Venturing into new markets offers exciting growth opportunities, but global hiring comes with challenges like compliance, payroll, and managing diverse cultural differences. One of the most important decisions a company can make is whether to use an Employer of Record (EOR) or establish an entity for hiring. This decision can impact compliance, operational effectiveness, and your ability to scale as a business.
What is an Employer of Record (EOR)?
An Employer of Record (EOR) is a third-party organization that takes on the legal responsibilities of employing workers on behalf of your business. They handle payroll, benefits, taxes, and labor law compliance, simplifying global recruitment. With an EOR, you can hire employees quickly without the need to set up a legal entity. The EOR market is valued at USD 4.42 billion in 2023 and is projected to reach USD 8.59 billion by 2030, growing at a CAGR of 6.8% (2024–2031).
What is an Entity?
An entity refers to a legal business structure your company sets up in a foreign country to directly employ workers. While it gives you complete control over your operations, establishing an entity takes significant time and investment.
Why Choosing the Right Model Matters
A global hiring strategy is essential for businesses to overcome expansion difficulties. Choosing between an EOR and an entity impacts costs, compliance, and operational efficiency. Making the right decision can streamline international operations and minimize risks, saving companies from potential legal and financial pitfalls.
Key Factors to Consider When Choosing
1. Timeframe for Expansion
If speed is a priority, an EOR is often the better option.
- EOR: Setting up operations with an EOR can take weeks, making it ideal for short-term projects or quick market testing. For example, a SaaS company launching a product in the United Kingdom can hire temporary sales teams using an EOR, gaining immediate traction without delays.
- Entity: Setting up an entity, on the other hand, can take anywhere from 2 to 12 months and involve complex legal paperwork. This approach is better suited for businesses with long-term plans and sustained growth in a specific market.
2. Cost Implications
Understanding the financial requirements of each model is key to making the right decision.
- EOR: With an EOR, upfront costs are low, but ongoing service fees, typically charged as a percentage of employee salaries, can add up. It’s cost-efficient for a lean team but may become expensive for larger-scale operations.
- Entity: Establishing an entity requires significant investment ranging between USD 15,000 and USD 20,000 in most countries. Additional maintenance costs like legal, accounting, and office expenses further increase the financial burden.
3. Administrative Complexity
- EOR: By outsourcing compliance and HR operations, an EOR drastically simplifies hiring. They handle payroll, benefits, and local labor laws.
- Entity: Managing an entity demands in-house HR, legal, and tax expertise. All compliance and administrative responsibilities fall directly on your team. For instance, in the EU, filing VAT returns accurately and on time becomes your responsibility when operating through an entity. However, even with your own entity, the administration for HR, accounting, tax, and entity management can be outsourced to specialized service providers like GoGlobal, under their Business Corporate Services offering to streamline operations.
4. Compliance with Labour Regulations
Non-compliance can be costly and damage your company’s reputation.
- EOR: The EOR acts as the employer on record and assumes responsibility for compliance. This reduces your liability and ensures adherence to local labor laws. A study commissioned by the U.S. Department of Labor highlights that up to 30% of employers misclassify workers, which can be avoided with an EOR.
- Entity: With an entity, compliance risks are higher as your business is accountable for meeting labor law requirements. Misclassification of employees, for example, can lead to hefty fines. Under California law, penalties for intentional misclassification range from $5,000 to $15,000 per violation, with repeat offenses incurring fines of up to $25,000.
5. Scalability
- EOR: An EOR offers flexibility, allowing businesses to test multiple markets simultaneously without the commitment of establishing entities. For example, an EOR can enable your company to explore Singapore, Malaysia, and Indonesia simultaneously to determine which market has the most growth potential.
- Entity: While slower to scale initially, an entity is better for long-term growth and stability. For instance, a call center in the Philippines might warrant the creation of an entity for a large workforce.
6. Brand and Cultural Integration
- EOR: Since an EOR is a third-party provider, your direct influence on the employee experience and branding is limited.
- Entity: Operating through an entity allows for deeper cultural integration and alignment with local business practices, strengthening your local brand presence.
When to Choose an EOR
Scenarios Ideal for EOR
- You want to test a new market with a few employees.
- Your project is short-term or seasonal.
- You lack in-depth knowledge of the local market and regulations.
Pros of an EOR
- Fast market entry with minimal risks.
- Simplified global recruitment.
- Cost-effective for small teams.
Potential Limitations
While EORs are great for flexibility, they can become costly for larger teams and limit direct control over employment operations.
When to Choose an Entity
Scenarios Ideal for an Entity
- You have long-term plans for a specific market.
- Your employee base is large, or the business involves strategic investments.
- The business is already revenue-generating, as this can attract private equity (PE) when hiring via an Employer of Record (EOR). The priority here is often setting up an entity to ensure compliance with tax laws.
Pros of an Entity
- Full control over business operations and the employee experience.
- Stronger local brand credibility.
- Legal presence in the country may allow the business to be eligible for government incentives and tax credits.
Potential Challenges
The process demands high initial investment and substantial administrative resources.
Which is Right for Your Business?
Ultimately, the choice between an EOR and an entity depends on your business’s timeline, resources, and long-term goals.
Do you need to scale quickly and with less risk? An EOR might be the solution. Employer of Record Services simplifies international hiring by handling onboarding, payroll, and ensuring compliance with local labor laws. Looking for more control over your operations and planning for long-term growth? An entity could be the better option. Assessing your needs and consulting with experts can help you make the best choice for global hiring success.