If there’s one thing that we can be sure 2024 will bring, it’s the fact that we’ll all be using AI tools like ChatGPT more frequently. That’s why today we’re having a little fun. We’ve decided to pit ChatGPT against Steve Malley, Global Director of EOR, our senior expert on how to properly evaluate the best time to transition from Employer of Record (EoR) to a legal entity. As you’ll see from today’s Q&A, there’s more to EoR transitions than meets the eye (even if that eye belongs to the world’s most powerful AI engine).
Without further fanfare, ChatGPT, meet Steve.
Here’s the question we asked ChatGPT:
“When is the right time to transition from EoR to payroll with owned entities?”
ChatGPT’s response on the right time to transition from EoR to legal entity:
The right time to transition from an Employer of Record (EOR) to payroll with owned entities typically depends on several key factors. These include the scale of your operations, the stability and long-term commitment in a particular market, the complexity of local employment laws, and your organization’s readiness to handle compliance and administrative responsibilities.
Generally, a transition is advisable when the company has grown sufficiently in a foreign market to justify the investment in setting up a local entity. This is often when the number of employees reaches a point where the cost savings and control over employment practices outweigh the convenience and cost of using an EOR. It’s also crucial when a company needs a physical presence to enhance business operations or when it desires more direct control over its workforce.
Additionally, the transition should be considered when the company is confident in its ability to manage payroll, tax, and legal compliance in-house or with local partners, as these responsibilities become significantly more complex and risky without the EOR’s infrastructure and expertise.
HSP’s Steve Malley responds:
Employer of Record (EoR) solutions are often the starting point for businesses hiring talent abroad (specifically, outside of the company’s home jurisdiction). However, given that an EoR is rarely an effective permanent solution for most companies, you’ll want to consider when it makes business sense to transition from EoR to establishing a legal entity.
Because this transition is typically high-stakes and complex (involving everything from setting up the entity itself to managing payroll, accounting, and taxes), you absolutely need to get it right. It’s not just about timing—it’s about all the financial, legal, and other compliance-related factors that comprise setting up a legal entity. In fact, most companies lack the in-house expertise to manage the transition effectively, so consider bringing on an expert in entity management to avoid costly missteps or compliance issues. That said, if done at the right time, transitioning from EoR to a legal entity can be a crucial driver for your company’s growth.
Here are some factors to help you evaluate whether your company is ready for a transition.
Your growing headcount in a country can be more expensive under EoR.
For starters, cost will become a significant factor when your company’s headcount in a country reaches a certain threshold. That might be the first thing you notice. For example, if your business is paying around $700 per month for ten or more workers, the costs you incur through your EoR solution could be double when compared to the expenses you can expect from transitioning to an entity. In short, when the cost of using an EoR service exceeds that of managing these tasks internally, transitioning from EoR to a legal entity becomes a financially sound decision for your globally expanding business.
The types of hires you make under EoR can expose you to Permanent Establishment (PE) risk.
The nature of the hires under your EoR provider should also influence your decision to transition from EoR to a legal entity. If your company employs revenue-generating individuals or if you’re generating revenue in a country where you’re using an EoR provider, you may well face PE risk—which can lead your company to face unexpected tax liabilities and compliance issues. You can sidestep this by establishing a recognized, official presence in that country—a legal entity.
EoR can hinder the success of Mergers and Acquisitions (M&A).
Because M&A can be a stressful time for all affected employees, a smooth transition can pave the way for a more successful M&A. A key part of this can be ensuring employee trust and confidence through the restoration of employee benefits. Unfortunately, your EoR provider may not be able to support this. If you find that you are facing limitations in EoR arrangements around prior employment agreements (use proper due diligence during your M&A to flag this), consider a transition from EoR to a legal entity to ensure that you can effectively manage your changing global workforce.
EoR: Your Start, but Not Your Endpoint
It’s common (and advantageous) for companies to start with an EoR solution for their first international hires. Doing so serves as an important stepping stone towards broader international market expansion. However, think of EoR as the beginning of your global HR expansion strategy, not the endpoint—you are not bound to this approach indefinitely. As your business grows and the global landscape changes, transitioning to a legal entity can offer you more control, compliance, and cost-effectiveness across your growing international operations.
As part of your growth strategy in the global marketplace, be sure to regularly evaluate whether it’s time to transition from EoR to a legal entity.
ChatGPT versus HSP: Real-world HR experience wins every time
In contrast to ChatGPT’s generic response, our perspectives—as experts with real-world experience—show that there is no “one size fits all” approach to transitioning from EoR to a managed entity. Every company is different. While fundamental principles apply overall, how those principles are applied is a differentiator to a streamlined, efficient, and cost-effective transition. That’s where experts with proven, country- and region-specific expertise can make all the difference.
While there are many service providers who bring large-scale, standardized solutions to global HR challenges, an HR expert with a tailored approach and real-world expertise will always deliver the right results for your company. In fact, our clients frequently share how much they appreciate that HSP has become an essential extension of their internal teams.
“HSP has the ability to make our problem theirs and act as an internal extension of our team.”
(Jesper Oestergaard, Head of Global Mobility and Payroll at FLSmidth. His team partnered with HSP to launch a successful global payroll implementation in this recent case study.)
The HSP high-touch, hands-on approach sets us apart and is a cornerstone of the personalized, bespoke solutions we deliver. Contact us today so that we can start delivering your custom solutions.
