Transitioning from EOR to local payroll

You have been using an International Employer of Record (EOR) for 18 months, identified international markets for your products and services, expanded your headcount beyond the initial hires, and are questioning if the EOR model remains viable for your next growth phase.

The EOR enabled you to deploy initial hires in new markets, however, you need to consider further factors as you continue to grow.

• You have limited direct control over the local HR process, employee experience and strategic alignment, creating hidden compliance risks and a separation between you and your employees.
• EOR fees increase in line with your headcount and can become substantial, ranging from $500 per person per month to 25% of total employment cost.
• Your brand is diluted as the EOR's name appears on employment contracts, confusing employees and weakening your brand presence and ability to attract and retain talent.
  You cannot tailor your benefits offerings to align your company culture, as the EOR provides standard benefits and HR policies.
• Reliance on a third party for safeguarding sensitive employee data introduces potential risks and compliance complexities (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 you can simply and efficiently plan and transition from an EOR to your own local entity registration.

Companies regularly transition from EORs to their own legal entity in an international target market, directly employing and managing their own people to support the next growth phase with the purpose of the following significant benefits.

• Engage employees more effectively, allowing better communication and integration into corporate culture. 
• Increase brand presence, directly investing in and committing to the local market, strengthening brand recognition and reputation.
• Implement global HR strategies, tailor compensation and benefits group wide, develop local talent pipelines aligned with long-term business goals.
• Control over local operations, decision-making, and strategic direction without any intermediation.
• Significant dollar savings as headcount increases by removing ongoing EOR service charges. 
• Take advantage of local tax incentives, tax deductions, and more efficient tax planning structures.
• Risk reduction and error mitigation through proactive risk identification, management of local labour law compliance and payroll tax filings.
• Contractual obligations concerning the transfer of intellectual property and non-compete clauses are more likely to be enforceable when a direct employment relationship exists.
• Sponsor work visas as a direct local employer.
• As a smaller employer ( compared to an EOR) benefit from more flexible employment laws, like Germany’s rule that unfair dismissal protections only apply if the company has more than 10 employees.
• Control over employee data, ensuring adherence to internal policies and local data protection regulations (e.g., GDPR, CCPA, etc.).
• Establish clearer frameworks for employment contracts, staff policies, and dispute resolution.
• Manage ‘Permanent Establishment’ or ‘Nexus’ risk by establishing a clear tax presence and strategy.
• Utilising the legal entity as a platform for further business development, sales expansion, and potentially manufacturing or service delivery in the region, including other countries. 
• Demonstrate commitment and maturity to investors, partners and customers, signalling a serious approach to international growth.

EORs do provide initial speed and simplicity for global expansion, however, relying upon them long-term will limit your control, cost efficiency, risk management, and strategic alignment.

Establishing your own legal entity provides greater operational control, significant medium-term cost savings, enhanced legal and compliance certainty, talent attraction and retention and a stronger foundation for sustained international growth

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