Guide to Hiring Employees in Foreign Countries Without a Local Entity
Need help onboarding international talent?
Millennials want to work abroad - at least according to a survey that showed that over 80% of them doesn't mind leaving their home countries for career opportunities.
However, with the expansion of remote work, it's no longer necessary to leave your home to get a job in a company based elsewhere. On the other hand, you're also free to move to Germany or Japan and work for a US employer. Simply put, the world is your oyster.
This raises a question for employers worldwide: how do you hire talented individuals across the globe in a quick and affordable way? Opening a subsidiary is a time-consuming process that may take too long, and companies are often looking to hire contract workers and full-time employees as soon as possible.
So, can you hire foreign workers without too much hassle? Luckily, yes. In this article, we'll share how you can hire internationally without setting up a local entity.
Why companies avoid opening a subsidiary?
For some businesses going global, opening a subsidiary is the right step - there are upsides to this move, such as better access to the local market, or more control over the company.
However, in many cases, it's simply impossible to wait that long. Opening a company in a foreign country means you need to study the local labor law, tax laws, prepare the extensive paperwork to ensure compliance, open local bank accounts, and more. Not only do all these steps take a lot of time, but they can also be incredibly expensive. You need to find an office, pay for rent, pay for banking services, find people to hire from the host country...
And on top of it, you're not even sure if the subsidiary will pay off in the end.
For these reasons, many companies try to avoid opening a subsidiary, at least at the beginning. But when you're in need for international employees and you have no time for this long process, what do you do?
Fortunately, there's a solution. Two, actually. And which one you'll choose depends on your business needs, budget, and plans for the future.
Let's take a closer look at the two ways of hiring remote workers without setting up a legal entity in the new country.
Hiring through an EOR
To get around the bureaucracy and hire faster while staying compliant with each country's employment laws, many companies seek for the Employer of Record services. This way, a US company can easily hire someone from Japan, or an employer from Belgium can hire a US citizen and pay them in a legal way, while providing them with the statutory employee benefits their country requires.
Simply put, an Employer of Record is an organisation that takes care of your hiring, onboarding, and payroll processes. They can be an excellent addition to your HR department or completely replace it if you run a small business and don't even have one. Employers of Record are particularly convenient when you want to hire globally and can't afford (or don't want) to register local entities. The EOR hires these international employees on your behalf and ensure compliance in every aspect of their contracts and makes your expansion to a new market a lot easier.
What does an EOR actually do?
An EOR practically takes a lot of administration off your plate - you're outsourcing the complete process of welcoming a new company hire, from drafting contracts to making international payments.
Here are a few tasks an Employer of Record takes over:
- Creating locally compliant contracts
- Handling payroll and payroll taxes
- Tracking employees' hours and leaves
- Ensuring that the working conditions (minimum wages, annual leave, etc.) are compliant with the respective foreign labor laws
- Renewing and terminating contracts
Benefits of using EOR services
There are a plethora of benefits of hiring an EOR to help you expand to the global market.
- If your workload has unexpectedly increased, you can easily hire foreign employees in a matter of hours. That way, you won't let your clients or customers down, and you'll be ready to tackle the new projects right away.
- EORs are incredibly cost-effective compared to maintaining a whole HR department or setting up an entity in a foreign country.
- Remote employees may find the onboarding process more comfortable when working with a local EOR. Employers of Record also understand the local culture and can be a valuable ally in building a relationship with your new employee.
- You get access to expertise and can rest assured that your international hiring process will be handled with professionalism and care. No more worrying about income tax, health insurance, and social security laws of a new country. Moreover, EOR organisations typically use a payroll or remote workforce management software that automate their processes, so there's less room for mistakes.
Are an EOR and a PEO the same?
Although similar, these organisations differ in one important aspect: when hiring through a PEO, you actually enter a co-employment arrangement. Practically, it means that a PEO provides services not only to the official employer, but to the client as well - in this case, the employee.
It requires a bit more paperwork and has more legal implications than hiring overseas employees through an EOR. That's why many US states have their own guidelines regulating how hiring through a PEO works.
Hiring independent contractors
Another accessible form of international employment, especially for companies that have fluctuating workloads or are scaling quickly, is hiring independent contractors. Their services are, in many cases, related to non-core business activities you may need to perform, such as accounting or marketing.
Unlike full-time employees, independent contractors work from their own premises, use their own equipment to perform the work, and are usually considered self-employed by the IRS, since they don't work for an employer - they actually have clients.
That means they're in charge of their own taxes and don't get to enjoy any protections and employee benefits like workers who are on a company's payroll.
Many companies hire both local and non-US contractors. Here's how hiring foreign contractors is different:
- Their income isn't US-sourced, so it's not subject to US taxes
- They need to fill out the Form W-8BEN (or W-8BEN-E if they own a business) to prove they don't have US citizenship
- There's no need to collect additional documentation, such as green card, work permit, work visa, etc. that's necessary for permanent residence in the US, or another country where your company is based
- You may need to draft an employment contract in your contractor's native language, too
Reasons to hire independent contractors
There are quite a few perks of having an independent contractor on your team. Here are a few.
- They're cost effective, since you don't need to cover their income or payroll tax, healthcare, social security, etc.
- In case your workload suddenly increases, it's fairly easy to find and hire contractors able to start working immediately.
- They bring in expertise and broad experience to your team without needing additional training for the job or supervision.
- You don't have to provide them with equipment or tools to work with since they typically have their own.
- You can work with them on an on-off basis, depending on how much additional help you need at a particular moment.
- If you want to hire contractors from abroad, it's relatively straightforward to do it, as long as you find a suitable payroll service to make international payments (with as low fees as possible).
How to be sure if your worker is a contractor or an employee
Since hiring independent contractors has plenty of benefits, with saving money being one of them, it's not unheard of that companies see this as a way to avoid paying taxes for their employees. That's why they sometimes classify their workers as independent contractors, when in reality, they should be considered full-time employees.
This isn't a common practice since fines and legal consequences an employer may suffer can do a lot of harm to a business. You may have heard about what happened to Uber - the company kept misclassifying their drivers, leaving them without the employee benefits and other protections, and even denying them their own tips and overtime pay. This situation ended up in lawsuits against Uber, in which the drivers won.
However, some businesses make an honest mistake when classifying their workers: they're simply not aware of the criteria that helps employers determine the workers' employment status.
To avoid this happening to you, here's what you can do.
- Check out IRS's guidelines. They have a 20-Factor test which represents a set of questions meant to help you determine the real status of your employee. You can also use the Economic Reality test provided by the Department of Labor.
- Ask for help. If the lines between contractors and employees are still too blurry in your case, don't hesitate to ask for help. The IRS has created a form for this case specifically: the Form SS-8 (Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding) and both you and your worker can fill it out.
How to pay foreign contractors?
When you hire full-time foreign employees, you pay them through the EOR, so you don't need to worry about fees, currencies, payment methods. But what about your contractors?
There isn't a solution that works for everyone - you need to find a way that works both for you and your workers. Our tip is to look for a service that allows your contractors to self-serve, doesn't charge high fees, supports various currencies, and transfers the money as quickly as possible.
Hire internationally without setting up locally
Global employment has never been more accessible, but there are important legal implications to consider if you want to do it right. Whether you're looking to employ independent contractors or onboard new full-time employees, it's critical to have a good understanding of how labor and tax laws work in each country you're hiring from.
However, don't let compliance matters stop you from diving into the global talent pool - especially when you have a simple answer at the reach of your hand.
Deel ensures each contract a full-time employee or contractor signs is entirely compliant with local regulations. Finally, there is no need to learn a new set of rules each time you're ready to hire in a new country.