Direct vs Indirect EOR: Making the Right Choice for Global Growth

Today’s companies can take advantage of a global talent pool of billions, rather than millions when hiring. Almost 4.7 billion people worldwide are now connected to the internet and can work remotely, an almost 2 billion increase in little over a decade.  

This can provide a level of scalability, flexibility and cost-savings that would have been unimaginable decades ago, provided your firm can take advantage of it. However staying on the right side of the law in areas such as healthcare, payroll and taxation when laws differ so much across the continents can be complicated, particularly if firms don’t take the right approach.  

While countries like the US can be quite lenient when it comes to late taxes, granting up to six-month extensions on request, countries such as Japan are nowhere near as generous, with extensions rarely granted and only in extraordinary circumstances. Knowing both the legal and habitual differences between countries can make or break a firm’s attempt towards global expansion.

This is why many companies choose to partner with an Employer of Record (EOR) provider when choosing to expand into countries where they don’t have legal entities. However, the term EOR includes an umbrella of different approaches, and these distinctions matter. 

Indirect vs direct approaches to EOR 

An indirect approach to EOR involves outsourcing work to multiple third parties globally, meaning that functions like payroll, accounting and healthcare are pawned off to local firms. This means that rather than solely working with the EOR company you initially signed up to deal with, you can end up working with practically unknown third and even fourth parties.  

In a direct approach to EOR, all these different functions are handled in-house. This means that no matter where you choose to set up shop, you know who is handling your key functions and who is paying your taxes.  

How the indirect EOR approach can work for global hiring 

Imagine an American technology firm that wants to hire great talent in Asia. They hire a developer who lives in Taiwan and works remotely. His employment is handled by an EOR firm which subcontracts his tax accounting to a local firm based in Taipei, while his payroll is outsourced to a separate company. 

Initially, this approach works. The firm has managed to set up in a new country and avoided jumping through a list of administrative hoops.  

How can an indirect approach to EOR go wrong 

It’s coming up to US corporate reporting season, and the firm’s finance department is getting into hot water when it comes to the Taiwanese developer’s data. It seems the local accountant has made a mistake, and hasn’t been able to provide the relevant information needed, and with no Mandarin speakers at the firm, communication isn’t exactly simple. 

This can have disastrous results for everyone involved.

A miscommunication as simple as a regional subcontractor failing to pass on a change of bank details can render employees in financial chaos, unable to pay rent and resentful of their employer. Missed payments can be a significant factor which impacts employee loyalty and retention. Some studies indicate roughly 50 percent of employees will look for another job after just one or two paycheck mistakes. 

The importance of regional knowledge when managing local regulation 

EOR providers using this indirect approach may not have a physical office in countries where they are employing subcontractors, knowledge of local languages, or any staff with personal knowledge of how, for example, taxation works in certain regions. 

In addition, many of these subcontractors may not have a working knowledge of business English, or US regulations when it comes to tax. 

This can make it hard to communicate effectively when trying to rectify issues. Getting the necessary data to solve problems from regional subcontractors can be a long and drawn-out process. Solving these issues can involve spending on translators, and understanding local administrative customs, and take months to resolve.  

Though English is commonly spoken as a second language worldwide, business-level English is relatively rare in regions like Latin America and East Asia. Legal and translation fees can easily represent a big chunk of a local salary in many parts of the world. 

How a direct EOR can smooth out potential hurdles to expansion 

Deciding to go with an in-house EOR provider that has a local office in all the regions it provides services to means increased access to language-competent staff, and greater security in their knowledge of how the country works. When questions do arise they are handled promptly by a team with local expertise in regional regulations. They know of any changes to local taxation systems as they arise, which allows firms to expand in confidence rather than fear. 

Atlas’ presence in a huge variety of countries around the world allows firms to better manage the complexities of hiring in foreign countries. Atlas has an on-the-ground presence in over 160 countries, on five continents, in places as diverse as Afghanistan, Australia, and Albania. 

Atlas’ direct model provides employees and clients with a premium experience that enables easy access to real people on the ground, who can help out quickly and proactively. Atlas provides local support, local language, and local knowledge, alongside a platform where clients can be in direct contact with someone who will help solve their issues. This approach makes for a compelling alternative to the infinite amount of different email threads and chatbots other employees have to deal with. 

Head here to download our EOR Evaluation Cheat Sheet or our Third-Party EOR Selection Guide to further explore how an EOR could support your global expansion.