When a company enters new markets, compliance should always be top of mind. In many cases, using a single global payroll provider is better than an Employer of Record (EOR).

A global expansion is an exciting time for any company. But any growth requires resolving important compliance questions that are country and region specific. First and foremost: How will you pay employees in compliance with local law and regulations that impact operations?

Employer of record (EOR) services have been a common and quick solution for companies that want to start operating in a new territory—especially when scaling fast and growing year on year.

But as any payroll professional knows, compliance needs to come first, if wishing to scale optimally and avoid heavy penalties that can damage a business reputation. While many countries allow EORs, an increasing number of jurisdictions have introduced more restrictions on the arrangement or do not allow leased labour relationships.

Depending on your company’s goals, working with a global payroll provider might be a more sensible decision than engaging an Employer of Record. In this guide, we explain the basics of EORs, where EORs are and are not legal and share a flowchart for determining whether you should choose global payroll or an EOR for your next expansion.

When an EOR does or doesn’t make sense

An EOR is a third-party provider that takes on the legal responsibility of employing workers on behalf of a company, while the client retains full control over the business’s day-to-day activities. This allows a business to quickly hire employees without time pressure, initial setup cost or the responsibility of setting up a local entity. EOR services from activpayroll are currently available in the Netherlands and Malaysia.

The Employer of Record makes sure working relationships and payroll are compliant with local labour and tax laws. EOR providers charge a flat fee per employee or charge a percentage of monthly income for providing these services, which can add up quickly.

Some companies choose to work with EORs as a bridge when first getting established in a country or when hiring people for a time-limited project in a new territory. But if the business is successful, most countries require a foreign entity to create a local subsidiary to hire and pay workers according to local laws. Some multinational companies have used EORs to avoid corporate tax obligations or social security contributions in host countries, which has led to more scrutiny of the model from governments.

However, countries such as Germany have implemented restrictions on EOR arrangements, which includes a labour leasing limitation of 18 months. In Singapore, a new law limits the use of EORs for hiring non-nationals, which can impact talent recruitment and mobility strategies. Immigration laws often require employers to have a registered entity within the country before sponsoring foreign workers for visas.

Where EORs are permitted and prohibited

When global payroll becomes a better choice than EOR services

For locations where EORs are restricted, or countries where the company plans to operate long-term, implementing global payroll for a local subsidiary is likely a better option. Sometimes when in a rush to expand, companies end up with a patchwork of EORs and payroll providers to cover a range of territories. The stop-gap solution turns into a long-term headache, with multiple vendors resulting in more complex compliance issues. Approaching expansion with a strategy of global payroll unification is a more effective strategy, one that optimises recruitment, retention and mobilisation of employees, while bringing clarity to complexity.

A legal entity in a country gives the organisation greater control over its operations, hiring and culture. It also shows a commitment to adhere to local tax, labour and social security regulations. The effort it takes to establish a new entity is obviously substantial but also reduces the risk of penalties for noncompliance with local laws, while increasing long-term operational stability in the territory. A global payroll provider and business presence can also be a positive for establishing a strong brand image in a new region, as well as market presence.

Global payroll providers support long term success

Working with a global payroll provider who understands the local legal landscape drastically reduces administrative burdens such as manual data entry and reduces the need to study sweeping legislation. Having entire payroll data available on one global dashboard allows a global business to streamline reporting and analysis and optimise payroll and employee related processes. Partnering with a global payroll partner with local experts on the ground streamlines the hiring process and ensure compliance with local labour and tax regulations. Simplifying your global expansion plans with a single payroll provider is the smart move for long-term, sustainable success.

If your business needs a global payroll provider to assist in your expansion to new territories, activpayroll covers 150 countries, with local and regional experts to assist in your endeavours.