For a growing company, pursuing and achieving the goal of international expansion can be fraught with challenges—especially for firms unaccustomed to navigating the legal, regulatory, and cultural terrain of an unfamiliar locale. Indeed, in a new survey of U.S. senior finance executives working at companies expanding abroad, about half (51%) agreed that legal, human resources, or tax compliance challenges have been a substantial barrier to implementing their international strategies. The survey was conducted by CFO Research, in collaboration with Globalization Partners, a global employer of record.
On the legal and regulatory front, hiring even one overseas employee can require setting up a subsidiary or regional presence to handle all personnel functions. Those functions include registering with tax authorities, opening local bank accounts, acquiring local commercial certifications, and administering payroll and employee benefits in accordance with local laws and regulations.
Some companies look to skirt regulations by setting up international employees as contractors. But they must be careful to ensure that contractors, by virtue of their responsibilities, aren’t actually employees entitled to the rights and benefits associated with that status. Misclassifying contractors can lead to fines and other penalties.
Simplifying Global Expansion
Given the HR challenges associated with overseas expansion, many companies turn to a model in which they outsource the international employment process to a third-party specialist. This third party, known as a global employer of record (EOR), is the legal entity that employs workers in a foreign country on behalf of a client. A global EOR handles recruiting (or simply onboarding of new hires), manages payroll, and offers benefits packages in line with local requirements and expectations. The global EOR assumes all responsibility for compliance with legal requirements. Its on-the-ground presence ensures that it’s in touch with the local employment culture, too.
In the CFO Research survey of 53 senior finance executives, more than half (58%) of respondents said their organizations already engage a global EOR to support their international business strategy or plan to do so in the next three years. This group included 23% who work with a global EOR today, and 19% who planned to do so within one year. What’s more, nearly all the survey respondents—94%—agreed that a trusted global EOR can do a much better job of overcoming potential barriers to in-country operations than a typical company can do on its own. And 96% agreed that it’s essential for CFOs to understand the capabilities of a trusted global EOR to fully inform enterprise decisions on overseas expansion.
The top perceived benefit of working with a global EOR is the assurance of legal and HR compliance, cited by 51% of survey respondents, followed by the assurance of being in regulatory compliance (42%) and the ability to leverage the global EOR’s local knowledge (40%).
In fact, many finance executives (83%) saw using a trusted global EOR as a best practice for relieving the management and administrative burdens of overseas business expansion.
A large number of finance executives—85% of those surveyed—agreed that using a trusted global EOR is also a best practice for addressing the enterprise risks that accompany overseas ventures.
Those executives identified a wide range of risks companies assume when they grow beyond their own country’s borders. At the top—and deemed most critical for global EORs to successfully address—are regulatory and legal compliance risks, cited by 66% of survey respondents. Notably, that figure is up 10 percentage points from a similar CFO Research survey in 2018, although in 2018 it was still the top risk cited. The uptick may reflect an appreciation for how quickly laws and regulations relating to employment can change around the globe.
Tax structure challenges were another leading risk, cited by 51% of survey respondents (up from 46% a year earlier), as was human capital/talent availability, cited by 45% (up from 38% a year ago). Roughly a third of survey respondents said they were also worried about political instability impacting their international business operations.
Which regulatory and compliance issues were seen as the most important for global EORs to manage? Ensuring compliance with tax laws was cited by 55% of respondents, followed by ensuring compliance with labor laws (53%) and international trade laws and agreements (47%). (See Figure 1.)
Managing Talent Worldwide
A global EOR can help find and onboard talent when staffing an office or operation in a new country. Both were cited as human capital challenges that were critical for global EORs to address. (See Figure 2.)
But according to senior finance executives, the most important thing a global EOR can do—cited by 59% of survey respondents—is to manage that talent.
The reasons aren’t hard to fathom. Employees not only need the tools to succeed, but also want to know their position is legally secure and stable and that their employer understands their specific needs and expectations. A global EOR’s on-the-ground presence and in-country experience can help to ensure success on all those fronts.
Employees working in a distant country also have a natural desire to feel connected to and engaged with their employer. Even simple things that a global EOR can offer—like onboarding videos in the local language—can be important in building a long-distance employer-employee bond.
Interestingly, nearly one in five senior finance executives believed global EORs also have an important role to play if a company has to let go of an international employee. Just as each country has laws and regulations defining what rights and benefits workers are entitled to as employees, so each country has its own rules for terminating employees. A global EOR, familiar with local laws and culture, can help clients sidestep costly mistakes.
In sum, expanding into another country, whether that means hiring a single sales representative or building a large distribution or manufacturing facility, presents numerous challenges for employers. Beyond getting their international strategy right, businesses have to comply with a vast array of laws and regulations when hiring, compensating, and terminating employees. And they must be sensitive to local employment customs if they’re going to earn the goodwill of their new employees. Finally, they must be prepared to repeat this process over and over again as they move into still more countries, since employment law and norms can vary greatly from one to the next.
For a clear majority of survey respondents, the solution is to offload these responsibilities onto a trusted global EOR whose global reach and local presence in countries around the world allows them to navigate employment challenges on their clients’ behalf. Businesses that opt for this solution enter new geographies more confidently, capably, and quickly than they could on their own.