An Employer Of Record: The Future Of Global Business Expansion

Managing the nuances, complexities, and underlying costs of global expansion

In today’s global economy, it is the ultimate goal of most organizations to grow not only their product offerings and workforce, but also expand their services into new markets, industries and regions. Global expansion brings significant advantages to organizations looking to gain a competitive edge: diversification, cost savings, increased revenue potential, new market entry, new customer base and access to new talent. 

Looking at the benefits, it can be easy to romanticize global growth, but many leaders overlook the nuances, complexities, and underlying costs of such an exciting endeavor. 
 

Realistically, global expansion is a difficult and lengthy process, where companies are often forced to navigate new legal systems, taxes, global payroll, cultures, languages and more. Fortunately, today’s technological infrastructure and HR solutions are empowering businesses to expand their footprint beyond borders and adopt a globalized workforce. 

The simplest way for businesses to enter a new market at speed is through an employer of record (EOR).

What is an EOR?

An employer of record is an HR employment solution that assumes HR, tax and local compliance responsibilities on behalf of employees working in a country where their employer lacks a legal entity. An EOR is responsible for keeping businesses compliant with local employment laws and tax policies. 

The company partnered with an EOR provider remains the managing employer and maintains control over HR functions, such as the hiring strategy, employee’s daily assignments and compensation. Whereas, an EOR provider acts as the legal employer that oversees onboarding processes, full compliance with local employment laws and payroll administration. 

An EOR hires employees in a country under its local business entity, shouldering all legal risk and responsibility for: 
 

• Visa, immigration and work permits 
• Country compliant payroll and taxes 
• Advice on cultural and language awareness 
• Benefits and payroll administration
• Compliance with local labor laws 
• Advice on required notice periods and termination rules

What Differentiates an EOR from Other HCM Models? 

A company cannot grow at a sustainable rate unless there are proper human management strategies in place. Every organization has different workforce management needs, so it is important to understand what capabilities the different strategies provide.

The two most common human capital management (HCM) models are an employer of record and professional employer organization (PEO). 

While the two services have a few similarities, such as the ability to process payroll, they operate differently. Partnering with an EOR provider is optimal for organizations looking to expand internationally because the provider assumes greater legal responsibility, reducing liability for the growing company. In contrast, a PEO model leverages third-party vendors to handle various payroll administration and tax responsibilities for their clients, and is sometimes referred to as an employee leasing organization. 

Under both EOR and PEO models, companies still maintain control over their day-to-day people management operations; the primary difference is that an EOR model assumes far more legal responsibility, making it a much safer solution for companies embarking on high-risk ventures, such as global expansion. 

Despite their different functions, an EOR is often miscategorized as a recruitment service or head-hunting firm. 

Although an EOR can widen an organization's talent pool by enabling companies to easily hire around the globe, it still leaves companies with the freedom and responsibility to recruit and establish their talent pipeline. An EOR model empowers organizations with the most comprehensive and streamlined system for workforce management. 

A testament to an EOR’s superiority as the most effective HCM strategy was seen during the pandemic. Due to the nature of pandemic era policies, many people chose to relocate to new cities or even new countries and work remotely. Companies that operated on an EOR model were able to seamlessly adapt because the EOR provider handled visa requirements and ensured the employer was compliant with local employment laws and guaranteed distribution of wages in local currency. 

The Two Types of EOR Models

If an organization chooses to utilize an EOR model, it is crucial to understand the two different models: direct EOR and indirect EOR. 

Indirect EOR providers leverage a model that depends on third parties and contracting local vendors who provide employment and payroll services in the country of origin. This means that you must go through several contacts to obtain the information you’re seeking. The information or question is first relayed from you to the indirect EOR provider, which is then passed to the local vendor(s), before coming back to your organization in the reverse order. 

Time is critical to the success of every business and you cannot afford lengthy processes to delay your execution, such as paying employees and processing invoices swiftly and accurately. 

The alternative is a direct EOR model, which does not outsource services because the EOR provider owns its local entities in each country. A direct EOR model provides a streamlined solution for global expansion with no third parties or multiple layers of communication. In-country experts with local knowledge are available to provide on-the-ground assistance and guidance. 

It is common for companies to work with a direct EOR when they are looking to have a globally dispersed workforce—this helps to avoid multiple time zones and points of contact that would create delays, miscommunications and lengthy processes.

The Benefits of Using an EOR to Expand Globally

Companies at any stage of their growth cycle can benefit from an EOR solution, but it is extremely advantageous for those looking to expand globally as it cut costs, eliminates bureaucratic hassle, and reduces time to market. An EOR breaks down the barriers to global expansion.

For example, if a company is expanding in Africa, new talent in different countries across the continent can be simultaneously onboarded, effectively managed and quickly paid. Once the new hire's information has been collected, an EOR’s team of experts will handle the paperwork and ensure all hiring and onboarding processes are compliant with local laws. 

An EOR handles international HR and payroll, local tax and compliance, benefits administration, visa and mobility needs for employees. 

There is no need to hire a new HR and legal team in every country your organization wants to operate in, which can be expensive and time-consuming to implement. Instead of spending excessive amounts of time or money establishing a legal business entity, companies can dedicate resources to their expansion and growth strategy, giving them the competitive edge.

From an economic perspective, setting up operations in a new country can be expensive. The average market cost to set up an entity in a new country is approximately $80,000. Here is a breakdown of the average costs:
 

• Entity Registration/Set-Up: $10,000
• Statutory & Labor/Employment: $5,000
• Entity Tax Compliance & Registrations: $5,000 and up
• Bank Setup & In-Country Capital Requirements: $20,000
• Legal & Financial Counsel: $10,000 and up
• Internal Staff to Manage Process & Payroll: $30,000 and up

In comparison, a direct EOR solution costs approximately $10,000 and effectively manages all the items above.

Depending on the company, industry, and target country, it can take as long as 20 weeks for some businesses to legally and compliantly establish themselves in a new country. For example, it can take 18 months for a business to expand to China, while a direct EOR model can reduce that time to a month or two. This increased speed to market provides your company with an advantage over your competitors.

This also applies to ensure full compliance in the target country. For example, if your company has a workforce that is spread across multiple countries, you need to spend a lot of time and energy to keep up with ever-changing country-specific industry regulations, local laws and tax policy adjustments. In contrast, an EOR has a team of experts who are constantly kept up-to-date with the latest changes in regulations, laws and policies. They will ensure that your company is in full compliance with changes in every country. 

An EOR Is a Powerful Driver of Business Growth

Whether your organization is aiming to hire new talent, tap into emerging markets, or simply be closer to customers, there are plenty of reasons why a company would want to expand globally. However, the path to global expansion is one traditionally marred with risks and high costs. An EOR is a streamlined and comprehensive HR solution that provides companies who are looking to grow and work on a global level with the strategy, expertise, and infrastructure to do so legally. Partner with a direct EOR provider today to pursue global opportunities for your organization in a simple, swift and cost-effective manner. 

Rick Hammell is CEO and Founder of Elements Global Services. He comes with more than 20 years of experience. Rick has been in the domestic and international PEO arena since 2008. He developed and grew his former PEO through its split from its parent company, where he served initially as director of human resources for a short period before becoming vice president & COO.  Connect ELEMENTS GLOBAL SERVICES