Why Some US Companies Prefer Employer of Record (EOR) Partners Over Self-Hiring

For lean startups watching every penny, the dream of rapidly scaling into a global business can quickly become a nightmare of unforeseen costs and compliance headaches. Running a multinational operation requires mastering a byzantine web of local employment laws, tax jurisdictions, immigration rules and more across a patchwork of countries. Even minor missteps can result in devastatingly large fines and legal liabilities.

Going it alone, and the expenses rapidly pile up — from establishing legal entities to handling international payroll, benefits, relocation and more. Pioneering founders quickly learn there are thousands of nuances to hiring, managing and paying talent compliantly in each new market they enter. It’s an exorbitantly complex undertaking that very few early-stage startups have the resources or expertise to take on internally.

The human capital black hole

At the core of the global expansion challenge is the costly burden of human capital management across borders. Something as fundamental as hiring a single employee in a new country can unleash an administrative quagmire requiring:

  • Registering a local business entity
  • Navigating work visas/sponsorship regulations
  • Setting up international payroll and benefits systems
  • Understanding employment laws and termination rules
  • Calculating statutory costs like social security and healthcare contributions
  • Remaining compliant with evolving labor, data privacy and tax regulations

Just the legal fees involved in entity establishment can run into the tens of thousands of dollars per country. The hassle of incorporating is compounded by the financial risk of permanently establishing a taxable presence through employees on payroll, which can trigger surprise tax bills later. It’s enough to deplete a startup’s cash reserves before they even identify their first international hire.

Providing a robust health insurance, retirement and benefits package is another major expense and complication for global teams. In the US, companies typically spend $16,000+ annually per employee on benefits. Those costs fluctuate wildly across different countries, regulations and workforce needs. Establishing relationships with benefits brokers and providers piecemeal is both expensive and time-consuming.

The dispersed office burden 

Even after running the hiring/onboarding gauntlet, companies must still contend with the day-to-day logistics nightmare of managing a dispersed global workforce. Simple tasks like procuring and shipping office equipment, booking workspaces, reimbursing expenses and providing IT support become herculean challenges at scale. Many companies underestimate these expenses until it’s too late.

According to one estimate, setting up a remote employee’s workstation alone can cost $2,000-$4,000 in hardware, software and cloud services. Additional costs add up quickly for remote stipends, coworking memberships, IT licenses, collaboration tools, compliance training and more.

Staying on the right side of the law 

Perhaps the highest priced risk of going global alone is the potential for crippling regulatory penalties and lawsuits. Employment codes vary wildly between countries, with complex laws governing issues like:

  • Worker classification/contractor vs employee
  • Minimum wage and overtime requirements
  • Paid time off, leave policies and termination rules
  • Workplace discrimination, harassment and safety
  • Data privacy and cross-border data sharing

Remaining compliant is a monumental undertaking. Even large enterprises with localized legal teams struggle to stay ahead of rapidly evolving statutes and enforcement in each country. A missed payroll filing, unpaid tax or wrongful termination dispute can quickly escalate into millions in fines, legal fees and settlements for startups operating unprotected.

Fortunately, founders don’t have to chart this hazardous global expansion alone. A growing industry of professional employer organizations (PEOs) and employer of record (EOR) partners now provides guiding support.

These entities become the official employer for a company’s dispersed international workforce, handling all tasks like payroll, benefits, HR, taxes and compliance through locally-established entities. They take on the legal liabilities while the company maintains operational control over managing teams day-to-day.

While leveraging an EOR requires paying an additional service fee, it provides a turn-key global employment solution that enables rapid expansion at a fraction of the costs and risks of going directly into new countries. Well-funded enterprises may have the resources for setting up captive entities and overseas offices. But for most startups, it’s simply cost-prohibitive to attempt that level of scale alone in the earliest stages.

By tapping into an EOR’s ready-built infrastructure and local expertise, founders can unlock new talent markets while conserving cash runway for other growth priorities. It provides a strategic shortcut for reaching global customers and talent pools at a sustainable pace. For companies expanding their frontiers, having the right partner provides both economic sanity and compliance peace of mind.