To employ international staff through any solution has its benefits and drawbacks. If the drawbacks (time, cost, complexity) and so on seem great enough, it can be tempting for employers to try to find alternative ways of ‘hiring’ the individual they want to work for them. These alternatives could include: sending direct cash payments to the individual; sending direct cash payments to an LLC or other private company established by the individual for the purpose of working for the employer; or offering to hire the person full-time, but only as a contractor. But to employ international staff without EOR assistance presents special risks.
This is because all of these alternatives do not actually present ‘solutions’ to the problem of hiring internationally. Indeed, if you want to employ international staff without an EOR, you need to be aware that shortcuts in this respect can actually represent serious business risks.
In this article, we take a look at what happens if you employ international staff without an employer of record (EOR).
The closest solution to employing international staff without an EOR is to hire them as contractors. This is a legal solution in the vast majority of countries, but you do need to be aware of some strict rules and regulations surrounding international contractors. If you fall foul of these laws, you risk fines and other penalties that could restrict your business in that country.
To hire someone as a contractor internationally, the process is relatively simple. Ideally, you issue the individual with a locally-compliant freelancing services agreement (i.e. a contract) – or you use the one that they issue to you – and then you make direct payments to their bank account from your business bank account at the agreed frequency (per project, weekly, monthly, and so on). The obligations to report and pay tax this income will usually fall on the contractor themselves.
That said, in some jurisdictions, employers need to declare that they have made payments to independent contractors. This is the case in the United States, for example, where employers must declare to the Internal Revenue Service (IRS) any payment(s) made to a freelancer that exceed(s) 600 USD.
While this is relatively straightforward, there are some risks in trying to employ international staff as contractors:
On a more technical level, if you don’t meet the requirements of international contracting, you risk something called ‘permanent establishment’ (often shortened to PE).
PE is a complex international tax concept that basically means you are deemed to have a formal (taxable) business presence in the country of operations, even if you don’t actually have an entity there. Such a finding can have serious implications for a company operating internationally.
We’ve written about permanent establishment in more detail here, but in short, permanent establishment relates to companies being deemed to have a fixed place of business in another country or state (even without a formal legal entity there). The consequence of a finding of permanent establishment is corporate tax liability in that country of operations, at a minimum. More serious consequences could include fines or blacklisting in the country of operations.
This sounds complicated, and that is because it is. The bottom line, however, is that companies can be found to have a taxable presence in a jurisdiction, even if they don’t have a legal entity there. This is an important consideration when trying to employ international staff because the mere act of hiring locals in a given jurisdiction can trigger PE investigations.
The reason that rules on PE exist is to avoid situations where companies would do a lot of business abroad, obtaining considerable profits, yet avoid having to pay corporate taxes on the ‘technicality’ that they did not have an entity there.
This problem arises a lot in the context of large multinational corporations (like Amazon, who routinely have been subject to criticism for their extensive international profit-making without tax payments), but applies just as much to smaller companies, too.
For the purposes of this article, what you need to know is that if you employ international staff without an EOR, you run a higher risk of permanent establishment. To learn more about PE and what risks your business might face in that regard, check out our article here.
For the vast majority of companies, hiring international staff through an employer of record (EOR) company is the best solution. Not only do the leading EORs provide a streamlined and hassle-free experience for your new hires, but they also handle all legal, tax, and regulatory compliance issues on your behalf. To compare the best EOR providers, check out our detailed comparisons here.
Top EOR Providers |
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| Provider | Overall Company Rating | Overall Employee Rating | Overall EOR Rating |
| Horizons | 5 | 5 | 5 |
| Deel | 5 | 5 | 5 |
| Remote | 5 | 5 | 5 |
| GoGlobal | 5 | 5 | 5 |
| Globalization Partners | 5 | 5 | 5 |
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