Transitioning from EOR to local payroll

So, you’ve been using an International Employer of Record (EOR) for 18 months, you’ve determined that there’s a market for your product and services, you’ve grown your headcount beyond the initial hires, and now you are asking if the EOR model continues to be a good fit for your next stage of growth. 

The EOR allowed you to deploy your initial hires in these new markets, but there is more to consider as you continue to grow.

• You have limited direct control over the local HR processes, employee experience and strategic alignment. The EOR is creating a separation between you and your employees. 
• The EOR fees increase in line with your headcount, and they can become substantial, ranging from $500 per person per month to 25% of total employment cost, depending on which EOR you are using. 
• Your brand is being diluted as the EOR's name appears on employment contracts, potentially confusing employees and diluting the company's direct brand presence.
  
• You can’t tailor your benefits offerings to attract specific talent or align with company culture, as the EOR offers standardised benefits and HR policies.
• Your reliance on a third party for sensitive employee data introduces potential risks and compliance complexities (e.g., GDPR, local data protection laws).
• Managing multiple EOR relationships across various countries can become administratively cumbersome and fragmented.
• The EOR model becomes transactional and does not foster a long-term strategic presence or deeper market integration.

The good news is that it is relatively easy to move away from an EOR to your own local registration, whether it be a branch or a subsidiary. Depending on where you are in the world and the size of your headcount, it may also require some careful HR planning. 

Typically, we see companies move away from EORs to establish their own legal entity or subsidiary in the target international market, which directly employs and manages local staff. This provides the company with some significant benefits, which are better placed to support the next stage of growth, including the below.

• Greater engagement from employees because of the direct employment relationship. By becoming the legal employer, companies are also better able to directly communicate with employees on all issues and better integrate the employees into their corporate culture. 
  
• Increased brand presence through the company's direct investment and commitment to the local market, strengthening brand recognition and reputation.
  
• The ability to directly implement global HR strategies, tailor compensation and benefits, and develop local talent pipelines aligned with long-term business goals.
  
• Full control over local operations, decision-making, and strategic direction without EOR intermediation.
  
• Significant savings as headcount increases due to the removal of ongoing EOR service charges. 
  
• The potential to take advantage of local tax incentives, deductions, and more efficient tax planning structures available to direct entities, including recovery of VAT/sales tax on your operating expenses. 
  
• Reduced risk of errors by taking direct control over local labour law compliance, payroll, and tax filings, mitigating reliance on a third party's interpretation and execution. This allows for proactive risk identification and management.
  
• Direct control over employee data, allowing strict adherence to internal policies and local data protection regulations (e.g., GDPR, CCPA, etc.).
  
• A clearer framework for contracts, intellectual property, and dispute resolution.
  
• Reduced ‘Permanent Establishment’ or ‘Nexus’ risk by establishing a clear tax presence.
  
• The ability to use the subsidiary as a platform for further business development, sales expansion, and potentially manufacturing or service delivery in the region, including other countries. 
  
• A clear sign of commitment and maturity to investors, partners and customers, signalling a serious approach to international growth.
  

So, while EORs offer initial speed and simplicity for global expansion, continued reliance on them presents limitations in control, cost efficiency, risk management, and long-term strategic alignment. Establishing a subsidiary offers greater operational control, significant long-term cost savings, enhanced legal and compliance certainty, and a stronger foundation for sustained international growth and talent management.

Get in touch with Stephen Wares for more information or to explore your options.