Entity Setup vs Employer of Record: Which is better for hiring overseas?

Once your company commits to recruiting and hiring remote workers overseas, you will face a decision on how to best hire the new employee.  The hiring method selected will not affect the employee as much as it will your company, and depends on your overall global HR strategy.

Is this your first time hiring employees abroad?  Do you have plans to hire employees in multiple countries?  Will you hire a locally managed team of remote employees?  The answers to these questions will guide your decision on the best hiring method for your company.

There are a number of ways to hire overseas employees, but the two that are used most frequently are incorporating an entity or using an employer of record.  This article will look at the advantages and disadvantages of each method.

Pros and Cons of Setting Up an Entity

The traditional way of hiring foreign employees (or expats) was to set up a branch or subsidiary in the host country and run payroll on your own.  Setting up an entity will require incorporation, registration and possibly meeting capitalization requirements.  There are pros and cons to this approach, that have to be weighed against other options.

Pros

• Autonomy: gives your company full independence in hiring and running payroll
• Employee confidence: they have a local branch of your company to rely on
• Employment costs: once payroll is established, the cost of adding new employees is negligible

Cons

• Entity setup: the cost and time of incorporating a foreign entity can be significant
• Local expertise: legal, corporate and payroll experts will need to be hired to assist in complying with regulations
• Country exit: difficult to easily roll up the entity and exit the country or retain employees post-exit

Pros and Cons of Using an Employer of Record

Another method used by companies hiring abroad is the employer or record (EOR) solution.  The EOR is an entity already set up in the foreign country, ready to administer employment for your company.  As the legal employer, the EOR onboards the employee and runs a local payroll while you still manage the employee’s work and schedule.

Pros

• Hiring and onboarding speed: employees can be hired right away as the EOR is already in place
• Setup cost: there is an initial EOR set up fee that is far less than entity set up costs
• Flexibility: suitable for one or more employees, in multiple countries
• Local expertise: The EOR is well-versed in local employment compliance
• Easy exit: it is a simple process to terminate the employee and exit the country

Cons

• Employment costs: there is a monthly fee for each additional employee
• Compliance and terminations: the company must work through the EOR for all terminations or compliance issues
• Employee confidence: employees may be confused by the EOR structure and how to interact with their foreign employer

Here is a comparison chart breaking down the differences between hiring foreign employees through setting up your own entity versus using an employer of record:

So, which option is better for hiring internationally?

Choosing the best option will depend on your company’s global expansion strategy, the number of employees being hired, and if you are recruiting in multiple countries.  Some companies may begin with an EOR and then transition to their own entity, or vice versa where they wind up their entity but still need a solution to retain remote employees.

When should a company set up an entity?

Multinationals with business activity in foreign countries will often set up an entity, where they have a long-term commitment to the market.  This can also make sense if a company wants to recruit an entire remote team in the same country due to skill set, language and proximity.  But incorporating is not really cost-effective for hiring one or two remote employees, if you don’t otherwise need to establish a legal presence in the country.

When should a company use an employer of record?

Companies will use an employer of record when they have found one or more employees that they want to hire and onboard quickly.  Smaller companies or startups may not have the HR background to run a payroll DIY and would need to rely on the expertise of the EOR to remain compliant.

The EOR also works well in a situation where a company located in the US for example wants to hire EU-based employees located in different countries.  The EOR in each country would take care of the respective employees seamlessly.  The EOR solution is also used to bridge the time gap for companies that are going through the process of setting up an entity, but want to hire employees immediately.  The employees would then be transferred from the EOR to the entity at a later date.

The Shield GEO Solution

Shield GEO has employers of record in all major markets that are already setup and ready to hire your new overseas employees in one or more countries.  The EORs have the background in local employment laws to ensure your company remains in compliance, while you can focus on employee management and performance.  The whole process is guided from the outset by a regional account manager that gives you a single point of contact and support.

We make international employment simple.

The information in this article is subject to changes in local legislation.