“Some benefits are customary, rather than legally required, but they may be necessary to attract local talent,” says Bill Kirwan, vice president, advisory for Vistra in the UK.
One path is to set up a local legal entity, such as a subsidiary or branch, which will allow the employer to provide workers with all legally required benefits. The employer may then add any customary additions it chooses. Establishing a legal entity offers the employer maximum flexibility in terms of allowable local activities and benefits provisions, but it can take months and costs can be substantial. Many organisations expanding abroad prefer a more tentative approach, hiring a small number of workers — or even just one — to gain a sense of the market before proceeding with a legal entity.
One alternative to establishing a full-fledged legal entity is to register in the target country as a non-resident employer (NRE). Establishing an NRE is typically less expensive and quicker than establishing a legal entity. But NREs are often intended to be short-term structures (perhaps lasting less than two years), and many are used to employ just a single employee or a few who carry out limited activities. Despite this, the employer must still take on full responsibility for hiring local workers, remitting their taxes and providing required benefits and any customary benefits. These are not easy tasks, and they can be difficult to justify given the short-term, limited nature of NREs.
Another alternative when expanding is to use an employer of record, or EOR. An EOR provider is a business with an established local presence that takes care of hiring workers and managing payroll, administration and benefits, while leaving the management of job duties to the client (i.e. the company expanding into the target country). An EOR arrangement may be a short term arrangement, or in some countries could last several years, while the company makes a decision about whether to establish a more permanent presence in-country. (It’s important to understand that due to rules related to corporate taxation, an EOR solution is not always an appropriate option when expanding into a new country.)
Providing statutory benefits
Before considering optional (i.e. non-statutory) benefits when expanding into another country, a company must ensure that it provides mandatory benefits under local law. An EOR provider will make this particular process easy, as it will be well-versed in providing statutory benefits in the target country.
Statutory benefits — which typically include medical insurance, pensions, employer’s liability, long term disability and more — are costly for any employer, but particularly burdensome and difficult to justify for companies with just a handful of employees. An EOR gets around this problem by working with many employers in the local market, giving it much more purchasing power.
“With an NRE, you’re on your own,” Kirwan says. Obtaining required benefits may be prohibitively expensive or even impossible. “In that case, the individual has to procure benefits for himself and get reimbursed by the company. That gives a big advantage to the EOR.”
An employer is also on its own when establishing a legal entity. Typically, an organisation establishing a legal entity in a new country will work with local experts to determine which benefits are required under local law (and which are customary) and how to provide them, including making any local payroll withholdings and remittances to local authorities. An EOR provider will itself have deep local knowledge and understand which benefits are required and customary. (An EOR will also take care of any withholdings and remittances.)
Understanding benefits requirements in new countries is often more complex than it might seem, especially since new employers may not know the right questions to ask to achieve compliance. “In many Latin American countries, employees receive a Christmas bonus. In Brazil, at the end of an employment contract, employees receive a service bonus. These are called bonuses, but they are statutory benefits, codified into law,” says JP Gooch, vice president of Vistra EOR operations.
Providing non-statutory benefits
Non-statutory benefits vary by country and are designed to supplement those required by law. As always, establishing a local legal entity provides maximum flexibility, both in terms of allowable activities in-country and what benefits an employer can provide. Once again, though, establishing a legal entity can be time-consuming and expensive. Using an EOR can be advantageous for smaller operations in particular, as coverage may not otherwise be available for a small number of workers.
“An EOR can offer more robust medical, life, disability or wellness policies than those mandated by employment law, which can be especially advantageous to a small employee population,” says Saul Howerton, vice president, advisory for Vistra in the US.
The most common non-statutory benefit is private medical insurance.
“If you need a knee replacement in the UK, under the state system, you may have to wait six to eight months. With private medical insurance, you’d likely have the operation next week,” Kirwan says.
Private medical insurance is usually offered as a perk to employees at the senior management level, but other non-mandatory benefits are available to everyone. A common one is extended maternity or paternity leave. In the UK, for example, women may receive six months off at full pay, rather than the mandatory 26 weeks at 80 percent of their salary.
In Eastern Europe and Asia, it’s customary to offer private pension plans in addition to those supplied by the state. “In Western Europe, pension schemes tend to be more generous, and supplements aren’t considered necessary,” Kirwan says.
Most non-statutory benefits are fully taxable, though governments do make exceptions. For example, in the UK, where it is customary to provide a company car for business and personal use, new legislation reduces the associated tax if the vehicles are electric. EOR providers may not be willing to arrange for car leases or may do so only for select clients and for a fee. The provider will also pass along any required insurance premiums to the client and likely also charge an additional fee for that service. In this area as in others, establishing a local legal entity provides greater flexibility.
Holiday parties, dinners for employees and their families, service awards and gifts may also be offered to show appreciation to workers. EOR providers typically don’t get involved at this level.
As a rule of thumb, when performing due diligence on an EOR provider, a company should determine what statutory benefits are provided and what non-statutory benefits are available under the EOR. These should be weighed against what non-statutory benefits are typically offered in the target country and what the organisation commonly offers, so the company can understand the limitations of the EOR provider relative to establishing a legal entity.
Companies accustomed to providing employees stock ownership plans, restricted stock units or stock options may run into roadblocks when hiring in another country. “Many EORs don’t want to get involved in the administrative tangles and legal risks these plans pose,” Kirwan says. Some provide stock benefits only in certain countries. Others allow companies to grant stock if they wish, but say it is up to the employer to file with tax authorities, and they must inform the EOR of any related payroll requirements.
“The bottom line is, if you’re dealing with an EOR, granting stock purchase plans is often not possible, and when it is possible, you have to manage it yourself. It can be a big headache,” Kirwan says.
Establishing a local legal entity will allow an employer maximum flexibility with regard to stock-related benefits, though of course this route will in no way eliminate compliance obligations. As for the NRE option, this is one of the cases where an NRE may offer a potential advantage. Since the benefits come directly from the employer, there is no need to find a local provider or have a large number of employees participate. But compliance requirements are tricky, and companies shouldn’t attempt to navigate them on their own. In fact, benefits law in general is highly idiosyncratic, and whether you use an EOR provider or establish a legal entity or NRE, companies should always seek competent local help to understand their obligations and options.
Compliments of Vistra – a member of the EACCNY.