HR Leads Business

Apr 4, 2022 | Lorelei Carobolante, GPHR, SCRP, HRCI Contributing Writer

Keeping Up to Date with Compliance-Related Risks When Expanding a Business into a Foreign Country

Global HR professionals should be familiar not only with the laws and compliance regulations to which their company must adhere in their country of origin, but also with the same types of laws and regulations in the countries in which their company wants to create satellite offices, subsidiaries or other types of operations.

They also need to keep in mind that those can change seemingly overnight. As an HR professional with more than two decades of global experience, even I am amazed at the constant change. This pace of change, especially over the past year, makes it even more important for you to be able to explain the different options for your organization and know how to keep yourself updated about them.

You should be in a position to help your organization act strategically about expansion into new locations and monitor changes that influence available options. If your leadership tells you, “We are going to invest in and open a subsidiary…,” you should offer a response such as, “Before you do that, why not have the individual work under an employee of record (EOR) first to get a sense of what the market is like for the employees and the talent that is available there?”

This gives your company a chance to determine what will work best in that new location. This option to open a subsidiary at a later date – after you have learned more about the market, the regulations, the labor market, etc. – remains open.

The most important thing to keep in mind is that the choice isn’t an “either/or” choice. It’s a matter of understanding what options are available and advising your company about what may work best at the point of expansion planning.  

If your company doesn’t have a subsidiary in a country in which it needs to expand, and needs someone who is actually employed and dedicated 100 percent to the company, one option for that expansion is to use an Employer of Record (EOR) model. Of course, there are other considerations to keep in mind.

Below are examples of options I recently shared in a presentation on Strategic Global HR Advice for Companies Opening Operations in New Countries on Alchemizing HR.

Employer of Record

A traditional EOR would hire local nationals on your company’s behalf, manage traditional employment tasks and adhere to local regulations and taxes. By serving as the employee’s legal employer, the EOR could take the place of opening a subsidiary (either temporarily or permanently). Since the employee(s) is operationally dedicated to your organization, focusing solely on growing the business in the expanded market can be achieved quickly.  

For example, if your company uses a licensed EOR, it will hire local citizens on your company’s behalf. Although the EOR would hire them as their employee, they would contract them to your company operationally. So, they work in their job role and interact with your company’s management. The EOR essentially only manages the payroll and employment legal-compliance processes while supporting your organization locally.

Professional Employer Organization

Often, a company wants to send someone to the new market to lead an expansion because that person already knows the company. They are a foreign national; so, they are going to need to be sponsored for a work permit and residence visa (depending on the country). Additionally, many countries now have a limited number of work-permit slots for foreign nationals. There are different strategies you have to use. One is – as you probably know – a Professional Employer Organization (PEO), which functions as an EOR but also can sponsor foreign nationals as their legal employer. Keep in mind that the choice will depend on the country the foreign national is from and, ultimately, on the government regulations for immigration visas and work permits.

Subsidiary

Creating a subsidiary doesn’t necessarily mean you can hire a foreign national. Like with a PEO, the target country’s immigration laws will affect this option. In Saudi Arabia, for example, if you expand as a subsidiary, you can generally have one foreign national, but you may have to hire one local national as soon as you are ready to hire another employee. Countries have different rules for hiring foreign nationals, and those rules can also be based on the type of subsidiary, its industry sector and the foreign national’s job role and qualifications.

Regardless of which path your company takes, a truly strategic global HR professional should be aware of all of the options, be able to talk knowledgably about them and know how to find out more about each. In the next few examples, you will see why this is so important:

One company with which I have worked opened a subsidiary in India, but they do not have their employees working under the subsidiary. They want the subsidiary to focus on the business; so, their employees are under EOR employment. They are citizens of India, and their organization has a wholly owned subsidiary in India at the same time.

Another company has a group of employees in China, and they also have a wholly owned subsidiary without any employees. They chose to put all of the employees under an EOR, because the EOR knows all the ins and outs of employment compliance that can change often. The EOR also manages the HR processes, so the employees can focus on getting business and growing the company rather than having to manage it themselves under their subsidiary. However, China is unique in its approach to EOR services. One EOR manages only Beijing and a second EOR manages employees located in the rest of China. This means that, although the employees are contracted to one company, two different licensed EOR firms must be used.

A third example is a U.S. company that has a subsidiary in the Philippines, and all of the employees are actually employed by that subsidiary. However, to manage employment process compliance, they use an EOR that also provides payroll services and other governmental reporting assistance, including employee tax returns and monthly and annual local government filings. In this case, all employees  are legally employees of the subsidiary. However, given the complexity of adhering to Philippine employment compliance (which also has changed frequently), they have the payroll-service manage all aspects of it for both their local and foreign national employees. Additionally, the Philippines requires all local companies (including foreign subsidiaries) to make some direct government contributions each month. The payroll service calculates the amounts due; the subsidiary admin makes the contribution, generates the receipt reports and confirms same with headquarters and the payroll service.   

These are real strategies and examples of paths that can be taken. Each has ramifications, such as opportunity costs and benefits, including risk management (avoiding compliance errors). In all cases, if you operate as a foreign organization, you should be comfortable and very familiar with local employment compliance processing and reporting before you localize your payroll and HR for your subsidiary. There’s a lot of risk otherwise.

Summarily, recognizing ways to strategically use the EOR model, either the traditional or PEO approaches, or subsidiary model can strengthen your ability to contribute effectively to your growing organization. When an HR professional recognizes all of the multiple paths that could be taken, then they will be much more informed when speaking with senior management and be able to help them narrow down the choices that are best for their organization.

Lorelei Carobolante is the CEO of G2nd Systems, an ISO/TC 260 HR Management Registered Expert, Project Leader for ISO 30415:2021 HR Management Diversity and Inclusion, and Chair for ISO TC/260 HR Management U.S. Technical Advisory Group. For questions or additional information, contact Carobolante at loreleic@G2nd.com.