Employer of Record services vs. traditional employment: Which is right for your business?
If you’re expanding into new markets, is it better to set up your own entities or work with an Employer of Record?
In the modern world of businesses, entire teams can be remote. You can seemingly launch a global enterprise with the click of a button. Employment can be less about where your employees are located and more about attracting top talent no matter the city. Whatever your reason for hiring international employees, you’ve probably come across a few options to help you get started.
The traditional method for global expansion is incorporating a local business entity—but Employer of Record services can step in and streamline the process. How do you know which is right for your business? It largely depends on your goals. This guide will help you understand each approach and weigh their individual benefits.
What Is an Employer of Record?
An Employer of Record (EOR) is a third party organization that onboards, pays, and manages employees on your behalf in any country where you don’t currently have an operation. Instead of having to set up a local business entity as you would with traditional employment, the EOR acts as the legal employer. This type of HR service is responsible for:
Country-compliant payroll and taxes
Compliance with local labor laws and regulations
Local benefit administration, including pensions and health insurance
Employment contracts
Onboarding and termination
EORs are renowned for their speed and ease. They can get your business up and running in another country in a matter of weeks at a fraction of the cost, but they can have limitations that make traditional employment attractive (or, in some cases, necessary).
Expanding With Traditional Employment
If you plan to go the route of traditional employment, you’ll need to decide on a business structure for your international expansion. There are three different models businesses tend to use:
Subsidiaries: A subsidiary is a completely independent business entity that’s owned by a parent company. As such, the subsidiary shoulders its own legal liability.
Branch offices: When a company wants to launch in another market without creating a new business entity, they’ll open a branch office. Unlike a subsidiary, the parent company maintains the full legal liability of branch office operations.
Representative offices: If a business does not plan to fully incorporate in a foreign market, they may launch a representative office. This type of structure is typically limited to non-transactional operations like marketing. It cannot legally engage in core business activities.
Benefits of an Employer of Record
There are few different reasons businesses may choose to use an Employer of Record. Some of the largest benefits include risk mitigation, speed, and savings.
Cost and Time Savings
It takes an average of 20 weeks and $80,000 to set up your business in a new country. This includes navigating red tape with permits and staffing—like hiring legal and financial advisors to make sure you’re compliant and building a local HR department. An EOR has all of this built in. You can launch in a new country in a matter of weeks for as little as $10,000.
Legal Compliance
An Employer of Record specializes in local employment and labor laws. They’ll manage everything from your local tax responsibilities to any legally required insurances or employee benefits. As the legal employer, the EOR helps mitigate risk by taking on the legal liability.
Local Expertise
Navigating business in a country with an entirely different language and work culture is a challenge. An EOR has the in-country expertise that will bridge your gaps of knowledge. They have a full understanding of cultural nuances, the type you can only achieve after years of experience. This can help you attract and retain top talent, especially when a competitive offer in one country can fall short in another.
Streamlined Onboarding Process
A great onboarding process can actually increase employee retention and productivity, which is especially important when you’re launching in a new market. Your Employer of Record can help streamline onboarding, offering employees support as they transition into their new role.
Temporary or Long-Term Solution
EORs offer versatility and flexibility. You can scale up or down depending on how your staffing needs fluctuate. Because an EOR is relatively inexpensive and allows businesses to set up shop quickly, it works well for both short-term and long-term projects. Many businesses use EORs to test new markets because they can easily exit or scale-up .
Expand in Several Markets at Once
Unlike traditional employment, an EOR gives you the power to expand into several markets at one time. Keep in mind, not every EOR operates in every country. Make sure you choose one that covers the regions where you plan to expand. For example, Atlas has a direct EOR model that covers more than 160 different countries. This model also cuts out the third parties that make indirect EORs less efficient.
Focus on Your Core Business
There’s a lot that goes into running a foreign office—from the paperwork and legal compliance to managing local bank accounts and contracts. An EOR will manage your international office, so you can focus on your core business operations.
Benefits of Traditional Employment
Traditional employment is a roll-up-your-sleeves approach that requires navigating through a lot of red tape—but big risks can come with big rewards. Here are some reasons you may want to expand on your own.
Full Control and Autonomy
Though an Employer of Record allows you to call the shots with hiring and contracts, EORs are still independent companies that have their own standard practices. Indirect EORs even work with third party providers, which add another link in the chain. When you create your own business entity, you can completely control your company without these external constraints, making it easier to pivot and adapt to changing markets.
Tax Benefits and Incentives
Your tax situation depends on the legal structure of your business and local tax laws, but launching your own entity can come with tax advantages such as deductions and tax credits.
Fewer Limitations
You can’t always use an Employer of Record. Not every EOR operates in every country. Some countries do impose time limits in certain circumstances. With an EOR, you may also need to limit the number of employees you hire to avoid the risk of becoming a permanent establishment (PE), which has additional tax and legal implications.
Long-term Investment
Launching a business entity is often seen as a long-term investment. Though it requires more significant capital upfront, there’s the potential to retain more profits in the long-term. The cost benefit really depends on the size and model of your business.
Specialization Within Niche Industries
Though EORs come with a great understanding of local laws and culture, they may not have expertise within highly specialized or niche industries. In this case, you may want to launch your own entity or choose an EOR that works with similar businesses.
What Works Best For Your Business
There’s no one-size-fits-all solution for global expansion. For many businesses, it’s a matter of trial and error. It’s important to weigh your options and make sure you find a solution that aligns with your future goals.
If you want to learn more about how an EOR can benefit your business, speak to an Atlas representative, today.