And Why Does it Matter?
Multinational organizations have been hit hard by the global pandemic, with supply chain issues, currency fluctuations, and general uncertainty in global markets impacting business as usual. However, in general, there’s a lot of benefits to having assets and employees in multiple countries.
Organizations with a multinational presence may benefit from lower production costs, greater efficiencies being able to work across multiple time zones, closer proximity to target markets abroad, avoidance of tariffs and quotas over their imports and exports, and access to a greater talent pool than if they continued to hire locally.
There are two main motivations behind hiring workers overseas, and while the route may be the same short-term, each of these motivations requires a slightly different long-term strategy. Let’s use two fictional case studies to get into the mindset of both.
Expanding into a New Location
Our first case study is a UK software company, looking to expand into additional areas in Europe. The organization has looked into establishing an entity in the countries in question, but is put off by the expenses and complexity involved.
This is made more difficult by the knowledge that in some countries, closing the local entity may end up being even more difficult than setting it up to start with. As the software company is under no illusion about guaranteed success, this feels like a bad move. Take Belgium for example, an area of interest. In order to close a local entity in this region, the UK company would need to appoint a liquidator to handle any property, and if there are unpaid debts to consider – go through an insolvency process, too.
This company can’t simply skip setting up locally, because they need people on the ground who are experts in that region, and can work compliantly. This is important both on their own side legally as a business, and also for the candidates that they are scouting. Think about it. If you’re working in Spain, and a UK company approaches you about a role, and casually mentions that they have no way to compliantly hire you as an employee, you would probably think twice before jumping on board.
Unless you are already comfortable working under a contractor agreement, and losing vacation days, sick pay, and benefits – this just won’t be attractive on your end. On the company side – if they are recruiting for a full time position, a contractor agreement would risk misclassification and be unsuitable anyway. It’s a lose lose.
Instead, what this UK-based software company is looking for is a soft landing. They want to get a person or two on the ground, generate some interest and just see whether there is an appetite from customers in that locality to build out a presence. At a later stage, they may well want to establish an entity. However, right now – they want speed to market, compliance, and the ability to attract the right people locally to get the job done.
Hiring for a Specific Role or Skillset
Now let’s think about another software company, this one based in the Netherlands, for example. They are working with a new, niche programming language, and the skill set is hard to find locally. Local recruiters are struggling to fill roles and find the right candidates. This organization is already choice-first. Most employees work remotely, and the company actually doesn’t need the new hires to be in the office. What they do need, is the best talent for the role.
This is the second main motivation for hiring candidates from abroad. In a similar way to the first example, this company wants to be able to compliantly hire employees abroad, without getting into any compliance issues in terms of misclassification of contractors.
However, even more than that, this company isn’t looking to expand into the new location, not today, and not in six months or a year. They just want to be able to onboard a single new employee. An entity isn’t just premature, it’s actually a poor long-term business decision. By setting up a legal entity, the organization would be taking on all the costs and complexities of setting up the entity, plus all the employment liability of working with this new employee.
This could include creating a new contract for this location, understanding the local laws and benefits, handling social security, and more. For example, in the Philippines, foreign employers are not allowed to hire local employees directly, except through entities that are authorized by the Philippine Overseas Employment Administration, and minimum wage varies from region to region.
Of course, if you’re thinking about expanding into this region long-term, it could be worth your while to learn how to become a local employer, but if you’re looking for one or maybe two new employees with specific skills, this is disproportionate effort.
Understanding EoR – A Model For Overseas Expansion and Remote Working
In both of these use cases, an Employer of Record (EoR) solution may be the answer that these organizations are looking for. The principle is simple. You utilize a local in-country partner (ICP) who takes on the employment of the new hire on your behalf. They will become the employer in the relationship, managing the payslips, handling mandatory and non-mandatory employment benefits, and holding the liability, while you manage the day to day working relationship.
Let’s look at our case studies, and see how they can use this model for flexibility, growth, and quick time to market. For the Netherlands-based company looking for a specific skill set, the organization can sidestep the complexities of setting up an entity and learning about the new location, and they don’t need to consider liability at all, simply hiring the best talent for the role, anywhere in the world.
They can utilize the EoR (also known as a Global PEO) relationship for as long as the employee remains part of the company. When it’s time for offboarding, there is no closing a business to consider, just ending the relationship with the EoR.
For the UK-based company, the initial stages are very similar. They can quickly move into a new location by utilizing Visas or working relationships to send employees to the region, or by hiring locally, and manage the relationships compliantly via the EoR. If the trial in the location is unsuccessful, it’s easy and carries less costs to move the employees back to HQ, or terminate the employment, than it would if an entity had been set up.
On the other side of the coin, if the company validates a need for the software in the new region, they can easily hit the ground running and scale as quickly as they need. As the presence in the new country grows, the organization can choose the perfect time to set up an entity that aligns with their business continuity. This could be when they reach a critical mass of employees, or when they start making enough local revenues to have tax obligations in that location.
A Global Payroll Provider that Understands Both Use Cases
In multinational organizations, there will likely be both kinds of use cases. Sometimes, an enterprise will want to test the waters in a new location ahead of international expansion, and other times they will simply have a must-have candidate in a new location where they don’t currently have a presence. The key is to work with a global payroll provider who offers as much flexibility as possible.
At Papaya Global, we have local in-country partners in more than 140 countries, and are well versed in the complexities of remote working. We help organizations quickly and compliantly hire overseas, acting as a single aggregator for all of your EoR relationships to add local insight, and to reduce the complexity of being a multinational enterprise.
Some of our customers continue using EoR relationships for many years to support single team members or small groups of employees in diverse locations around the globe. For others, we consult closely with their HR, finance and legal teams to decide on the best time to establish a local entity, continuing to service this payroll from within the same platform.
As a single solution for contractors, employees, and EoR relationships, we offer the flexibility that you need to make intelligent decisions that suit your roadmap.
Thinking about global expansion? Let’s talk.