Direct Hire vs. EOR: Can You Employ Someone Abroad Without a Local Entity?

When hiring abroad for the first time, most businesses begin with a simple question: Can I pay someone abroad directly without a company in that country? The answer is also simple: Typically, no. Except for the small number of countries that make allowances for non-resident employers (NREs) or cross-border payroll, a company can’t hire someone in a foreign country and act as their direct, legal employer unless they register a local entity and employ them under it.

This is why many companies opt to use an employer of record (EOR) to employ their workers abroad. The employer of record already has a local entity in that country (or has an arrangement with a third party who does), and acts as the legal employer of your workers.

In this article, we’ll look at your two options if you want to hire and pay employees abroad through a business entity to stay compliant with foreign laws: An EOR or your own locally established legal entity. We’ll also look at which countries have NREs or cross-border payroll and examine if working with independent contractors might be an option, instead of direct employment.

Can I employ a foreign worker by simply paying them via my company’s current payroll system?

No matter what country your worker is in, it’s illegal to simply pay a foreign employee directly without paying the proper taxes and offering proper benefits. Remember: You must abide by the rules of your employee’s country — not the one your company is headquartered in. This means that even if you only hire one person in that country, you (or an EOR) must still have a legal entity registered in that country, run locally compliant payroll, and make proper social and tax contributions.

What about non-resident employers (NREs)? Is this a viable option for paying foreign employees?

Some countries, especially those in the European Union, offer arrangements that let companies conduct payroll from a foreign country. Known as non-resident employer (NRE) or cross-border payroll arrangements, they allow your company to pay foreign employees and make the proper tax and social contributions without having a legal entity in that country.

While somewhat common in Europe thanks to the European Union, these arrangements are not allowed in Asia and are rare elsewhere in the world. And even when they are available, they’re often not the best solution for businesses. For example, in Australia, Brazil, and parts of the United States, they’re allowed by law, but other rules and regulations around payroll or registration make forming a legal entity easier, more practical, and/or less expensive.

What happens if I just pay a foreign worker directly, with no entity or EOR?

The consequences of not following local employment laws can be extremely dire. In addition to having to pay back taxes and social contributions, financial penalties are often severe, and can include asset freezing. In some instances, company executives can even face criminal liability. And of course, there’s the harm to your relationship with that worker and your entire workforce at large.

Is it legal to pay someone abroad as an independent contractor?

Most countries around the world do allow for some kind of independent contractor arrangement between one of their citizens and a foreign company. However, the risk is high. All of those possible financial penalties that we just discussed (that can happen when you pay a foreign worker directly without paying taxes or making social contributions) still exist. If you work with an independent contractor, but your relationship with that contractor looks like an employment relationship, you may be cited for worker misclassification. This violation can carry some large penalties — for example, the penalties for worker misclassification in France can reach up to €225,000 EUR. You may also be held responsible for backpay, benefits, and social contributions that should have been provided.

How do I know if it’s OK to treat someone who works for me abroad as a contractor?

It’s hard to know. Worker classification laws are both variable and volatile. In the last five years, countries in all six major continents have passed new laws regarding worker classification. In addition, in such jurisdictions as the United States, India, and Australia, some rules regarding how a worker should be classified are based on legal precedents, which can change unexpectedly.

Whether or not a worker can be treated as an independent contractor often relies on factors like what kind of business functions the worker is performing, how much oversight you have over their work, and whether the contractor can do work for other businesses while working for you. To figure out if you’re at risk for misclassifying someone as a contractor who should be a full employee, check out our Worker Classification Calculator.

How is hiring an international worker as a contractor different than hiring them through an EOR?

Hiring someone abroad through an EOR instead of attempting an independent contractor arrangement makes all the difference when it comes to compliance and worker misclassification risk. The EOR already has a business entity set up in the country you’re employing in, and acts as the legal employer of your workers in that country. The EOR takes on the responsibility — and legal risk — of paying proper taxes and social contributions, as well as ensuring your employees receive all paid holidays and other benefits guaranteed by local labor laws.

What's the difference between direct hire and EOR abroad?

A direct hire is someone who works directly for your company, which requires that you have a legal entity abroad. This means you have to set up and register a subsidiary of your business or an entirely new business in a new country, including typical requirements like opening a local bank account and having an in-country representative. Because these requirements are costly and time-consuming, many companies turn to an EOR.

Using an EOR allows you to get employees up and running in a new country in a drastically shorter time frame (around two weeks), usually with less cost. However, in many countries, EOR employees may be limited in the duties they’re allowed to perform. For instance, because of medical licensing requirements, healthcare workers often need to be direct hires. Because of tax exemption status, non-profits might also have to employ workers as direct hires.

Additionally, having EOR workers perform revenue-generating functions like conducting sales and making business deals can trigger permanent establishment risk. When a country determines that your company is permanently established, this can necessitate the creation of a local entity to employ these workers and pay local business taxes.

How do I figure out the best way to employ someone abroad?

To determine whether you should use a direct hire, EOR, or independent contractor approach, consult with the professionals. At Safeguard Global, we offer solutions for all three employment arrangements and can give you guidance on which solution (or solutions) might best suit your needs. Contact us today for a personalized demonstration.