Founders should know:
Managing teams in multiple countries is complex because every country has distinct regulations.
A key first step is properly selecting the types of employees your company needs.
Contract workers offer flexibility, but many countries are cracking down on misclassification of these workers.
The employer of record (EoR) approach allows you to get started quickly because a legal entity in the country isn’t required.
For longer-term (5+ year) commitments to a country or region, establishing a legal entity provides greater flexibility.
Even before the tumultuous events of the Covid-19 pandemic, companies were opening up to building a distributed workforce and expanding their operations overseas. That process accelerated dramatically over the past year as companies looked for ways to keep growing while keeping their employees safe. Implementing a work-at-home policy was the natural way to maintain operations during the pandemic, and many companies that never considered moving to remote work suddenly found themselves managing a distributed workforce.
The experience convinced many corporate executives that they could hire anywhere in the world, not just within commuting distance of their central office. It remains to be seen how those companies will respond as vaccinations spread and the threat of the pandemic begins to recede. One thing, however, is certain. Remote work and distributed teams have become a “normal” part of the work culture.
Companies have seen the advantages of the distributed model – hiring from a global pool of talent over not just local talent, entering new markets with feet on the ground, infusing their operations with new ideas and methods – and many will continue to build in that direction.
At the same time, compliance on a global scale has never been more demanding. Labor laws in many countries, particularly in Western Europe, are growing in complexity every year. Tax codes continue to change everywhere. Managing payroll manually for global teams, even in just two countries, can be extremely challenging. Managing teams manually in five or even ten countries can be overwhelming.
To be honest, running a global payroll is like trying to speak 20 languages at the same time. There are simply too many variable elements to keep straight through Excel sheets and calculators.
Fortunately, we live in an age of rapid technological progress. New challenges spur new technology solutions. Global payroll platforms with automated workflows and advanced analytics can make it surprisingly simple to run a global payroll and deliver payments to employees across borders around the world, with all the proper taxes withheld and all authorities and stakeholders paid appropriately.
Advanced global payroll software has answered the burning question of “How will I pay my global teams accurately and compliantly?” But before that question can even be asked, there is a more fundamental question to answer: “What category of employee is right for my company?”
This article will shed light on how to approach that question.
The Three Primary Employment Options
There are three main types of employees: contract workers, those hired through an employer of record, and regular employees under payroll. Choosing the option that best serves the needs of your company is the first step in a successful overseas growth strategy.
The process begins by defining what you are looking for in a global hire. There are a number of considerations that can help form the decision.
1. What is the nature of the team’s activity abroad?
Different types of teams need different levels of flexibility. For example, if your primary purpose is to send a small sales team abroad to test a local market for your product, you might choose an option that is quick to launch without tying you down, in case the market proves untenable. On the other hand, if you are opening an R&D center for an indefinite period, you might want to choose an employment option that offers more stability over flexibility.
2. How long is your commitment?
The hiring option you choose will be influenced greatly by the level of commitment you have to the specific expansion project. Some companies want to enter a country quickly and stay for a short time. For them, opening an entity slows down the process and makes it more expensive and more complicated. Other companies are committed to staying in a market but want to build the team slowly.
3. How large of a workforce do you plan to hire?
In many cases, especially in today’s era of remote hiring, a company might just want to hire a single person or a small team of two or three employees. In contrast, another company might have a large-scale expansion plan. Knowing how many you want to hire, both at the initial stage and how many you foresee hiring in the next 1-3 years will influence the hiring option you choose.
Contract workers are self-employed independents who are hired for specific, short-term projects. Since they are self-employed, they are responsible for paying their own taxes. In most places, labor protection laws such as minimum wage and extra pay for overtime do not apply to them. Employers are not obligated to provide health coverage or pension. Contractors submit invoices for the work they do and receive their pay in a lump sum.
For a company just starting out in overseas expansion, hiring contract workers may seem like an ideal way to keep costs low and the payroll process simple. For many tasks, contractors are indeed a perfect solution. Most companies of all sizes and structures outsource small projects to contractors now and then. However, there are risks in relying too much on contract workers.
First, misclassification is a genuine concern, especially when a company relies too much on contractors. Specific restrictions vary from country to country but in general, contractors must be classified as employees if the company controls where and how they do their tasks, and if the jobs are long-term or regularly recurring tasks. Governments have been cracking down on misclassification in recent years because the practice exploits workers who should receive benefits such as health coverage and pensions, and it deprives the government of payroll taxes the employer should be paying.
But even if a company is super-careful and avoids misclassification, there is another reason to limit the use of contractors. As temporary workers, they come and go as they please with no commitment to the company. To really grow, however, companies need people they can rely on from day to day. They need a permanent workforce for stability and continuity. Those regular employees can be supplemented by contractors, but over-reliance is risky, both for compliance and for growth.
Employer of Record (EoR)
An employer of record arrangement allows companies to hire workers in any country in full legal compliance, even if they don’t have an entity in that country. By working with an EoR or a vetted partner, the client company finds the talent and directs the employees in their day-to-day activities, as it would in a regular employment situation. The only difference is that the employees are officially employed by the EoR or its local partner.
In many ways, working with an EoR is similar to outsourcing the back office of its payroll department. The EoR handles the administrative tasks of workforce management – collecting time and attendance reports, withholding taxes, calculating salaries and benefits, etc. Most importantly, the EoR, as the legal employer, assumes liability for the employees.
An EoR is an excellent interim solution for companies that want to start hiring in the shortest possible time. It’s great for hiring remote teams wherever the talent is located. Hiring through an EoR arrangement does not require opening an entity, which is a great deal of work for the sake of hiring one or two people in any given country.
It’s also ideal for companies looking to test a market without committing to it long-term, or for companies that plan a short-term presence in the country. For example, a company with a technology platform may want to send a team of salespeople into a market for a few months to sign up as many people as possible, then to move to another location. They can do it easily with an EoR.
The solution works in many cases, but it does have limits. Some countries only allow companies to hire through an EoR for a limited time. Germany, for example, sets a limit at 18 months.
As your company’s local presence grows to about 10-15 employees and you plan to stay for the foreseeable future, it may be time to consider opening an entity. At that point, you are probably paying enough in fees to justify the cost of an entity.
Regular Payroll Through a Legal Entity
If your company has a long-term strategy in a country with a commitment of at least five years, opening an entity may be the best solution.
An entity is the most intensive solution in terms of time and money. It takes the longest to get started (unless you start with an EoR while the entity is processed) and costs the most. It places all of the liability on your company, making you responsible for ensuring that all employee taxes are handled properly, and compliance errors can result in fines.
It also represents the most stable presence in any country. Some local companies may not want to sign contracts with a business operating through an EoR because they consider it an interim solution. With an entity, you are set up to engage fully in any kind of commerce and contracts.
Putting People First
An overseas expansion can be remarkably rewarding, but it is essential to remember that every country has vastly different regulations. The more you know about the local laws and restrictions, the more success you are likely to have.
The vast regulatory difference between countries is often expressed through the boilerplate employment contracts that are common in each country. While it may be tempting to save time and money by adopting a “fast and easy” onboarding process through a “standard” template, it is highly advisable not to give in to this temptation. Each country is different and signing on a contract that may not suit the local regulations can prove troublesome in time.
It is also greatly advantageous to you, the employer, to adopt a people-first attitude to global hiring. That means taking concrete steps to ensure a first-rate employee experience. That’s the best way to build a loyal and stable workforce that will work hard for your company. No matter how great your vision may be, it will never be achieved without a motivated workforce determined to make it happen. That can take many forms, but it is rooted in ensuring that employees are engaged, informed, and feel like equals – which can often be challenging when it comes to a remote team far away from the core office.
Creating a policy of equal benefits for all, regardless of location, is a good place to start. An org chart that shows the whole company together as a single unit can also go a long way towards building a sense of belonging.
It all starts with choosing the best employment type for your company. That’s how you ensure that the foundation is solid from the start – the key to success in today’s global world of work.
Learn more about global employment decision making in Papaya Global’s Ultimate Guide to EOR.
About Eynat Guez, CEO, Papaya Global
With 20 years of experience in global workforce management, Eynat is a leading expert in HR and payroll management. She holds a BA from The Open University in Israel in Business Administration and International Affairs. She served as COO at LR Group, a global holdings group; founded Relocation Source, a DSP and Global Mobility Solutions provider; and founded Expert Source, an Asian PEO organization.
In 2016, Eynat co-founded Papaya Global and became its CEO. Papaya, one of Israel’s fastest growing startups, recently became a unicorn with a valuation of more than $1B. Papaya is developing a global people management platform for all employment needs, from onboarding to payment, in 140+ countries. It has over 200 employees globally, grows 300% year-over-year, and raised over $150M from U.S. investors, including Bessemer Venture Partners, Insights Ventures, and Scale Venture Partners.
Eynat puts great value on diversity, both by maintaining diversity within in the company, including a 50% ratio of men to women, and by volunteering at the Israel- Palestinian Economic Initiative led by the World Economic Forum.