EOR vs. Entity Solutions for Global Hiring

With economic pressures mounting globally, companies are using global employment to diversify revenue streams and achieve strategic growth. 

There are two main ways to hire globally: work with Employers of Record (EORs) or establish a local entity. The decision depends on your unique business needs and priorities. This guide will explain the differences between EORs and entities to help you make an informed choice.

The EOR model

An EOR legally employs professionals on behalf of another company. This model allows you to hire anywhere and build a global workforce without establishing legal entities in each country. EORs manage compliance with local labor and employment laws and handle payroll, taxes, benefits, and other HR processes. Using an EOR streamlines the entire employment lifecycle and allows you to focus on core business activities. 

The global entity model

Establishing a legal entity is the traditional approach to global employment. There are two main types of entities:

1. Subsidiary: An independently operating legal entity of which the parent company has full or partial ownership. The subsidiary is responsible for its own compliance, but the parent company may be protected from liabilities, depending on local laws and regulations. The parent company's investment in the subsidiary is at risk if compliance issues occur. 
   

2. Branch: Rather than being a distinct legal entity, a branch is a registered international office that the parent organization uses to do business from. The parent company retains full liability for compliance.  

Global entity setup is an extensive process that involves:

• Researching the market and regulatory landscape

• Choosing an entity type

• Registering and incorporating with local authorities

• Obtaining licenses and permits

• Opening a local bank account

• Establishing HR and payroll processes

• Ensuring ongoing compliance with employment, labor, and tax laws

EOR vs. global entity: side-by-side comparison

EORs and global entities each have their own benefits and serve companies differently. Here's how they compare in terms of setup time, complexity, cost, flexibility, and compliance risks. 

EORs give you easy access to global markets. With an EOR, you can start onboarding employees immediately. You don't have to incorporate, learn each country's labor and employment laws, or navigate the complexities of payroll and taxes. EORs manage these responsibilities while providing local expertise and ongoing compliance support. 

If you're seeking stakeholder buy-in for global scaling, the convenience of working with an EOR can help you make a strong case. The global entity approach is more complex and time-consuming, requiring you to:

• Research local laws and regulations.

• Align legal documentation and processes with compliance standards.

• Navigate payroll, taxes, and other HR functions in a new location.

• Assume legal employment responsibility.

Cost

Both the entity model and the EOR model come with expenses that you must factor into your budget. 

EORs typically charge a fee to cover their services. This fee is either a fixed amount or a percentage of the employee's salary.

Entity setup expenses include:

• Registration fees: Creating a local entity involves registration fees, legal fees, and accounting fees. The exact costs depend on the country of incorporation.

• Operational expenses: Recurring expenses include office space, utilities, and salaries for local HR, legal, and finance team members.  

• Tax compliance expenses: Local entities are responsible for preparing and filing tax returns, as well as managing VAT where applicable. 

• Auditing fees: Compliance and financial audits are important to keep the entity in line with local requirements. 

• Potential fines: Assuming responsibility for compliance means accepting the financial risk of errors, such as payroll tax errors, immigration violations, and employee misclassification.

Taking all expenses into account, an EOR is the most cost-effective solution for global employment and expansion.

Management and flexibility

Establishing an entity gives you complete control over your operations and employees. You're also fully responsible for compliance and financial investments in the entity infrastructure. This gives you flexibility in daily management, but enhances risks and limits your ability to quickly scale up or down.

An EOR also gives you control over your operations and employee-related decisions, such as promotions and terminations. The main difference is that EORs handle compliance, payroll, and benefits administration, so you can expand while minimizing your risks. 

By using the EOR’s entity infrastructure, you have the flexibility to scale up or down as needed.

Whether you use an EOR or establish a global entity, you'll need to plan for compliance in areas such as: 

• Employment law: You must meet local requirements for employment contracts, working conditions, benefits, and termination procedures.

• Payroll compliance: Payroll administration involves withholding the correct taxes and making all the necessary employer contributions.  

• Data protection: Countries have varying data privacy protections, including standards for data collection and storage.

• Immigration: Visas and work permits ensure every employee at your company has the legal right to work.

Local entities can bring more legal risks than working with an EOR if not properly managed. A best-in-class EOR has a team of legal and HR experts to navigate complex compliance requirements, so you don't have to.

If you establish a global entity, make sure your in-house HR team has the time, tools, and knowledge to stay on top of evolving compliance obligations.

Challenges in global entity management 

For many years, establishing a legal entity was the default way to expand globally. EOR solutions emerged to simplify the administrative, compliance, and financial burden of global entity management systems. 

Compliance frameworks

Establishing a global entity requires navigating labor and employment laws and tax requirements that vary across countries. Undetected compliance gaps can lead to costly fines and reputational damage. Maintaining an entity requires local expertise and close monitoring of regulatory changes. 

An EOR does all of this for you and provides the skills, support, and technology to mitigate compliance risks. 

Administrative workloads

Managing international payroll, benefits, and HR functions creates major administrative burdens. With a legal entity, you'll have to handle all these processes while meeting local data protection standards.

An EOR protects productivity in core business activities by streamlining administrative duties for efficient global operations.

Financial management 

Legal entities have to navigate fluctuating exchange rates, varying tax regulations, and diverse reporting requirements. An EOR can guide you through these complexities and provide the infrastructure you need to streamline financial management in global markets. 

When to use an EOR vs. an entity

Consider these three factors to decide if an EOR or a global entity is best for your company:

1. Business goals: Do you have a long-term commitment to this market or region?

2. Budget and resources: Do you have the resources to cover the varying expenses of managing an in-country entity infrastructure? Or are you looking for a more affordable entry point with predictable fees?

3. Risk tolerance: Can you manage compliance risks and administrative challenges on your own? Or would you prefer a team of local experts to manage these responsibilities for you?

When to choose an EOR

An EOR is the best solution if you:

• Need to minimize risks and limit liability exposure in unfamiliar legal environments

• Want to test new markets while maintaining agility

• Plan to hire employees in multiple regions or operate in several countries simultaneously

• Want to relocate employees to another country

• Prefer predictable expenses

When to establish an entity

Establishing a global entity is best if you:

• Have a long-term commitment to a specific market

• Have the resources to absorb higher upfront expenses and variable monthly expenses

• Can manage HR tasks and administrative duties internally

• Operate within certain regulated industries that require a legal entity to operate in the country

If your company plans to establish a local entity, you can use an EOR as a temporary solution while completing the setup process. Or you can wind down a global entity and easily transition to an EOR to streamline HR functions and simplify compliance.

Why trust G-P

As the recognized leader in global employment , G-P helps companies of all sizes build and manage global teams in 180+ countries without the need to establish new entities. Our industry-leading global employment products and EOR solutions are backed by the largest team of in-country HR, legal, and compliance experts to streamline and simplify the entire global employment lifecycle.

We’ve helped hundreds of customers reach their global employment goals with ease. For example, we supported Karger Publishers in scaling to 15 countries, while ensuring full compliance with labor laws in each location.

Build global teams quickly and compliantly with G-P

For companies seeking easy access to new markets with built-in compliance and zero legal guesswork, an EOR is the best choice. 

Book a demo to learn how our EOR solutions can help you go global and stay compliant.