EOR vs. Entity: What’s the best setup for global employment?

How to choose between an EOR vs. an Entity for global hiring

With the shift to remote work accelerating in recent years, companies are no longer constrained to hiring within their headquarter city, or even within their national borders. Global hiring has become an increasingly attractive option allowing employers to find and onboard the best global talent, regardless of where they are. But how do you hire, pay, onboard, and employ people in a different country? 

The traditional method is to establish your own entity in the country where you want to hire. This allows you to operate legally in that country, which means you’re able to hire directly and manage the employment relationship. However, establishing an entity requires a significant investment of time and resources, so if you want to hire in multiple countries, the expense as well as the logistical hassles can quickly become prohibitive.

As an alternative, you can partner with an employer of record (EOR), which is a company employing people on your behalf in the country or territory you’re interested in. The EOR is the legal employer, which means handling contracts (employment agreements), onboarding (hiring), compliance (workplace training), payroll, benefits, and more. In this arrangement, you pay a fee to the EOR for the employment services they provide, and in turn, Team Members provide services to you. Depending on its operating model, an EOR might employ people directly (through its own entities), indirectly (through local partners), or both.

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In the past, EORs tended to be service-based businesses that operated locally—within a specific country or region, for instance. But in recent years, a newer generation of EORs have become more tech-enabled and automated, providing faster service as well as a more consistent employee experience. A global employment platform like Oyster, for instance, allows you to hire almost anywhere in the world, so you don’t have to deal with multiple EORs.

So, if you’re looking to expand across borders and enter new markets, should you open an entity or work with an EOR? The short answer is: It depends! There’s no one right approach, because it depends on your business needs, your growth plans, your market objectives, your talent strategy, your internal resources, your risk tolerance, and more—such as the legal requirements and stipulations of the countries or territories you’re interested in. The best way to get started is to understand your options, so you can make an informed choice.

With that in mind, here are the top considerations to help you decide whether an entity or an EOR is the best choice for hiring international employees.

1. Financial considerations 

The traditional route of setting up an entity requires a hefty investment as the initial cost can run into tens of thousands of dollars. This includes registration costs (company registration, tax registration, employer registration, business license, foreign investment approvals, etc.), hiring local resident directors, and even minimum share capital requirements (depending on the country). You’ll also need to hire a team of local lawyers, tax advisors, accountants, payroll providers, benefits providers, and more. Even after the initial setup, there’s the expense of managing the entity since it will require ongoing support and resources from your HR, Operations, Legal, and Finance teams. Such ongoing maintenance can include annual filings and transfer pricing agreements between the newly-created entity and your parent company.

EORs, on the other hand, can significantly lower the barrier to entry because you don’t have to make a huge upfront investment of time, resources, and money. Typically, EORs have flat monthly fees, so the cost will be consistent and predictable for each country, and you don’t have to expend money or resources on entity management. And if you decide to no longer operate in a particular country, you don’t have to worry about the sunk cost of the local infrastructure you’ve put in place.

So, is the cost of establishing an entity worth it? It depends on your company’s particular situation, such as your funding, cash flow, resources, and risk tolerance. If you’re a large multinational, or you plan to hire a large volume of employees in a particular country, or you want to set up shop for the long term, the cost might well be justified by the benefits of having your own local identity and infrastructure in place.

On the other hand, if your viability in a new market is unclear, you want to preserve flexibility, or you want to test the return on an investment of a workforce in a new country, the cost of establishing an entity may be prohibitive and an EOR could be the right choice.

It’s also possible that you may start with an EOR, but after a certain number of employees are engaged through the EOR in a given country, you may want to switch to employing these individuals via your own entity. Conversely, you may find that operating an entity is getting cumbersome and expensive, and that switching to an EOR would make it easier to manage your global workforce. It depends on the unique needs of each company and the regulatory landscape of the country where you’re operating.

2. Flexibility and scalability

An entity doesn’t allow much flexibility, since you can only use it to hire in the specific country where the entity is incorporated. You may also be reluctant to hire in other countries because you’ve made a significant investment in the country (or countries) where you have your own entity. The process of setting up an entity can take several months—some countries require original copies of documents and wet signatures, while others require you to be physically present to open a bank account, all of which makes it a lengthy process.

Entities aren’t easily scalable either, since expanding into new countries requires hiring teams of lawyers and accountants in each of those jurisdictions and putting in the time and capital to set up shop. Engaging a global law firm or a global accounting firm might make it slightly easier to set up entities around the world, but it still doesn’t enable fast scaling. Other factors affecting scalability are the level of local bureaucracy that needs to be navigated, whether the corporate legislation is favorable to foreign persons or non-residents, and how difficult it is to incorporate (or dissolve) a company—all of which will vary from country to country. 

An EOR, on the other hand, allows for both flexible and scalable hiring across borders because you can quickly enter a new country and start hiring right away. If you’ve found a great candidate in another country and want them to join your team, chances are they won’t wait around for the weeks or months it might take to set up an entity, so an EOR gives you the flexibility to attract top global talent. Similarly, an EOR allows you flexibility in terms of trying out new markets without the long-term commitment of an entity.

EORs are also better for scalability because they allow you to hire as much as or little as you want—in as few or as many countries as you wish. Since EORs already have the legal and employment infrastructure in place, and can provide the local knowledge and expertise to help you hire successfully in those regions, you can scale quickly without having to do research on local labor laws or tax regulations or cultural norms and expectations.

Finally, EORs give you the flexibility to enter or exit countries without much fuss, which can be particularly beneficial in times of uncertainty or crisis. For instance, if the market takes a downturn and you need to switch where you hire or employ, or you need to scale your operations up or down, EORs give you the ability to do that quickly and easily. Or if there’s a geopolitical crisis, such as the war in Ukraine, and you need to temporarily relocate your employees in that region, EORs can assist with visas and relocation support so your team members can move to a safer place and are legally authorized to work in their new host country. Basically, EORs can accommodate rapidly shifting needs and priorities, and make your business more adaptable and resilient as a result.

3. Legal considerations

Regardless of whether you hire directly via your own entity or with an EOR, being compliant with local employment laws and tax regulations is absolutely paramount. This means ensuring that you respect the law with regard to contracts, working hours, wages, probation periods, payroll taxes, employer contributions, holidays, paid time off, benefits, bonus pay, allowances, notice periods, reporting requirements, and more. For instance, if a particular country mandates 30 days of PTO, or 6 months of parental leave, or overtime wages at a 150% rate of pay, or 30 days’ notice, or 13th and 14th month pay—compliance with these requirements is necessary in order to operate in that jurisdiction.

If you set up an entity, it means you’ll be handling all of the above in-house. In other words, you’ll need to understand and comply with your legal obligations as an employer in that particular country—or you might incur fines or other penalties. In practice, this might mean hiring a team of local experts, such as lawyers, accountants, tax professionals, payroll providers, and local benefits providers. Your entity will need these local resources to operate compliantly in any given country. The advantage of an entity is that you’re fully in control of meeting the compliance requirements—it’s your own in-house team doing the work. On the other hand, navigating the laws and regulations in a foreign country can be tricky, and operating your own entity means taking on all the compliance risks yourself.

Partnering with an EOR outsources these compliance obligations to the EOR. A trustworthy EOR partner should have a deep familiarity with local labor and tax laws, and will therefore be able to keep you compliant without you having to worry about it. They’ll ensure that employment contracts are compliant, appropriate taxes are withheld, your benefits package meets statutory requirements, and more. They’ll also flag potential risks and offer strategies for how to mitigate them. They’ll keep you up-to-date on any changes in the regulatory landscape. Since the EOR is the legal employer, their own compliance interest serves your compliance interests.

4. Risk management

Having a physical presence in a country and employing people there means being exposed to risk, whether that’s an entity or an EOR. In some ways, establishing an entity can mitigate those risks because you have your own identity in that country and are employing people directly through your own infrastructure. If your intention is to operate in a country long-term, this may well be the safer route. You’ll have full control over your employees, and your employees will receive their full entitlements from you. This reduces the risk of individual labor claims as well as assessments from employment authorities.

On the other hand, opening an entity effectively means that you have a  permanent establishment in the country, which may result in additional taxes, penalties, or audits by local authorities depending on the corporate activities of the newly-formed entity. In that sense, working with an EOR can be less risky for your business because it’s the EOR that assumes the responsibilities and the risks of being the worker’s legal employer. In other words, the EOR takes on the burden of managing contracts, complying with tax regulations, administering employee benefits, protecting employee data, and more.

EORs can also help you assess and mitigate risks in other ways. For instance, companies sometimes have contractors in other countries who are really doing the work of full-time employees and/or being treated as such. This kind of misclassification can be very risky if a government entity or regulator finds out, or if you’re a startup trying to raise funds and are being audited. With the help of an EOR, companies can convert misclassified contractors into full-time employees so that they’re fully compliant.

5. Employee experience

Establishing an entity means that you’re hiring locally, and the employment relationship is completely within your control. It ensures that your employees receive the full benefits they’re entitled to, and it facilitates a closer employer-employee relationship when you’re hiring directly. There’s no confusion caused by employees providing services to one company while being legally employed by another, so in this sense, employees themselves may prefer this option.

On the other hand, one of the top employee expectations today is the freedom and flexibility to work from anywhere. EORs can facilitate the kind of lifestyle (and workstyle) in accordance with applicable law and in line with the expectations of today’s knowledge workers—namely, the ability to design their life and work as they see fit. Many of today’s workers, especially the younger generation, might value location flexibility more than the technicalities of their contractual arrangement.

Working with an EOR gives employees the best of both worlds—they can work for companies whose values and culture align with their needs, while also being able to work remotely from anywhere. In this sense, EORs enable companies to reach the talent that’s right for them, while also enabling employees to connect with employers they actually want to work for. The EOR is simply the layer that enables employees to connect with their preferred employers.

EOR or Entity: What should you choose?

It should be clear by now that there isn’t one right answer! The best option will vary depending on your unique situation and needs, as well as what countries you’re looking to hire in. The important thing is to understand the risks and benefits of each approach, so you can make an informed decision based on your specific situation.

If your company is looking to hire internationally and can’t decide between an EOR vs. an entity, feel free to reach out to Oyster for a personalized consultation to discuss your needs and goals.

About Oyster

Oyster is a global employment platform designed to enable visionary HR leaders to find, engage, pay, manage, develop, and take care of a thriving distributed workforce. We let growing companies give valued international team members the experience they deserve, without the usual headaches and expense of hiring abroad.

Oyster enables hiring anywhere in the world—with reliable, compliant payroll and great local benefits and perks.

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