Hiring Overseas: EoR Offers an Attractive 3rd Option
In today’s hard business environment, companies everywhere are looking beyond their local neighborhoods to find the best talent. With more people working remotely than ever, and more options available for hiring abroad in full compliance, companies are finding better talent at lower costs than ever.
For many years, companies avoided hiring overseas because of the high costs of opening a legal entity in another country. Only the biggest companies had the resources and the ability to shoulder the risks involved to open foreign subsidiaries. Hiring a team of independents can work in the beginning of a venture but for a company to grow, it needs stability, and that comes from hiring regular, permanent employees who will contribute day in and day out.
An increasingly popular option is known as the Employer of Record (EoR) model that combines the advantages of opening an entity and hiring contractors, allowing businesses of all sizes to take advantage of the outstanding opportunities abroad without the risk and hassle of opening an entity or the instability of a freelance workforce. Through an EoR (also known as a Global PEO), companies can hire permanent employees abroad, even without an entity.
Why Companies Should Look at the Overseas Option
Hiring abroad has many advantages. In the past, everyone worked in an office and companies were limited to hiring a workforce that was in commuting distance of the office. As telecommunications technology improved and people were able to perform their jobs from remote locations, the options for hiring talent grew dramatically.
Now, with the EoR option, companies had even more options. They could hire employees at lower costs than their local market, often with higher skill levels. Hiring in places such as Mexico or China proved affordable. Companies could offer extremely competitive compensation packages abroad at a fraction of the costs they were paying for local talent. In addition, the new employees brought other advantages. They opened doors to whole new markets and shared new ideas and new ways of doing business.
The challenge, from the start, was compliance. But with EoR, the problem of compliance was completely solved. The new employees were officially hired by the Employer of Record, which holds full liability for the employees. But the client would direct the employees in day-to-day tasks. The EoR also serves as the administrative back office, simplifying the process. The EoR option makes every company a potential multi-national, even if it has a team of five employees in a tiny office in Eugene. That company can have an even bigger team of sales people or marketers (or any other positions) in Argentina in a matter of weeks, at lower costs and with no risk.
EoR vs. Opening an Entity vs. Hiring Contractors
Over the past decade, the gig economy has swept through the business world, creating new opportunities for people at all levels of employment. A new class of worker was born – the digital nomad, capable of performing his or her job from anywhere in the world. People were no longer chained to their desks, or even to their offices. The entire, connected world was their office.
Companies jumped to hire contractors because they offered an enticing package. As independents, they were self-employed. That means the company did not have to worry about complex payroll matters such as withholding the proper taxes. These contractors were paid in a lump sum and calculated their own taxes. There were no employer taxes such as social security, no health care to pay for, and no pensions or mandatory benefits.
The problem with contractors, however, is that they cannot be treated as employees – unless they are reclassified as employees. But then they lose much of the advantage they had as contractors, namely the easy payment method and lower employer costs. Misclassifying contractors carries stiff penalties that could undermine the benefits of hiring abroad and damage a company’s reputation.
On the other side of the spectrum, there is the option of taking the leap and opening an entity in each country where a company wants to hire. Opening an entity is the safest and surest way to hire abroad, but it carries great costs, takes months to process, and saddles the company with full legal liability for the business and its workforce. If the venture doesn’t work, it often takes time and money to close it as well. Meanwhile, the company continues to pay taxes to the host country.
The middle option of EoR combines the best of both worlds and presents several reasons why companies should move their contractors to EOR. It is legal and stable, like an entity. But there is no payroll to calculate because the EoR handles it. There is no risk of misclassification and no concerns about closing the entity if it is not deemed worthwhile. An EoR can be used to test a market before making a major commitment. It’s also fast to set up, so a company maintains the agility to take advantage of an immediate opportunity.
What to Look for in a Global EoR
Just as with any type of business, an EoR or PEO abroad can vary in terms of how it functions and what services it performs. If a company is looking for ways to hire abroad in a compliant way with the least amount of back-end processing, here are some tips for finding the right EoR.
First, make sure the EoR has a physical presence in the country where you want to hire, not just its own entity. If it does not have its own people in the country, it may not be able to keep up with legislative changes that could impact a business, such as changes in taxes. That could hurt compliance in the long run.
Second, check with the EoR for any limits that a given country may place on the EoR model. Germany, for example, only allows a company to work with an EoR for 18 months. After that, the company needs to open an entity. Other countries could have their own limits, and it’s important to know that in advance.
Third, choose a pricing model that works best for long-term planning. Some EoRs charge a flat rate for every employee. Others charge a percentage of the total payroll they process. With the latter model, costs are liable to fluctuate from country to country, and employee to employee, making planning difficult. A flat rate is easy to calculate and offers no surprises.
Finally, it’s a good idea to choose an EoR that has the flexibility to provide your employees with the benefits you want to offer. Some EoRs only offer a limited number of benefits that are the same for each employee. Others have the capacity to offer more. If benefits are used to attract better talent, make sure the EoR is capable of delivering them.