There are a number of reasons why a home business may want to employ someone overseas. It may because the role or position you need is cheaper overseas, the skills required are harder to locate in your country or you want to establish an overseas presence to sell or market your product.
Whatever the reason, it’s good to go into something with your eyes open and that means being aware that whilst processing local payroll can be a headache, global payroll requiring paying people in full compliance across multiple countries is a far more complex and time-consuming process.
With that in mind, there are three main methods for hiring and paying overseas workers or employees: Opening a legal entity, using a Global PEO, and using contractors. We will explore each of these in turn.
Open a local entity
One way to pay overseas staff is to open an entity in their country of work. This is a common course of action for multinational corporations and requires the business to register a branch, subsidiary or local office.
Having a legal presence overseas can make it simple to then put the employees on a local payroll. The issue with this is that it is quite a time-consuming option for many SMEs, who may not be ready to open a legal corporate entity abroad — particularly if there is just one employee, or it’s just a temporary strategy. Here are the three ways to open an entity overseas:
Representative office
Opening a representative office is the easiest of the three and the fastest because it’s entirely owned and administered by the company. This method is the lightest on red tape, but the employees at the representative office can’t be involved in sales or contracts — they must work as representatives only.
Whilst it heavily depends on the country, applying for a license for said office can be a matter of just a few weeks. Then, it may be another couple of weeks for the seal of the representative office, along with the tax code application and publication of the establishment.
This license will have an expiry (i.e. 5 years) where a renewal application will have to be submitted.
Branch office
A branch office is essentially a way to extend your company overseas, resembling the head office. Like the representative office, the branch is administered and governed under the laws of the home company, with everything being reported back to, and the responsibility of, head office.
It’s worth bearing in mind that some countries will require the branch to be set up by a local resident — meaning hiring an overseas manager may be necessary. From here, payment to the overseas employees is as easy as paying a local payroll — albeit their local payroll.
Subsidiary
A subsidiary, unlike a branch or RO, is a totally separate legal entity. This is a long-winded process for just the benefit of paying overseas employees, being both expensive and time-consuming.
The parent company has majority ownership of the subsidiary but isn’t legally responsible for it. This inevitably has many advantages, particularly if there are legal issues caused by overseas employees.
There are often large paid-up capital requirements when setting up — such as Singapore’s $100,000 for a travel agency subsidiary.
Whichever solution is chosen though, there are a number of moving parts in a global payroll standardization of data, gross to net payments, taxes and cross-border payments that all must be made accurately and on time in sync month in, month out.
Use a Global PEO
A global PEO (Professional Employer Organization) is an employment solution intended specifically for overseas and remote employment. All the above methods of opening a legal entity are essentially known as the payroll method. With a Global PEO, you swerve payroll and the legislation that comes with it.
This is analogous to an agent or a middleman, where the PEO becomes the employer of record for the person you wish to hire in the new overseas country.They directly hire your overseas employees on your behalf and bear the tax and legal liabilities of hiring them.
Global PEOs aren’t just a loophole solution but are often an all-in-one HR package — including payroll, onboarding, legal and tax compliance, along with other HR management duties.
This is a good option if you want to mitigate the risks of establishing yourself abroad i.e. you’re just testing the waters. This way, there are very few sunk costs if it doesn’t work out, or, you are looking to hire a very small amount of overseas personnel with zero physical footprints in that country.
This isn’t to say there are no downsides, as you will be relinquishing some control over your HR. This could impact your company culture, conflict with your internal HR, and may not be the most optimal way to onboard personnel.
Use Local Contractors
Using a local contractor is a method that avoids both the global PEO/EOR route and opening a local entity. Contractors can be a great solution for temporary work, as it allows for flexibility among staff who are often highly qualified.
You will not need to go down the payroll route, because they are self-employed, and can potentially save money on paying employee benefits, holiday pay and so on.
There is a major danger to be aware of here, though, which is the risk of misclassification. The most common example of this is that the overseas country views the worker as your employee due to the arrangement, their work, and the structure of the relationship.
The potential costs of misclassification include penalties (in the event of fraud), employment taxes, social contribution, back wages/overtime pay, insurance contributions. In the very real possibility of misclassification, you can be left with an unexpectedly high bill — not to mention that you will have to set up a legal entity in the event that a legal battle occurs.
