As more and more companies begin to focus their growth strategies around global expansion and possibilities that come with building globally distributed teams, the question becomes – what’s the best way to set those plans in motion?
Traditionally, the standard approach to global hiring was to first establish a global entity in the target country — a significant investment of time and resources. Today, however, the Employer of Record (EOR) model has begun to outpace this traditional global entity model because it offers unique advantages like the speed and flexibility of tapping into new markets without the accumulated risk and commitment that setting up a global entity carries. The good news is, whichever model is right for your business, G-P offers advisory services that can help.
As this is the first post in our “EOR vs. Global Entity” series, we’ll examine the differences, challenges, and opportunities that both options offer, with insights and advice from G-P’s legal expert Kathryn Barnes.
Comparing the costs between an EOR and a global entity
To start, setting up a global entity comes with incorporation costs. For instance, several countries require companies to pay capital into a bank account before the incorporation registration can proceed. While this will vary by country and other company-specific factors, this cost can reach over USD 100,000, according to Barnes.
Moreover, that money, in many cases, needs to sit in the bank account for the longevity of that global entity. Suppose a company were to dip below that USD 100,000 marker. In that case, the bank can shut the account down, nullifying the company’s ability to do business in that country.
While setting up a global entity is costly, entity management also comes with a price. Typical running costs include insurance, licenses, salaries, and corporate taxes ─ all vital cogs in the ever-lasting game of operating compliantly. The time drain of global entity setup can significantly burden teams, which should be acknowledged as a potential cost, too. Workers are often forced to reserve all of their time and energy for overcoming the bureaucratic complexities of entity setup instead of focusing on their day-to-day responsibilities.
In contrast, an EOR typically comes with a flat monthly fee, ensuring consistent compliance costs for each country and sparing internal teams from the responsibility of staying on top of legal intricacies, such as remaining up to date on different in-country labor laws which often change over time.
Understanding compliance and risk when operating globally
Compliance can make or break your global expansion plans, so it’s absolutely critical that growing businesses are ready to take on the complex and ongoing landscape of international rules and regulation.
Ever-fluctuating labor laws act as a significant deterrent to successful global entity maintenance. For instance, Barnes highlighted that some countries have adjusted their legislation to dictate that international directors of a company are no longer acceptable to compliantly operate a business. This means an in-country director is now required, a stipulation not all companies can accommodate.
Governments are diligent when it comes to ensuring compliance from all local businesses. They can fine you, stop you from doing business, or pause you from hiring until you can show what you are doing in their country is legally compliant.
Not to mention, labor laws consist of government laws and court laws. One can overrule the other, requiring companies to react quickly and adapt to the new governing regulations. For example, Barnes noted that Germany has advised companies to expect upwards of 30 changes to their labor laws in 2024. There are no guarantees that additional laws won’t be introduced or changed during the next 12 months on top of the expected ones.
This means companies taking the entity approach to managing their global operations will either have to work with third parties or build their own in-house legal and HR resources and expertise to ensure they maintain compliance with every business operation and task they perform – while assuming all the risks of fines or penalties that come with noncompliance.
Partnering with an Employer of Record, on the other hand, offers another compliance path altogether. As the legal employer of your team, your EOR partner takes on the complex regulatory tasks and, subsequently, the financial consequences accompanying them. This is beneficial in two ways: helping to ensure ongoing global compliance while also mitigating risks along the way.
Recognizing the greater flexibility that an EOR enables
Businesses need flexibility most to succeed in a new market, which is another key difference between these two approaches. Several regulatory variables can extend the entity setup process no matter how much research is done or advice is received ahead of time. By factoring in this buffer, companies can comfortably deal with potential delays, such as banking issues or tax filings. For example, in some countries, setting up a bank account can take up to 15 months, warned Barnes.
These delays can impact many companies’ global success as market speed is crucial to building brand awareness and sets the foundation for long-term growth. Completing this year-plus-long setup process while navigating the bureaucratic red tape can drain time and vital resources. This is where partnering with an EOR becomes an advantage.
An EOR provider has already done the legwork and is familiarized with the local landscape, acquiring exceptional expertise through experience. When testing a new market, quality EOR providers are able to advise and steer companies toward untapped, overlooked business opportunities. Once you determine your target location, your company can begin hiring through the EOR quickly. An EOR partner with the longevity and quality of G-P, for instance, can enable companies to begin hiring in a new market within minutes. Moving into – or out of – these new market opportunities allows your company to find success faster. In contrast, if you were setting up your own global entity, it could end up taking months, while also locking you into markets that may not meet your goals.
How G-P can support the right model for your global business
More than anything, it’s important for companies to realize that they have options when choosing how to build their global teams and expand to new markets. Newer companies may see the advantage of an EOR model right away, while established companies may begin to revisit their global entity strategies as they realize the many benefits that converting entity management to an Employer of Record model can offer. Whichever path is right for your business, there are many variables at play – all of which must be handled with extreme care.
That’s why G-P offers a growing range of G-P advisory services ─ giving customers a single touch point for information related to global growth and access to our HR and legal experts. With the local knowledge on hand when you need it, the time and resources required to research and overcome global expansion challenges is significantly reduced. It also decreases the risk of compliance missteps when trying to do it alone.
With G-P as your global EOR, you can leave the HR and legal complexities to us, so you can focus on growing your teams. We are also here to help share our expertise for support with existing entity management.
Contact us today to learn how G-P advisory services can help your company.
