For forward-thinking organizations that want to drive growth whilst successfully mitigating strategic, financial, and HR risk

Guide to International Expansion & Hiring Talent Overseas.

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International expansion is often a goal for tech firms seeking long-term growth and success. However, accessing overseas markets and working with world-class people outside the home market requires careful planning as they involve significant challenges. And there are many myths about the right way to expand internationally.

Having a solid plan can result in delays, extra costs, and missed revenue targets.

But is there a right way to expand internationally: an approach that will allow you to recruit and retain great overseas talent in critical markets and disciplines while remaining legally compliant and protected from foreign laws?

There are a number of ways to tackle this, but certain key considerations should be at the heart of any global expansion strategy.

This guide addresses these considerations and aims to give you a complete picture of what your company should consider when planning your global expansion strategy.

  • Why is it important to get it right the first time?

  • What should you take into account if you want to do it yourself?

  • How do you recruit and retain global talent?

  • What are the ways of achieving global expansion?

  • What are the risks, and who assumes them?

  • Where do you stand legally in foreign jurisdictions?

Introduction

Making the right choices when expanding business internationally

A lot is at stake when you take a company overseas. Heads of Sales, HR Managers, CEOs, and boards of directors have different requirements relating to global expansion, finance, HR, and operations.

Any practical solution must address all of these issues and work the first time around. But within your organization, there might be some differences of opinion about the best way forward.

Some may want to handle your international business expansion in-house. And some may want to look for assistance in a third-party solution like an Employer of Record (EoR) or Professional Employment Organization (PEO).

While there are benefits to all these options, they also have potentially substantial drawbacks.

  • Opening an entity in an untested market can be time-consuming, not to mention an enormous risk—understanding different cultural, tax, and legal systems is no small undertaking.

  • There can be many risks with PEO / EoR solutions, which can lead to legal exposure—in both employment, intellectual property, and taxation law.

The best solution for your long-term objectives and growth should help you achieve your targets while not putting your business at any risk. It should:

  • Ensure compliance with local laws

  • Avoid direct exposure to foreign laws

  • Protect your IP

  • Minimize your HR burden

  • Help you retain your top talent

  • Set the foundations to establish a future entity

Most importantly, the solution should allow you to focus on what you do best—growing your business.

Ensuring success the first time around is a challenge. But getting it right means driving things forward: more customers in more markets generating more revenue.

Setting up your own international entity without help

Global expansion is a big step—and something you, understandably, want to retain control of. Your team’s initial feeling may be to open a legal entity in the target foreign jurisdiction and manage it in-house rather than outsource the challenge.

Whether opening your own entity in a foreign jurisdiction is the correct option for your business depends on your in-house expertise, risk tolerance, and the time you have available for administration.

While setting up a legal entity in most overseas jurisdictions can be a relatively simple task for companies, there are challenges associated with the “do it yourself” method.

The following subsections are several issues to consider.

A possible route to opening an international entity

The following is a possible route companies could take in a foreign jurisdiction.

Establish relationships with local accountants and attorneys

Set up foreign bank accounts

Find premises—either your own or perhaps a serviced office

Manage your own HR function or outsource to a local services provider

Register the local subsidiary with tax, employment, and other local government entities

Recruit new employees—either directly or via local recruitment company(ies)

Send over a lead team member from HQ

Transfer cash from parent to subsidiary

Set up multi-jurisdictional Intellectual Property transfer agreements

Create local employment contracts, employee handbooks, HR policies, benefit structures, etc.

Setting up your own international entity

To set up your own entity in a foreign jurisdiction,  there are two models a company can generally choose from:

A branch is not a separate legal entity from the parent company, but an extension of it, operating under the laws of another jurisdiction. As part of the parent company proper, liability and tax requirements (like tax treaties between the countries) are its responsibility. Essentially, the US parent company trades directly in the foreign jurisdiction and is subject to all foreign laws.

A subsidiary (usually a limited company), is a local entity owned and run by a foreign parent company. It is a distinct legal entity with separate legal liability. It can enter into contracts, and it is subject to local taxes and laws in the same way that any other resident company is.

Which model is best?

Which model you choose depends less on the parent company’s practical and commercial preferences and more on its ability to fund and source the local law and tax professional resources to enable expansion via a subsidiary.

Ensuring you manage the process correctly is crucial as not doing so can lead to fines and/or being shutdown—impeding growth before you have started—not to mention long-term reputational damage.

Sending your best staff

When starting out in a new country, it seems logical to send your best people to jump-start the process. However, this could potentially be a loss for your main team and negatively impact results in your most established market. And just because they are your best staff in the US, it does not mean they are knowledgeable about the local market.

If you do decide to send employees over, you may still have local employer obligations, including workers’ health and safety responsibilities.

And depending on the country in which you’re launching, those employees likely will need work visas. In the UK, for example, there are various “business visitor” visa categories, offering different scopes of activity. Fines for failing to follow the requirements of the UK Border Agency are significant.

While your company and personnel will almost certainly meet immigration requirements, visa applications can be longwinded and time-consuming processes that can detract from your main goal of global expansion. Additionally, before applications for visas are made, the entity needs to attain a sponsorship license, which, once again, is timely, convoluted, and can only be achieved by a local subsidiary.

Recruiting top talent without knowing the local market

When the employment landscape is unfamiliar, finding great talent is more challenging. Companies are often forced to search for candidates using ‘cold’ methods such as LinkedIn, or they rely on traditional recruitment agencies.

When weighing up opportunities between established local companies and new foreign entrants, candidates can be reluctant to go with an unknown entity with no history in their country. But even if you do manage to identify the right candidates for your business, there are still a host of other factors that could negatively impact the hiring process.

Culture: Companies recruiting overseas should consider cultural differences in their target destination—even if they share a common language. The recruitment approach is likely to be different from where the head office is based. And understanding cultural differences such as working conditions is important during the recruitment process.

For example, although there are many similarities between the US and UK, such as a hard work ethic, there are still cultural differences in approaches to work. For example, employees in the UK traditionally have shorter working days and more vacation days than their US counterparts. Being unaware of these differences will affect your chances of attracting the right talent.

Distance: Distance is still a barrier to overseas recruitment—both physical and time zone differences. Of course, the internet has shortened distances and made things easier, but there is still merit in being able to access local networks that have been nurtured over the years.

Understanding and complying with overseas regulations

The administrative costs do not stop when the entity has been established. Employers have to file taxes, make social security payments, run payroll, and carry out a slew of other HR functions to be compliant with local laws and regulations in the target market. The challenge is first understanding the regulations and then continuing to keep abreast of changing legislation.

Not complying with local regulations—being unaware is not a get-out-of-jail card—can put an end to expanding in that particular overseas market.

Local employment law is another potentially problematic area. Whatever the target jurisdiction, it will undoubtedly be distinct from US law. For example, in European countries, employment law is more employee-centric than in the USA, and ‘at will’ employment does not exist. There are also different holiday entitlements, benefits packages, and pension entitlements for overseas employees, all of which must be adhered to for compliance, not to mention attracting quality employees.

Opening an entity abroad takes a long time

Opening an entity abroad is a significant drain on resources. But perhaps the most considerable opportunity cost is the time it takes to do so, including all the necessary research before entering the market.

Direct costs include filing taxes, running payroll, and making the proper deductions from employees’ wages. However, indirect costs include the time and money it takes to address these direct costs and gain an understanding of how to deal with the legal, HR, and finance issues in the overseas territory. As it is unlikely the team has experience with local laws and regulations, there can be big risks when expanding internationally, including accidental non-compliance and fines.

In case you were planning to open a physical office

Considerable time will have to be spent researching the particulars of your physical office. Key considerations may include:

What is the best area?

Should it be near customers or competitors?

How will your choice of area affect employees?

Will your location affect your brand image, and does this matter?

Do you need to pay higher process in cities, or can you reduce costs by setting up in an out-of-town business park?

Do you need to be near transport links? If so, which ones?

Do you need a particular type of building?

Should you license, lease, or buy office space?

Global employment solutions: EoR vs PEO

If you decide it doesn’t make sense to do it yourself, you might look to a third-party global employment solution for assistance. PEOs and EoRs, collectively known as Global Employment Organizations (GEO), are popular and well-known solutions to help businesses expand globally. 

Though it should be noted that these solutions don’t offer a complete replacement for the “do it yourself” approach listed above. It’s rare for a GEO to offer more than simple recruitment assistance or any form of physical premises for your expansion.

Although some people use the two terms interchangeably, as global PEO and EoR companies do offer some of the same services, there are several differences between them.

What is an Employer of Record (EoR)?

An EoR service (or a global EoR) is a third-party that enables businesses to hire overseas employees without the need to open an overseas entity. In this arrangement, the EoR is the legal employer of the employees in the foreign jurisdiction. It can then undertake a number of functions, including onboarding and paying international employees, as well as adhering to legal compliance.

EoRs either operate in the target jurisdiction(s) or, sometimes, they hire third-party subcontractors to employ workers in countries where they don’t have their own operations. In this way, they are able to ensure their globally expanding clients comply with local employment laws through their legal knowledge of that jurisdiction.

EoRs also take care of basic HR and administrative duties, including:

  • Employment contracts

  • Rudimentary advice on compliance with local employment laws

  • Payroll, benefits, and employee insurance

  • Tax: registration and compliance with reporting requirements

  • The basic tasks involved with severance and termination

EoRs either operate in the target jurisdiction(s) or, sometimes, they hire third-party subcontractors to employ workers in countries where they don’t have their own operations. In this way, they are able to ensure their globally expanding clients comply with local employment laws through their legal knowledge of that jurisdiction.

What is a Professional Employer Organization (PEO)?

The purpose of a PEO is to jointly employ people with their client through what is known as a co-employment model. Unlike EoRs, PEOs do not become the sole legal employer of the hired employees. That remains the responsibility of the client company. 

For the co-employment contract, the PEO and its client share the rights and responsibilities of a hired employee, with the PEO being the administrator and the client the manager with control over its employees’ work and responsibilities on a day-to-day basis.

PEOs are also service providers, affording rudimentary HR and administrative support to clients in foreign jurisdictions—much the same as EoRs. Some PEOs even provide EoR solutions as part of their offering.

The HR functions PEOs offer include the following:

  • Payroll, benefits, and employee insurance

  • Administering local employment taxes

  • Onboarding

  • Rudimentary advice on local employment laws and regulatory compliance

What are the benefits of EoR and PEO solutions?

Compared to the “do it yourself” approach, working with an EoR or PEO can offer benefits. These include:

Reduced time to market
Establishing a legal entity, understanding foreign employment law, and complying with foreign regulations increase the time it takes to enter a foreign market.

Increased time to focus on global expansion
By not having to worry about logistics and compliance, your business will have more time to focus on growth. Basic assured HR functions Having a partner that will take care of some of your HR needs can make your life much easier and your employees’ experience much smoother.

Basic assistance with local compliance
Employment law varies significantly across the globe. Not complying can lead to significant legal and economic problems.

EoR vs PEO: the pitfalls of each solution

Although EoR and PEO companies can have benefits, for tech firms requiring complex solutions, there are serious pitfalls of these two business expansion methods. 

Employer of Record risks: being the employer but not the employer

The very selling point that makes Employer of Record services attractive to US tech companies is also their main downfall.

Why? Because they’re not the sole employer - you are too.

  • EoRs claim to act as a legal barrier between the employee and the US tech company; however, in reality, they do not provide anything like as much protection as promised.

    Although the EoR is supposed to be the legal employer of the employee, they are not legally able to direct or control the employee as they have no managerial rights. This means the US tech firm is (legally) the employer in the eyes of the local employment law, destroying the legal barrier the EoR seeks to erect between its customer and the employee it employs for them.

  • In a traditional employment relationship, an employer can give a task to an employee, which automatically allows them to work on the company’s IP (e.g., report updates, sales presentations, code development, etc.). And when new IP is produced, it automatically becomes owned by the employer.

    But when the EoR is the ‘on paper’ employer, it does not have the automatic legal authority to grant access to its client’s IP.

    There is no legal mechanism through which an EoR-hired employee can work on that IP; thus, technically, no work can be carried out. Additionally, any new IP created by the employee is legally the property of the EoR because the contract of employment is between them.

  • Most companies plan to use an EoR solution until the overseas effort has bedded in and become successful, at which point they set up their own legal entity. When they do this, the employees that had been working for them through the EoR need to be transferred to the new entity.

    Most local laws have transfer-of-business regulations that control what happens when one company transfers employees to another company. They are known as TUPE in the UK, for example; and Europe-wide, they are based on the EU’s Acquired Rights Directive.

    Local employees highly value these local laws; they are often time-related, and the longer the employee is employed, the greater their local employment law rights.

    The problem arises when the US company uses an EoR as a long-term temporary local employer—which is the entire purpose of the relationship. Because the EoR is an ‘on paper’ employer rather than the exclusive employer, it cannot transfer employees compliantly to the new entity, which means there cannot be continuity of employment. Employees lose all of their accrued rights and return to zero.

    This can negatively affect the chances of recruiting and retaining top talent. If employees are not compliantly transferred, they will lose valued worker employment rights when transferred to the company’s own overseas entity.

PEO co-employment: the big problem

Organizations offering PEO services establish co-employment arrangements with their overseas partners. The purpose of these contracts is to share the rights and responsibilities of hired employees. They are a popular way for companies looking to alleviate administrative burdens and compliance risks when hiring workers in other countries.

Under PEO co-employment contracts, the client company retains control of employees’ day-to-day activities. They manage their schedules, delegate their responsibilities, and make decisions about their career progressions. Meanwhile, the PEO is responsible for administrative duties related to employees, including paying them, organizing their taxes, and providing their benefits.

PEOs claim to reduce risk for their clients as they are experts in areas ranging from international payroll to employment law. However, while PEOs may be adept at understanding some employment law and undertaking some rudimentary local law obligations, the co-employment model creates three severe problems for PEO clients.

  • The co-employment model means that the US-based PEO client continues to have full legal obligations as they are still an employer. One of the most serious issues is their continuous legal liability under foreign law in foreign legal jurisdictions and subject to foreign courts of law.

    For example, a US company could retain a PEO in the UK to hire and provide HR services for ten employees in the UK and five in France. The PEO would use a local entity in France (possibly a subcontractor) as its PEO partner to hire the five employees and provide HR services. Because of co-employment, the US company would be:

    Liable for their UK employees under UK law

    Liable for their French employees under French law

    And if an employee in France had a grievance, the employee would be able to sue the US company in French courts under French Law using French Legal Procedure. The fact that the PEO provider is the local co-employer offers zero protection against legal proceedings.

    Even if the PEO was only contracted to hire employees in the UK, the US company would still be liable in that jurisdiction. US companies that use PEOs are generally unaware of the very significant pitfalls of signing co-employment contracts. They believe, understandably, that they are legally covered under the model—which is not the case.

    If an unfortunate situation does happen, a US-based company could find itself being sued in a foreign court; its lawyers do not speak the language and have no experience with the foreign legal system.

    This presents great risks, and the likelihood of success is as low as the costs will be colossal.

    Additionally, employers can be legally responsible for civil and criminal offenses committed by their employees—legally known as vicarious liability. For example, if an employee gets into an argument with a client and strikes them, the employer can be liable. The co-employment contract does not shield US employers from being legally responsible for their employees’ actions overseas. Co-Employment means local foreign exposure.

  • DescriptioTech companies need to protect their IP when expanding internationally. However, the co-employment contract signed by both the US-based company and the PEO produces a complex legal situation that is disadvantageous for the firm. The IP created by the employee will belong to both co-employers, and it will not be subject to US Law or created under US Law. It will be foreign law IP jointly owned with the PEO—a worrying situation that significantly reduces its value.

    For example, a computer programmer working in the UK may create mini-programs, scripts, patches, or localizations for their PEO’s client. As the US company signed a co-employment contract with the UK-based PEO, the software created by the programmer will legally belong to both the PEO and the US company. In certain situations, the employee may even own the IP. The same is true for local CRMs and customer data.

    This situation is a great risk for the US-based company. The co-employment contract they sign means they may never be the complete owner of their own IP—instead, it will be fragmented across foreign legal jurisdictions and entangled with the joint ownership of the PEO and their subcontractors. A danger for the US IP owner, and a hazard for their stakeholders and investors.

    The PEO is always a high-risk “solution”, as, technically, no work can be carried out.

  • DescrCompanies employing employees through a PEO generally only intend to use the third party until their operation is large enough to open an entity in a foreign jurisdiction. This may take around three years. When the company does open its own entity and hire its own employees directly, it will want to transfer all of the PEO employees that currently work for the company.

    However, PEO transfers do not allow the continuation of employment from co-employment to sole employment. The purpose of local employment law is to protect workers’ rights; therefore, co-employment arrangements mean employees lose their rights when transferred. Employees lose out on the existing terms and conditions of their employment and their continuity of service, which do not legally transfer with them.

    They will lose some of their most important legal rights to sick pay and accrued entitlements such as bonuses and holidays, as well as specific protections around dismissal and redundancy.

    There are clear consequences of not offering continuation of employment.

Is there an alternative model to EoRs or PEOs?

Although EoR or PEO solutions seem like straightforward and complete options for international expansion, companies that use these vehicles can potentially land in serious financial and legal trouble.

US companies wanting to expand globally would be ill-advised to rely on legally ambiguous solutions that have the potential to put them at significant risk.

Instead, looking for a solution with four key characteristics would be beneficial:

  1. No co-employment contracts

  2. Complete protection from foreign legal proceedings

  3. Safeguarded Intellectual Property

  4. Protected continuity of employment

A fifth key benefit worth seeking that EoR / PEO suppliers generally don’t offer is executive search solutions that find and hire talent to drive the overseas expansion.

Contractual Trust and Virtual Subsidiary structure

An alternative model exists where a contractual trust is established to hold and manage overseas assets on behalf of the company looking to expand. This protects the company from the risks generated by EoR / PEO solutions.

In this model, the global expansion solution provider would act as the trustee with their client as both the beneficiary and settlor of the trust.

  • The trustee creates a “virtual subsidiary” to employ, pay, and manage staff in each target jurisdiction.

  • The trustee’s task is to manage the assets according to the settlor’s wishes, which are set out in a contractual arrangement.

  • The beneficiary will benefit instantaneously from what the trust produces and creates.

  • The settlor decides how the assets in a trust should be used.

Using a trust model instead of a traditional EoR / PEO arrangement means that the provider temporarily holds the client company’s capital (tangible property, intangible property, human resources capital) in trust. However, it is not the final owner of that property— unlike in the EoR arrangement. Nor is there the legally-tangled question of shared ownership, as there with PEO’s co-employment model.

The contractual trust model removes the four key areas of risk in the EoR / PEO models described above.

No co-employment contracts
The provider, as the trustee, is the true, sole employer of the overseas employees, retaining the right to control, direct, supervise and manage them. This structure does not and cannot create co-employment and its attending risks. There is one single contract of employment between the employee and the provider, and the employee and their work are held in trust for the US company.

Protection from legal proceedings
Because the provider, through the virtual subsidiary structure, has an exclusive employer-employee relationship with the overseas talent, it has complete control to manage employee grievances. It assumes the responsibility and the risk in any legal proceedings taken by an employee. This means there is an impenetrable legal barrier between the foreign employees and the client company.

Safeguarded Intellectual Property (IP)
As we’ve seen in this guide, legal issues arise around IP ownership and viability under traditional EoR / PEO models. The contractual trust structure removes the risk of all of those legal issues by making the client company the full beneficiary of any and all assets held in and developed within the trust and the virtual subsidiary.

Protected continuity of employment
As continuity of employment cannot take place in both the EoR and PEO models, and employees will lose certain rights and benefits.

In the model we describe here, the provider is the sole employer via the virtual subsidiary it established on behalf of the client company. This paves the way for a smooth employee transition when the client is ready to set up their own entity.

In this arrangement, companies can assure their staff that their accrued time and benefits will be maintained—an important element to attract and retain employees.

Here is what an alternative to the PEO / EoR model could look like. Legal risk is assumed by the provider. The client company is not legally responsible for the final employees, it protects its own IP, and can transfer employees upon opening an overseas entity.

What else should you expect from the right international expansion solution?

  • Executive Search capabilities with specialist expertise in your industry and extensive local talent networks

  • Cultural understanding and sensitivity

Instead of relying on cold recruitment methods or multiple recruitment agencies, global expansion can benefit from specialist consultants. Professionals who draw on their deep knowledge of local employment landscapes and extensive networks can identify and engage top local talent for you.

They must have an in-depth understanding of the target jurisdiction’s culture to successfully onboard and support employees throughout their time with the company. They also need to understand the parent company culture to ensure both employee and employer share values and vision and to be able to recreate that cultural environment for the overseas employees. Cultural compatibility should be the foundation of any solid relationship.

Allowing you to focus on the future of your business expansion

No two expansion requirements are the same—and the solution shouldn’t be either. Out-of-the-box solutions can sometimes appear to be the cheaper option, but they often come with shortcomings that can put your business at risk. An end-to-end solution tailored precisely to your needs for which the final price is agreed at the beginning will be the most efficient and cost-effective solution in the long term.

Of course, in the future, when your business expands as projected, you may no longer need a third-party solution. Then, you may have a large enough presence with enough of a local track record to open your own overseas entity. But until that point, a solution that saves you time and hassle while avoiding unnecessary risk will let you focus on driving new revenues and successfully expanding internationally.

Which international business expansion strategy will you choose?

Let's discuss your requirements to see if we can help.

What you need for global expansion

EoR and PEO are aging models for global expansion. The SOLAarc Incubator offers tech companies looking to expand overseas an alternative. The legal infrastructure in this model removes the problematic issues with PEOs and EoRs and protects you from their risks.

SOLAarc Incubator vs PEO vs EoR

Requirement

SOLAarc Incubator

PEO

EoR

Manage foreign payroll and associated local taxation

Manage local employment benefits compliance

Manage local law vacation entitlement

Manage local law compliant expense reimbursement

Managing performance improvement, misconduct, redundancy, and termination

Basic HR functions

Manage compliancy with collective agreement regulations

Enables a parent company to operate in a foreign country without a foreign legal entity and with zero foreign legal risk

Search, attract, and incubate overseas talent

Enables the parent company to avoid foreign tax registration and foreign tax risk

Full foreign law compliance guaranteed (sick pay, parental laws entitlement, holiday entitlement, visa necessities)

Local regulation compliant background checks, candidate screening, and personnel risk management

Parent company owns all of the Intellectual Property created by the foreign worker

Multi-Country intellectual property rights held in trust for the parent company

Local employment contract compliant with foreign law and fully protective of the parent company

Compliance with foreign human resources law and norms to protect the parent company

For all legal dimensions of the local market—a foreign virtual subsidiary exclusively responsible for risk mitigation and control

Sole employer of overseas talent that guarantees a continuity of employment transfer to your new, local, analogue subsidiary

No co-employment, no secondment = no risk of being sued by a foreign employee under foreign regulation or law

Fully replaces a local legal entity

Advanced Local HR functions (e.g., health & safety, visa support, hybrid working regulations, performance improvement, compliant transfer to your subsidiary etc.)

Guaranteed protection from all employee foreign litigation