Setting foot in a foreign country is a critical aspect of expanding business horizons. For some companies, entry into a new market can be a survival tactic in the highly competitive global business environment. Whatever the goals you may have, choosing the right type of business model is key to ensuring the smooth establishment of your presence in the target market.
There are two best pathways you can choose from. You can establish your business presence in the target market either through the establishment of a legal entity (a subsidiary company) or by hiring a remote workforce. Many businesses prefer to choose the latter option since it’s cost-saving and easy to hire the workforce.
Within the remote work setup, you have different service options, but employer of record (EOR) services often stand out. The main reason is that, with EOR support services, you can enter a new market with minimal capital since you don’t need to form a legal entity and, at the same time, operate your team without any compliance risks. These are some key reasons that make EOR services unique from other service options when looking to build a remote team abroad.
However, it isn’t that one size fits all. The EOR model isn’t suitable for all business sizes and isn’t applicable to address some types of business circumstances or goals. Through this blog, you’ll learn about various business circumstances in which using EOR services isn’t considered to be the best option. To provide comprehensive insights about handling each situation, the blog also offers alternative solutions you can look into.
Under What Business Circumstances is EOR Not the Best Option?
Cost
Cost-effectiveness is a major advantage of using EOR services for global expansion. However, if a company is looking to hire a large number of employees in a target market, EOR services aren’t the best option. Employing the EOR team will be costlier as you increase your employee size. It’s because the cost of EOR services is charged per employee. At some points, it’s a better option for you to form a subsidiary company when the cost of keeping an EOR team is higher or equal to the cost of subsidiary incorporation. In general, the EOR service charge has a range of USD 149–199 monthly per employee in India. For instance, keeping an EOR team of 10 employees in India would cost you nearly USD 23,880 a year. This amount will keep increasing with the number of employees. So, companies should calculate their optimal size, and after that, if need be, they can switch the model for cost reasons.
Business Size
Generally, EOR is best suited for a company aiming to keep a small group of employees in a particular location. Opting for EOR services isn’t an ideal choice if a company aims for rigorous team expansion and adds a workforce of more than 100 employees. Also, if the parent company is a large enterprise with deep pockets, forming a subsidiary company in the target market is more suitable. When hiring more employees for your subsidiary company, you don’t need to incur extra costs for each individual. Here, the money will be spent on the cost of updating the infrastructural units of your office or workplace.
Ease of Hiring for Established Brands
Choosing EOR services isn’t suitable for companies with established brands, as hiring a remote workforce in a target country is relatively easy for them. Generally, every individual tends to work for companies that have a good brand image globally. For instance, the US-based automotive giant Tesla, Inc. is in talks with the Indian government to start its presence in the Indian market. Once the government gives its nod, it will be easy for the automotive company to hire Indian talent. However, every large company doesn’t necessarily have established brands globally. For some large companies, hiring remote talent from another country would require assistance from local experts, such as EORs.
Absolute Control
If you want absolute control over your remote team, EOR isn’t an ideal choice. In the EOR model, you need to delegate some control to the EOR partner, who actively handles administrative activities for better employee engagement and management on your behalf. When working with EORs, your employees must also follow the policies and guidelines set by your EOR partner. If you want absolute control over the team, subsidiary formation is the best option. In a subsidiary company setup, the parent company has control over the board of directors of the former company. It can set policies that are deemed fit for the latter company.
Marketing or Sales
If the main focus of your business is marketing or selling your existing products, using EOR support services isn’t suitable. Also, EORs don’t provide services for hiring manufacturing or blue-collar workers. It’s because EORs only deal with remote employees, who are hired to fill the skill gaps of overseas businesses. Sales activities attract tax, which is only possible through a permanent establishment. In India, a company that sells its products in the country is liable to pay a sale tax of 18% GST (goods and services tax). The best option to sell your product is either opening a sales branch or forming a subsidiary company in the country.
Small Salary Bucket
Opting for EOR services isn’t meaningful when the salary package of your remote employees is small. The main reason is that the cost of the EOR services may be relatively high and can be less cost-effective compared to other employment solutions, like employing contractors. Also, EOR employees must avail of a range of benefits, including medical benefits and health insurance, which are not suitable for employees with lower salaries. You can consider using contractors if you have a low salary package for your employees.
Short-duration Projects
For short-term projects or hiring a small group of remote professionals, you can consider hiring contractors rather than using EOR services. If you’re looking for a remote workforce for a short-duration project of 6 months or less, EOR services aren’t suitable. One key reason is that it normally takes 2-3 months to hire an EOR employee, depending on the complexity and nature of the job requirements. If your projects require completion in 6 months or less, you can simply hire contractors. Yet, you must also keep in mind that hiring contractors may attract legal penalties if your contractors fail to comply with regulations.
Conclusion
As a cost-effective business model, EOR services shine among other employment arrangement options for foreign companies. However, the model falls short when addressing some business concerns and conditions. In those circumstances where EOR isn’t a suitable option, you can consider different options, like hiring contractors or forming a subsidiary company. So, choosing the right business model is crucial for setting up your presence in the target market.
