complete control over your international employment.
- Tax Benefits: Depending on your business and the foreign location, you may be eligible for tax advantages and incentives that are not available through EOR.
- Brand Recognition: A foreign entity can enhance your global brand image and signal your commitment to the local market. Additionally, there is a positive emotional benefit for your employees when they are employed directly by your company rather than by a proxy company like an EOR provider. This could increase employee commitment.
- Setup Process: Establishing a foreign employer entity involves a setup process at the local social security body in the host country, often taking a few weeks.
- Risk Exposure: You are responsible for ensuring compliance with local laws and regulations, which can be challenging and risky, especially if you’re not familiar with the foreign jurisdiction. Typically, your payroll provider will handle this for you.
In deciding between EOR and setting up a foreign employer entity, consider your expansion strategy, the specific requirements of the target market, and your long-term goals. EOR is a valuable solution for quick market entry and reducing initial costs, especially if you’re testing the waters in a new country and anticipate not recruiting many employees. On the other hand, setting up a foreign entity offers lower long-term costs, more scalability, and greater control. Ultimately, the choice between EOR and a foreign employer setup should align with your business objectives, risk tolerance, and the resources you can allocate to global expansion. Please contact us at Internago, and we will assist you in making an informed decision.