Employer of record vs. Entity setup vs. Engaging contractors
Want to onboard an employee in Brazil or Mexico today?
The rise of remote work model has transformed the way we work and has also brought a new set of recruitment opportunities for businesses. Companies are not longer hiring within their national borders but now tapping into global market to find and onboard the best global talent.
Global hiring has become an increasingly attractive option enabling employers to attract and retain top talents from anywhere in the world. However, this does not come without risk and complexity. To compliantly hire internationally, businesses have three different ways to get there and must assess each one of these approaches.
These three approaches are setting up a legal entity in the chosen country, engaging contractors or using an employer of record (EOR).
The following article will help you understand what these three approaches – Employer of record vs. Entity setup vs. Engaging contractors – are, and which solution will best match your strategy ⬇️
Key takeaways
✔️ If a business is looking to establish a long-tem presence in a market, then opening a local entity is the best solution.
✔️ When a business is looking to hire someone for a short-term project, then engaging a contractor would be the winning strategy.
✔️ If a business wants to quickly onboard employees or contractors in a new market, then using an EOR can best fit your needs.
Setting up an entity
Setting up an entity is the traditional solution when a business wants to hire internationally. Establish a legal entity in a specific country will allow your business to operate legally in the country, hire, pay and manage your talents there.
Pros
Maintain control over operations: by setting up an entity, you gain full control over your operations as well as align recrutment and engagement strategies with your corporation culture.
Increase visibility in a new market: If the market is one of your recruitment hubspot, then, creating your entity could help you increase visibility and recruit the top talents your need.
Have legal clarity: Setting up an entity will force you to increase your local market knowledge and be able to have full control and understanding of the local laws.
Cons
- Consume time and resources: Registering a company can be a long and costly process. And, even after the initial setup, there’s the expense of managing the entity.
- Reduce flexibility: A local entity doesn’t allow much flexibility mainly because you only only be able to hire in the specific country where the entity is incorporated.
- Legal considerations: Hiring the employees with your own entity means hat you are the legal employer and then, bear all the risks.
Engaging a contractor
This solution might seem a good fit to reduce the cost of setting up an entity or hiring a full-time employee. Engaging a contractor can be a winning strategy in some cases and will depend of your business strategy and goals. For instance, it is a great solution when you need a talent for a short-term project.
Pros
Gain flexibility: The main pro of engaging a contractor is the flexibility it grants. It enables your business to test the market before setting up a legal entity or hiring an employee.
Short-term project: If you have changing work requirement or a short-term project, then, engaging an independant contractor would be the best solution for your business.
Cons
- Misclassification Risks: The major risk of hiring independent contractors is the misclassification risk. In many countries, the line between employee and contractors are blurry and there are high risks to misclassify your talent. Finance and legal penalties are quite common, even more in Latin America.
- Less control: Independent contractors have more work autonomy than employees. They decide when, where and how best to work and accomplish tasks.
Using an Employer of record (EOR)
Partner with an employer of record (EOR) is quite a game changer and can help you hire globally. The EOR will be the legal employer, which means they will handle employment contracts, onboarding process, compliance, benefits, payroll and more.
Pros
Quickly expand globally : Using an employer of reord service will help you to quickly and easily hire in various market. It allows you to broader your talent pool and not be limited to local talent.
Team of experts : No matter what is your expansion objective, going global requires a strong local knowledge. EOR partner usually has a glocal expertise to help you expand your operation.
Streamlined solution : EOR offers a streamlined solution to hire, pay and manage a global workforce. They handle the administrative and HR burdens which allow you to focus on your core business.
Cons
- Less control over workforce operations: As the EOR will be the legal employer, your business won’t gain full control over workforce operations.
What's the best strategy for your business ?
So what’s the best solution between open an entity, engage a contractor or work with an EOR ? The answer is: it depends!
There is no one unique approach. The solution you choose will depends on your business needs and strategies, your growth plans, recruitment goals, internal resources, etc…
The most important is to understand the options you have and to choose the right solution for your business. Here is some questions you need to assess before picking one option.
How much are you ready to invest ?
Each solution will have a cost, of course, but some more than other. For instance, opening your own subsidiary will involve higher upfront costs than using an EOR or engaging a contractor.
Indeed, setting up an entity requires a hefty investment at the registration. After the initial set-up, there will be the cost of entity management and ongoing support.
On the other side, EOR requires a lesser investment of resources, time and money. The cost is usually consistent, and you’ll not have to worry about the cost of a local infrastructure.
Engaging a contractor would be the less costly solution as soon as you do not misclassify the talent you work with.
Our advice: You may start by engaging a contractor or hiring full-time employees with an EOR to switch later on to employing them via your own entity. Do not forget that some of these solutions can be complementary.
Does your internal team have enough local market knowledge ?
Regardless of whether you hire employees via your own entity, via an EOR or engage a contractor, understanding local employment laws and being compliant with them is critical.
If you hire employees via your own structure, you’ll be handling employment contracts, mandatory benefits, taxes, and payroll. In practice, this means that you’ll have to hire your own team to comply with your legal obligations as the employer. The compliance risks will be fully supported by your own entity which can be tricky at first but will give you more control.
With an Employer of record partner, you will have a team of local experts to help you navigate local laws. In addition, the compliance obligations are outsourced to your EOR partner as it is the legal employer. Then, they’ll always ensure that you’re compliant with local labor laws.
Engaging a contractor does not force you to understand labor laws however you must verify that there is no misclassification risks.
Our advice: Before opening up your own company or choosing your EOR partner, make sure the local experts who will supports your business have a strong knowledge of the local laws. If engaging a contractor is your goal, then make sure there is no misclassification risks.
How quickly do you want to operate ?
An entity does not allow much a rapid and quick market entry. It generally takes month to create and run your entity. It generally takes several months to start a business in a country and does not enable fast scaling.
On the other hand, EOR services allows you to hire your employees quickly. For instance, in Brazil, it takes you 5 days to hire employees. If you have found a great candidate in another country, there is few chances of waiting the opening of your local entity.
Engaging a contractor is the best solution in terms of scalability. It allows you to start working in one day, as soon as the contract is signed.
How much time will you operate in the country ?
Are you only looking to hire your candidate/engage a contractor in the region or are you looking to expand your business and set up operations in the said country? What is your level of commitment to the said market ?
The strategy will mainly differs depending on your expansion goal. While the setup of a legal entity will signal your objective to develop your business in the region, using an EOR to hire a candidate will not demonstrate your will to establish a long-term presence in the region.
An EOR will allow you to hire your full-time employee. It can also be used as a stop-gap in the process of setting up the entity.
How much control do you want to have?
By setting up an entity, it means that workforce operations are completely within your control. Therefore, you can align all internal process as recruitment, onboarding and engaging strategy with your corporate culture. It allows you to gain full control on attractivity and retention but does not come at a cost. Indeed, it requires a investment in HR resources and a good knowledge of the local culture.
On the other hand, hiring with an EOR facilitate global hiring and compliance. Depending on your partner, employee experience would be different, and you should make sure your partner focuses on this feature as it has direct consequences on retention. Make sure you choose the right EOR partner to ensure a good employee experience.
With a contractor, the level of control will be lower. You’ll gain in flexibility what you loose in control over workforce operations.
What is the level of flexibility and scalability you require ?
The level of flexibility and scalability of an entity is not much as you will only be able to hire in the country you incorporated your business and you’ll need a team of lawyers and accountants to run your business.
On the contrary, EOR offers maximum hiring flexibility as well as engaging a contractor. You can hire across borders right away and try new markets Also, the level of bureaucracy is lower than establishing an entity.
EOR or entity, you can do it all with Europortage
Settin up an entity of hiring a global team is complex especially when it comes to compliance. That’s why we recommend working with a direct and local partner like Europortage.
Our team of local experts is on hand to support you throughout the entire employee lifecycle, including time-off management. We can give you clear advice on business incorporation and global hiring, in addition to handling employment contracts, payroll, and benefits. That way, you can focus on growing a world-class team and business.
Get in touch to find out more and start hiring top talent in Brazil and Mexico!
