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As remote work and hybrid work models become the new norm, more and more businesses decide to look for talent outside their traditional hiring markets and to hire international employees to fill their open positions. While there are many benefits to working with a global workforce – enhanced creativity, multilingual customer support and access to a global talent pool, to name but a few – many organizations lack the necessary experience to deal with the challenges that come with international hiring, such as complying with local labor laws and creating an attractive benefits package for new team members.
In many cases, however, the problems start well before that. In fact, many businesses don’t even know how to approach the subject. One of the first questions that usually comes up is whether it’s necessary to establish a legal entity and, if not, what other ways there are to hire employees abroad. Especially for SMBs and start-ups that don’t have the same funds as large international corporations, not having to set up a foreign entity every time they want to hire someone abroad makes a big difference.
In this blog post, we’ll show you three different ways to hire workers abroad that don’t require incorporation and discuss their respective advantages as well as the challenges that come with each approach.
The first option for businesses that want to hire staff abroad is to work with international freelancers and contractors. Freelancers and independent contractors are an increasingly important talent resource for businesses. For instance, estimates by Upwork suggest that 36% of the working population in the U.S. was freelancing in 2020, making up a share of no less than $1.2 trillion of the national economy.
Freelancers and contractors fall under the category of independent workers, which means they don’t have employee status. Consequently, businesses can engage freelancers and contractors in almost any country in the world without having to set up a legal entity, since the latter pay their own taxes and social security contributions and don’t figure on the business’s monthly payroll.
Working with freelancers and contractors who are based in different countries all over the world has numerous advantages for organizations, including:
Lower costs than employees: Since freelancers and contractors pay for their own insurance, make their own tax deductions and are not entitled to benefits or bonuses, hiring independent workers usually works out cheaper than hiring a full-time employee.
Less admin: Other than the financial benefits, working with independent contractors also means less admin work for the business. No benefits management, no payroll processing, no tax payments.
Increased flexibility and access to specialized skills: Independent contractors can be engaged for a fixed project or needs-based for ongoing collaboration. This means a high level of flexibility for the business because freelancers are available on demand and can be used for the exact amount of work they’re needed for. Also, freelancers often have specialized skills and qualifications which might be needed for a specific project only but don’t justify hiring someone full-time.
Despite the many benefits of working with a contingent workforce, there are also some drawbacks when it comes to engaging with freelancers and contractors. These include:
Employee misclassification risk: Employee misclassification happens when a worker is hired by a business as an independent contractor although he or she should rightfully be classified as an employee – for example because he or she works almost exclusively for the business, has fixed working hours and receives certain benefits and work equipment. Misclassifying workers can have severe consequences for the business. And since the rules for classifying employees and contractors differ from country to country, organizations working with contractors all over the world are at high risk of non-compliance.
Permanent establishment risk: Many organizations ignore that, depending on the business activity, permanently engaging freelancers and contractors in a foreign country could trigger permanent establishment – especially if it turns out they actually qualify as an employee. Permanent establishment (PE) means that the business is considered to have an ongoing presence in a foreign country where it is not officially incorporated. Being classified by local authorities as PE can trigger tax liabilities, penalties and other unwanted consequences for the business.
Expensive cross-border payments: Another challenge of working with international freelancers is paying their invoices. In most cases, independent contractors who are based abroad will want to be paid in local currency, which means high exchange fees – plus the sometimes astronomical transaction fees that banks charge for international wire transfers. As an alternative, companies can turn to payment options such as digital wallets, which allow them to pay international contractors in several different currencies and with only low fees.
Did you know that you can easily mitigate compliance risks when working with independent contractors by using Lano’s global contractor management solution? Avoid misclassification risks through localized, compliant contractor agreements and compliantly pay your fleet of international freelancers in 28 different currencies.
Direct employment means that an international organization hires employees in a foreign country under one of their own entities, but without setting up a new legal entity in the jurisdiction where the future employee(s) are based. In other words, rather than going through the trouble of establishing a local subsidiary, office or branch to act as the legal employer, the foreign business uses an already existing (foreign) entity which is then registered as a foreign employer with the local authorities.
Let’s take the following example. A French translation agency is looking for a Finnish-French translator to work for them on a full-time basis. If they find a suitable candidate in Finland, they could hire the Finnish translator as a remote employee under their French entity, since Finland doesn’t require businesses to establish a legal entity to hire someone locally.
If managed correctly, hiring employees in a new market directly under their home entity can have several benefits for an organization. Here are a few examples.
Possibility to hire multiple employees: Once all the necessary registration processes as a foreign employer are completed, it’s relatively easy to hire more employees in the respective jurisdiction.
Having talent work exclusively for you: The problem with contractors and freelancers is that they never work exclusively for one business because they divide their capacities between several clients. Hiring international employees, however, allows you to recruit talent for your business full-time, without any concessions.
No additional costs: Direct employment means not having to go through the lengthy and costly process of setting up a legal entity nor having to pay fees for third-party service providers. This makes direct employment a very cost-effective option for hiring employees abroad.
Even though direct employment is a legally legitimate solution to hire international employees in various countries, there are some administrative difficulties that companies should be prepared for if they decide to use this approach. These challenges include:
Permanent establishment: Similar to working with local freelancers and contractors, having employees working for you in a foreign country could make you liable for corporate income tax in this jurisdiction. In many cases, the risk is even higher than with freelancers or contractors, since employment is often seen as a higher level of commitment to the respective market by authorities.
Navigating local employment laws: Even if your organization doesn’t have a local legal presence, the employee is still hired under the laws of the jurisdiction where he or she is based. As the employee’s legal employer, you must comply with all the local labor laws and regulations in order to stay compliant.
Managing local payroll, taxes and benefits: Foreign employers have to fulfill the same obligations as local employers with regard to payroll, taxes and employee benefits. This means having to learn how to process payroll according to local standards and having to liaise with the local tax and social security authorities to make sure income tax and social insurance contributions on employment income are paid accurately and on time – unless the foreign business decides to outsource payroll to a local payroll service provider.
Check out Lano’s payroll services and get access to a global network of top-tier payroll partners who can help you manage your multi-country payroll in over 150 countries.
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The third way to hire international employees (without having to set up legal entities all over the world) is to use a third party, which can be either an Employer of Record (EOR), a Professional Employer Organization (PEO) or a Global Employment Organization (GEO). EOR, PEO and GEO are three different global employment solutions that allow businesses to compliantly hire employees abroad without creating a legal presence.
An Employer of Record hires local employees on behalf of a foreign client business, thus managing all the administrative and compliance-related aspects of the employment, including payroll, employment contracts, payments and more. The organization contracting the EOR service is meanwhile in charge of managing the employee who works exclusively for them. EORs usually have legal entities in one or several countries where they offer their services, while service providers with a global range are typically referred to as Global Employment Organization (GEO).
A Professional Employer Organization offers a similar service; however, there are some significant differences between EOR and PEO, namely that the PEO takes on the role of a co-employer and is primarily in charge of HR-related tasks, while the EOR actually acts as the employee’s legal employer.
Using an external service provider like an EOR simplifies global expansion by allowing organizations to safely test new markets without having to make a large upfront investment to establish a legal entity. But they also offer businesses various other advantages, including:
Guaranteed compliance: Local labor laws, payroll regulations, tax rules… There are numerous compliance pitfalls organizations need to be aware of when hiring internationally. Since compliance mistakes can become quite costly, having a service provider who ensures full compliance on all levels means peace of mind.
Easy payment option: Paying employee wages and salaries is usually included in the services of an Employer of Record, which means that the organizations contracting the EOR doesn’t have to worry about paying their international employees.
Local expertise: Having an experienced local partner who is familiar with employment laws, payroll rules and more is a big advantage when hiring employees abroad.
Everything taken care of: Another major advantage of hiring employees abroad through a third party is not having to deal with administrative or HR tasks. From payroll to benefits management to employee registration, an Employer of Record takes care of everything related to admin, HR and compliance, leaving the client business free to focus on integrating the new employee(s) into their global team.
In terms of compliance and service levels, global hiring solutions like EORs and PEOs could arguably be rated as the best and easiest option for companies looking to build a global team. However, leveraging such a solution is not without its challenges.
Choosing the right service provider: The rise in remote work has also led to an exponential increase in service providers offering solutions for hiring international employees. In the sea of available providers and solutions, choosing a global employment solution for your business can be difficult.
Paying additional service fees: As with any other services you contract for your business, EORs and PEOs don’t offer their services for free. For each employee hired through the EOR, PEO or GEO, you pay a monthly fee, which you will have to pay in addition to the employee’s salary and bonuses. But while it’s true that these are additional costs the business could avoid by opting for direct employment, most organizations will find that it’s an adequate price to pay to have peace of mind when it comes to compliance.
One service provider per country: The country coverage of many PEOs and EORs is limited to one country or a handful of countries, making it necessary to engage multiple providers if you want to hire talent in multiple countries. The number of service providers offering truly global coverage is therefore quite limited, which is why a global Employer of Record solution like Lano offers real added value to companies.
There are several ways for organizations to hire workers abroad without setting up a legal entity. The three main approaches are direct employment, hiring independent contractors and using third-party services like an Employer of Record. As we’ve seen, all three approaches have their merits and challenges, and businesses must decide individually which option works best for them. When looking at crucial aspects like compliance, however, the go-to option for businesses to hire full-time talent abroad is an Employer of Record solution that covers a variety of different countries.
With Lano's Employer of Record solution, companies can find the service provider that best fits their needs from a network of trusted EOR partners who help them hire, manage and pay employees in over 150 countries worldwide. Once you’ve identified the perfect candidate for your open position, you can leave all the legal and administrative work to us and focus on integrating your new hire into your global team. Book a demo with our expert team to find out more.
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