Global Expansion and hiring talent abroad
Global expansion is one of the most important strategies for businesses to grow which gives them a competitive advantage and access to new markets and customers. It is an important strategic decision that requires careful consideration of factors such as office space, international talent recruitment, tax residency of business and compliance exposure.
One of the most important challenge businesses face in global expansion is to hire talent internationally as it requires thorough understanding of the local manpower laws, drafting of employment agreements, local culture, and employees’ expectations.
There are few options available to businesses to hire the talent abroad. Establishing a legal entity and hiring the employees may be suitable option in some cases however setting up an entity can take time and it is not very cost-effective especially if you are planning to hire only a few employees or are not sure how long will you operate in a new location. It also leads to the permanent establishment of business internationally which exposes the business to various tax and regulatory requirements.
In this article we will explore the following two alternatives to establishing a local entity as a way of hiring talent internationally:
- Independent contractors
- Employer-of-Record (EOR); A smart alternative
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Factors to be considered when hiring talent abroad
Before we discuss the above mentioned two alternatives, it is important to understand that in most countries, as a general principal, manpower laws will protect employees over employers in case of any dispute. It is equally important to understand how employees are classified in each country because that determines the protection and benefits available to employees. For instance, are employees considered full-time or part-time, what is the minimum wage and what are the compensation payments available to employees in case of employment termination are all determined by how employees are classified.
Foreign government is another stakeholder when it comes to hiring their citizens as employees as the withholding taxes and social security contributions must be made to the government and tax offices. If a company fails to comply with such requirements, then it runs a risk of facing penalties from the authorities.
With these points in mind let us now explore what are the pros and cons of working with independent contractors and using the Employer-of-Record (EOR) service for hiring the talent abroad.
Engaging Independent Contractors
An Independent contract is one where no employment agreement is signed. An independent contractor is a person that provides their services to other clients. Mostly, independent contractors are self-employed, and they are not bound by restrictions of typical employment such as working hours and reporting. In addition, independent contractors are only responsible for the results but follow their own procedures.
Working with independent contractors is apparently uncomplicated and straightforward however in reality that is not the case as discussed below.
Complexities and risk of working with independent contractors
Working with independent contractors can raise compliance and litigation concerns and it is not the most productive relationship. Governments look at the substance over form to determine whether a particular relationship is that of employment or independent contractor. Take for example the following situations:
- Legally a person could be an independent contractor but if the person is intended to be an employee or fulfilling the role of an employee then it will be considered as an employee.
- If an independent contractor is being offered allowances, benefits, or stock options then it will be considered as an employee rather than an independent contractor.
- If someone else besides the contractor decides and allocates the tasks to the contractor, then it will be considered as employment.
- If a significant portion of the contractor’s income comes from one business, then the contractor will be considered an employee of that business.
- If the contractor does not have its own equipment and tools to perform the job, then it will be considered employment.
Since the implications of hiring independent contractors are big, it is therefore very important for any company considering hiring independent contractors to do the due diligence of the manpower laws of the target country to understand how employee-classification, how authorities enforce such classification and what are the implications.
When and how to engage independent contractors
Independent contractors are suitable if the nature of the job is temporary or short-term. If independent contractors are engaged, it should be done in line with the engagement template of the head quarter rather than localizing the agreement. In addition, it is better to engage an independent contractor that has a separate company so a degree of separation can be demonstrated.
Hiring through Employer-of-Record (EOR); A smart alternative
An Employer-of-Record (EOR) is a professional service provider that onboards the employees of the client under its own company thus immediately allowing the client to hire employees internationally and legally without the need to set up a legal entity. Employer-of-Record (EOR) has various advantages. Some of the advantages are given below:
Advantages of Employer-of-Record (EOR); A smart alternative
1. Risk Minimization
Establishing a company in a new country is a risky decision. A business faces the risk of a lack of demand for the products or services and higher compliance costs. Withdrawing from a new location can also be very expensive and can lead to serious losses. Employer-of-Record (EOR) service provides an opportunity to businesses to initially test the demand in the new location before committing to setup a new entity.
2. Faster Market Entry
Establishing a new entity takes time. For example, in Indonesia, it can take 2 to 3 weeks to establish a new company. It may take even more time if additional licenses are required that are applied separately. Employer-of-Record (EOR) service can save time and allow immediate hiring of talent abroad. EOR also eliminates the bureaucracy and paperwork involved in setting up a new entity.
3. Full compliance with local laws
The Employer-of-Record (EOR) ensures full compliance with local employment and tax laws. Employer-of-Record (EOR) prepares the employment contracts and does the regular monthly compliance such as calculation of deductions, filing taxes and social security contribution according to the prevailing laws and regulations of the country. This ensures that no penalties are incurred
4. Prevent Potential Penalties
Employers should familiarize themselves with employment-related liabilities such as compensation payments, termination payments, benefits etc. If they are not careful the one small mistake can result in lawsuits and hefty payments. An Employer-of-Record (EOR) knows the fine details of law related to manpower law and can advise the client to protect its business.
5. Complete Payroll Assistance
Employer-of-Record (EOR) not only on-boards the employees but also assists with regular payroll. This means the business does not have to worry about the calculation of salaries, deductions, issuance of salary slips and transfer of salaries at the end of the month to employees. This is all taken care of by the Employer-of-Record (EOR) which saves much time.
Hiring employees abroad is an important decision that should be made after considering various factors such as duration of the operations, local manpower laws and costs involved to set up a local entity. If the business does not plan to stay in the new location for longer than few weeks, then it might be ok to engage an independent contractor. However, if business plans to operate in a new location for the long term then it is advised to take the services of an Employer-of-Record (EOR); a smart alternative to independent contracting. It is also advised to consult an expert advisor that has expertise in the manpower laws of the target country.
MAM Corporate Solutions as Your Employer-of-Record (EOR); a smart alternative
MAM Corporate Solutions has expertise to be Employer-of-Record (EOR) in Indonesia for clients around the world. As a result of the current pandemic, foreign investors need Employer-of-Record (EOR) service in Indonesia more than ever before as the travel restrictions make movement difficult. In such a situation, MAM Corporate Solutions offers its complete range of Employer-of-Record (EOR) services in Indonesia to foreign businesses who want to conduct business activities in Indonesia. If you are seeking Employer-of-Record (EOR) service in Indonesia, MAM Corporate Solutions can ensure that all your employment-related concerns are addressed effectively to ensure your business growth.
Contact MAM Corporate Solutions
MAM Corporate Solutions has extensive experience and expertise in being the Employer-of-Record (EOR) for clients from around the world. We are well versed with local manpower laws. If you need Employer-of-Record (EOR) service you can contact our expert anytime by Clicking here or provide below as much detail about your inquiry as possible to receive the most relevant response.