In the previous chapter of the Lano Employment Academy, we have taken a close look at the broad field of global employment compliance. As discussed, there are many different aspects organizations need to be aware of in order to guarantee compliance in cross-border employment. But how can businesses actually put global employment into practice? In other words, how to hire an international employee?
There are several routes businesses can take when hiring international employees, and contrary to popular belief, it is not always necessary to establish a local legal entity. Here is an overview of the different options businesses have when employing overseas.
There are different types of global employees. In addition to full-time and part-time employees, organizations looking to hire foreign talent can also opt to work with independent contractors. Hiring workers as independent contractors involves less paper and admin work, since contractors handle their own taxes and social security. But following this approach also entails various risks businesses need to be aware of.
Every country has distinct rules that govern how workers are classified. Although there are certain similarities such as the level of control the business holds regarding how, when and where the contractor carries out the work for which he or she has been contracted, there is a strong need to be familiar with the country-specific regulations to avoid employee misclassification. In general, hiring workers as independent contractors is only an option for short-term projects and for tasks that lend themselves to outsourcing and can be carried out with little to no supervision from a manager.
No legal entity needed
Less admin work
No need to manage taxes and benefits
Risk of employee misclassification
Limitations regarding project duration and scope
Interested in knowing more about the different types of global employees and when to use an independent contractor instead of a full-time employee? Read here all about the pros and cons of the different global employment types.
The reason why many businesses tend to hire independent contractors when they first set out in a new market is that it doesn’t require establishing a local legal entity. What many organizations overlook, however, is that it may also be possible to hire an employee in a new market under a foreign legal entity. This is called Foreign Employer (FE).
Instead of creating a new legal entity in the target market where the new hire resides, the organization uses one of its existing foreign entities. This entity is then registered as a foreign employer with the local authorities for payroll and social security purposes. The employment contract is concluded between the employee and the foreign legal entity which acts as the employee’s official employer.
No legal entity needed
Relatively quick and easy set-up
May require support for processing non-residential payroll
Limitations as to what activities employees can engage in
Organizations that have a long-term strategy for a new market and want to be fully operational without any restrictions regarding the business activities they can engage in and the number of employees they can hire usually decide to create a foreign entity. Setting up a foreign entity means creating a separate legal entity that is officially registered in the new target market.
Representative office: minimal legal presence in a foreign country; purely representative function; no sales or transactional business activities
Branch office: official local extension of a foreign company; owned by the foreign company which hence carries the legal and tax liabilities related to the operations carried out by the branch office
Subsidiary: foreign legal entity that is completely independent from the parent company which is hence protected from any legal liabilities that may arise; fully operational on all levels
Creating a subsidiary is the only option for organizations to set up a separate legal entity that shields the parent organization from any type of legal liability. But it’s also the most expensive and time-consuming option, since it requires proper incorporation.
Allows businesses to be fully operational in the new market
No permanent establishment risk
Ability to hire an unlimited number of employees
Provides a clear legal basis for hiring, processing payroll, and more
Long and sometimes complicated process
Very expensive due to incorporation fees and capital requirements
Makes exiting the new market difficult
Considerable administrative workload
Last but not least, businesses can hire international employees through a global employment solution. Global employment solutions come in different forms and shapes. They range from in-country Professional Employer Organizations (PEO) and Employer of Record (EOR) services to fully automated global employment platforms.
What PEOs and EORs do is to hire employees in different countries on the client business’s behalf. The main benefit of hiring through a third-party service provider is that it takes the compliance burden off the shoulders of the hiring organization.
Fastest and easiest option to hire full-time employees
Compliance burden and legal liability is on the service provider
Payroll, taxes, benefits management and other HR tasks are taken care of
High level of flexibility
Sometimes limited duration (e. g. AUG in Germany)
Only suitable for a limited number of employees
Service fees can be high
Need to find a good service provider
The Lano Academy is for informational purposes only and should not be construed as legal advice. Lano Software GmbH disclaims any liability for any actions you take or refrain from taking based on the content contained in this article.
BECOME A PARTNER
© Lano Software GmbH 2023