If you’re currently using EoR to hire employees overseas, you already know that this solution can help you sidestep the complexity of the legal, financial, and regulatory requirements involved in overseas hiring. However, EoR is not a permanent hiring solution for most companies. For legal and compliance reasons – and the high cost – EoR is intended to be a short-term solution in most countries.
Using EoR incorrectly by not complying with country-specific requirements could trigger a change in how authorities view your company from a legal and tax status perspective. This change in status can force your company to abruptly transition from EoR to a legal entity.
This blog briefly walks you through four considerations to help you better understand the transition from EoR to permanent establishment. For detailed insights, download the ebook, 2024 EOR to Entity Transition Checklist, to learn about the key potential PE triggers that could jeopardize your ability to use EoR.
1. The role of headcount and other activities on EOR.
Your headcount and the types of activities you’re conducting can send a flag to the authorities and require you to terminate your EoR arrangement and become a tax-paying entity in that country – known as a “permanent establishment” (PE). Make sure you take stock of which types of employees and activities your company is undertaking in a particular country now and in the next 12-18 months. These factors may affect your ability to use EOR:
- Growing headcount: Depending on the size of your headcount, the number of employees can require you to end EoR and shift to a taxable status (“permanent entity”).
- Revenue and value-generating activities: The types of activities that you’re conducting can require a transition from EoR to a legal entity.
2. How transitioning from EoR to entity will affect employee benefits.
If you’re transitioning from EoR, how employees are affected by that transition is one of the most important things to consider. Because every country’s laws and requirements are different (and many vary by jurisdiction or locale), understanding these upfront is key to a successful transition. Because the benefits that the EoR provider offers are not necessarily the same ones that you’ll be able to offer to your employees under the new entity, make sure that you conduct a Conduct a benefits gap analysis and develop a plan to effectively communicate and manage any differences in benefits to employees.
3. Avoiding risk in employee transitions from EoR to entity
Companies need to exercise great care and consideration around managing the employee transition process. The transition from EoR to entity can be a time of significant change for employees – they will experience unexpected changes in benefits and compensation. If not handled correctly, those changes can create stress, loss of goodwill, turnover, and even legal liability for your company. A crucial part of this responsibility is understanding the entire transition process – what you are required to do (requirements from a legal and EoR provider perspective) and what you should do (provide proactive, clear, and accurate information to employees).
EoR provider requirements. Every EoR provider has their own requirements for moving the employees off EOR employment (the most obvious one being how much time the EoR provider requires to be able to start processing the employee transitions). In addition, how those transitions will be handled varies by country (which also affects employees).
Country-specific statutory requirements and employee protections. Each country has specific rules and regulations around the termination, many of which serve to protect employees (from notice periods for termination to collective bargaining agreements).
Employee’s original date of service carryover: How you carry over the employee’s original date of service (the date the EoR provider hired them) when that employee transitions to an entity is important. Because so many employee benefits are tied to the original hire date, workers will be very concerned about ensuring they don’t “lose” the benefits accrued from their original hire date.
4. How (and when) will you achieve operational readiness?
Even after you’ve made the decision to move to an entity, your transition isn’t over until your employees are actually working. Operational readiness can be tricky to plan for. You’ll want to start by knowing how much notice your EoR provider requires to terminate services. From there, you can create a plan to cover the full breadth of your transition from EoR, manage it well, stay compliant, and create a positive transition process.
To make sure that you achieve operational readiness with minimal disruption and risk to your organization, be sure to apply the latest and most comprehensive global expansion expertise and market intelligence. Download the ebook, 2024 EOR to Entity Transition Checklist, to learn about the key potential PE triggers that could jeopardize your ability to use EoR.
HSP is an end-to-end global expansion solutions provider focused on helping companies scale their operations overseas effectively and efficiently. We are the only global expansion expert to offer growing companies a full suite of end-to-end solutions designed to help them scale to any size, in any country.
Our in-country experts have delivered the full spectrum of global expansion solutions—from EoR to entity setup and management—across more than 100 countries (and counting). To help you make informed choices, try our EoR Cost Calculator to see when transitioning to an entity may be most cost-effective. HSP brings full payroll, accounting, tax, legal, compliance, and HR services to corporate teams, integrating with in-house staff to both guide and execute across every domain. Contact us today to start delivering your custom solutions.
