When Does a Small Entity Abroad Still Make Sense for a US Company?

Felicia Roderick, client growth manager, North America, at Safeguard Global says a small entity abroad isn't automatically a problem. It should be tested periodically against headcount, trajectory, cost, administrative burden, and employee continuity. She walks through that test, one customer's move away from three entities, and what protects employees in the transition.

What should a US company ask about its small entities abroad?

A big thing they need to do is reassess those teams and take a deeper dive into when they were created, why they were created, and whether they are currently sustainable. What is the reason for those teams? Is the HR team able to support these entities? What is the employee experience?

There is usually a strong business reason why the entity exists. But sometimes an entity was created for a need that existed several years ago, and the company hasn't stopped to take the time to reassess whether that need still exists, how many employees there are today, how much internal administration it requires, or if it’s the best financial position for the company.

When should a US company open its own entity instead of staying on EOR?

We always do have a rule of thumb here at Safeguard Global that if you have 15 or more employees under Employer of Record (EOR), it may be time to consider opening your own entity.

For instance, I have another client. They currently have four employees with us in Poland, but they plan on bringing 40 more in at some point. And that's where I brought up in the conversation: Would you want to pay for an employer of record for 44 employees? At that point, it would make more sense, structurally and economically, for you to open your own entity. We do offer an entity setup and management service.

When is EOR a better fit than keeping a small entity abroad?

At the end of the day, EOR is a more economically sound way to go, and you also get more value and savings when you have one or two employees.

Usually, a lot of customers come to me to enter a brand-new market. What stuck out to me about another customer in particular was that this wasn't about entering three new markets. They already had employees in these three markets: Hong Kong, Finland, and Italy. Italy had four employees. Hong Kong and Finland had only one each. They have a very lean HR team, and the sense that I got from them was that managing these entities took up a lot of their time. Their team just didn't have the bandwidth or knowledge to maintain entities in these countries for one-off employees or a small team.

We initially had discussed Core HR, which is our HR and benefits service. But with Core HR, there is some work that they would need to do to maintain those employees on their end. They would still have to maintain the entity. They would still have to maintain any localization needs or risks. And Core HR can be costly if you have only one employee.

What helped them when we moved to EOR was that we took on all of that — not only HR and benefits, but also payroll. We work directly with the employee, and we have our own HR team. This removes not only the overhead and cost of managing an entity but also the need for a local bank and local lawyers. These customers might have a presence in a country, but they don't have someone on the ground as we do.

What protects employees when a US company moves them from its own entity to an EOR?

A big point the customer wanted to ensure was continuity for their employees, because a lot of these employees had seniority. And, unfortunately, not everything transfers perfectly in some of these countries because the legal and benefits arrangements may differ under the new employing entity. Hong Kong, Finland, and Italy could not be handled through one universal transfer.

In Hong Kong, a lot of the focus was making sure the customer understood both the mechanics of the separation and the rehire, and then what that new employment package would look like. In Finland, we didn't want that transition to feel like they were suddenly starting over simply because the legal employer was changing. Finland was a good example of how something that sounds operationally simple can have much larger implications for the employee experience. Italy really demonstrated why you need local expertise. You can't take what worked in Hong Kong or Finland and simply reproduce it there.

When you don't have the knowledge yourself about that local market, it could create a lot of stress and anxiety. In a lot of countries, especially the most popular markets, Safeguard Global has its own entity there. Your employee can have face-to-face meetings or Zoom meetings. They have a contact they can reach out to. They don't have to go through a third party, which can sometimes still have communication delays.

Why would an EOR provider ask why you're hiring someone?

I always want to understand why someone is asking for the service. For one recent example, I had a customer that approached me about using our EOR in China for a finance manager. Initially, it sounded like a pretty standard request. Then we received the employee's details and learned the customer only intended to employ the individual through EOR for a few months, while they were closing their existing entity.

That changed the conversation significantly. China's standard fixed-term structures were much longer than what the customer was proposing, and our standard termination notice also had to be taken into consideration. So, instead of moving forward immediately with the EOR request and just putting that through as a sale, you have to go back and check in. I went back to the local team to evaluate whether this kind of arrangement would actually make sense.

Because the reason behind the temporary employment was that they were closing an entity, it also created an opportunity to make them aware that Safeguard Global can support entity dissolution. So instead of EOR, we could work with them to close their entity. That's why I always include those questions when sending candidate information, once you're ready to move forward: Why are you hiring this person? Is it temporary? What is the term length? Is it for entity dissolution?

What should every HR and global workforce expansion leader remember?

Reassess each small entity against what it costs, how many employees you plan to have there, how much internal administration it requires, and continuity for your employees. Then choose the structure country by country. Not every country is the same.

If you're a US company with a handful of small entities abroad and you're not sure they still fit, bring me what you have in each country: the headcount, why the entity was created, and what's planned for that team. If the structure still matches the business, I'll tell you that. If it doesn't, I'll help you work through what an actual transition would look like.

Talk through your entities abroad