When hiring outside of your home country, the risks can be high along with costs and the other 101 things there are to consider. And there are many options available on how to hire someone overseas. Knowing how to engage remote workers is the key to scaling quickly while at the same time protecting your organisation, compliantly.
It’s often thought that hiring a contractor minimises risk by keeping them at arm’s length, so to speak, since you’re not creating that direct employer to employee relationship and the responsibilities that brings with it. But there are real risks and implications that come with this choice.
So, let’s run you through the pros and cons of hiring independent contractors as well some of the alternatives available to you!
Permanent establishment risk
What’s permanent establishment risk got to do with hiring international contractors?
Firstly, let’s set the scene. This is perhaps the largest risk that is run when hiring a global workforce.
This risk depends – not so much on how you employ or engage your team – but can be raised based on the nature of your organisation and/or the nature of the work being done in said country.
In a nutshell, permanent establishment risks are tax risks in foreign countries, where a local tax authority may consider your organisation in breach of the corporate tax spectrum, perhaps by generating revenue or hiring senior management. It is crucial to have at least a preliminary understanding about permanent establishment risk before hiring in foreign countries.
Hiring independent international contractors
Hiring international contractors is useful for project-based contracts or when looking for a cost-effective and quick hiring option. International contractors are an efficient and affordable option for short-term projects where personnel is required to work in a part-time capacity.
Issues can arise due to an ill-defined employment relationship since the contractor and working relationship is with a non-employee. Employers enter muddy waters when offering independent contractors benefits such as PTO and holiday allowances, effectively creating an employment relationship. Blurred employment lines opens both parties to liabilities and may easily lead to permanent establishment risk.
So when weighing up whether to hire an international contractor independently or not, here are some helpful reminders:
Advantages
- Quick time to hire
- Easy to administer
- No administrative cost
Disadvantages
- Limited application
- Potential for liability
- Creates Permanent Establishment Risk
Where hiring an independent international contractor may be the right approach
- Project-based hiring
- Temporary Basis
- When alternatives are expensive
What other hiring solutions are there for hiring overseas workers?
In addition to hiring independent contractors, there are a few other hiring mechanisms to choose from when it comes to growing an international team. These include using an Employer of Record solution (a third party, which we’ll explain more in just a moment), as well as direct employment with and, perhaps surprisingly, without a legal entity. Each alternative comes with its own advantages and disadvantages.
Alternatives to independent international contractors: using an Employer of Record (EOR)
Using an Employer of Record (EOR for short) has become more and more popular in recent years for organisations looking to expand their businesses to international markets. This kind of solution is most commonly seen in the US where organisations frequently use EOR solutions to comply and employ individuals cross-state.
But what is an EOR, especially in a global context? EORs are third-party organisations that hire employees locally for you. In doing so, it’s the EOR that create an employment relationship with the employees and are responsible for the benefits, administration and liabilities of that relationship for you. The relationship your organisation has with the EOR becomes a commercial one. But the employer-employee relationship is between the worker and the EOR, not directly with you and your organisation.
This is particularly attractive for organisations aiming to enter tricky international markets, such as China, Russia and Brazil, without going through the complex red tape and time involved with setting up in these countries. Because of their ability to facilitate quick hires, in certain countries and where speed is of the essence, using an EOR can help businesses stay ahead of the competition. It’s important to note, however, that EORs also lead to a “grey area” in the context of compliance and have limited benefits and legislation options. Their pricing model is also based on a percentage salary – so the higher the headcount and the more senior or experienced the hire, the more expensive this solution becomes.
Advantages
- Quick entry to market
- Little administrative burden
Disadvantages
- Compliance ambiguity
- Limited benefits options
- Stock options
- Corporate culture issues
- It can get expensive quickly
When to use an EOR to hire an international worker:
- When “dipping toes” into a competitive and tricky market
- As an interim solution while setting up a legal entity in a complex country
- When hiring support staff
Alternatives to independent international contractors: Direct employment without a legal entity
Direct employment does ‘what it says on the tin’. It happens when creating a direct employment relationship between your organisation and an employee. It’s common opinion that you need to have a legal entity to enter this direct employment relationship but that’s a misconception. Direct employment does not need to have a legal entity as long as they are able to set up payroll and employee arrangements. This option is beneficial when hiring a few people.
However, it’s important to note that this alternative isn’t available in certain countries such as the US, South America and China. It should also be noted that direct employment without a legal entity while ticking a compliance box does not mitigate permanent establishment risk.
Advantages
- Fully compliant with HR Law
- Direct relationship with employee
- Stock options and benefits
- Quick and low-cost
Disadvantages
- Not available everywhere
- Does not mitigate risk
When to use direct employment without legal entity
- Hiring a small team where you plan to have an established presence later
- When you plan to keep a small team for a longer period
Alternatives to independent international contractors: Direct employment with legal entity
Direct employment with an established legal entity is the most well-known hiring mechanism associated with large-scale business activity. This option is fully compliant with HR and tax laws and free of permanent establishment risk. The permanent relationship allows for the most benefits and potential for expansion.
However, this mechanism incurs the highest up-front costs and also leads to a higher administrative burden. A cost-benefit analysis based on the organisation’s goals can help determine whether this is the right option for you.
Advantages
- Fully compliant with HR and Corporate Tax Laws
- Direct employment relationship
- Can sponsor work visas
- Organisation can take advantage of tax incentives
Disadvantages
- Relatively high administrative burden
- Higher up-front costs
- Time to set up (dependent on country and local law)
When to use direct employment of an international worker with a legal entity
- When generating revenue in a foreign country
- When employing people on a senior management level
- When aiming for rapid, permanent expansion
How to decide whether to hire independent international contractors or use an alternative
There are several factors to consider while choosing the best hiring mechanism for a business hoping to expand internationally. While this article discusses available options and associated risks and costs, it is by no means exhaustive. We haven’t touched on compliance risks here, for example!
For a more detailed discussion on the topic, you can sign up for access to a webinar we held on the subject.
If you need more personalised guidance based on your international expansion plans, we at Cintra Global are happy to help. Our team of international expansion experts can offer advice based on your specific business needs and current market trends. Get in touch with us and take your business to new heights!
