Hiring Foreign Workers Without Setting Up a Company

There are advantages and disadvantages of hiring foreign workers outside a company’s home country, and one key challenge is the need to comply with local employment laws. Many countries require a local corporate entity to run payroll and meet withholding requirements for workers. However, the steps required to set up a full company in a foreign country can be daunting.

When a business evaluates the pros and cons of setting up a foreign company, there need to be compelling reasons to justify the effort. If the primary purpose of establishing a company is hiring foreign workers, then there may be alternatives that are faster and cheaper when entering a new market.

There are four potential ways of hiring foreign workers without establishing a legal entity in the host country.  Not every option is available in all countries since in some locations running a remote payroll is not possible, and employment laws can be strictly enforced.

Home Entity Employment

If permitted, the easiest method of hiring foreign workers is through the existing home country company, without setting up an additional entity in the host country. Expat workers on assignment will typically be on the payroll at home, and the only change required is to set up some method of payroll in the host country.  The same payroll could be used for local, resident workers as well.

“France, Estonia, Sri Lanka and some other countries offer a payroll law compliance option for the employer, under which foreign employers with no in-country premises can make special “payroll only” registrations with in-country tax and social security agencies so they can issue a legal local payroll.” 

Pros

The advantage of home entity employment is that it is easy to manage once it is established with the correct registrations. There are no costly steps to establish a local entity, maintain office space and make annual reports on business activity.

Cons

The disadvantages for this method is that it may only work well for short term contracts, since the special payroll registration will not relieve the foreign worker of tax obligations or work permit rules for longer engagements.

Employment through a Supplier, Joint Venture or Partner

If a business has an established relationship with local suppliers in the host country, they may be willing to formally employ the foreign worker on their payroll.  This approach can also be used with affiliates, joint ventures or other partners, who can be utilized as a local entity if a company has a large number of foreign workers in the host country.  However, if the company has already gone through the process of setting up a venture or subsidiary they might also be in a position to run a compliant payroll on their own.

“If you send someone to France and your organization is registered or has a subsidiary there, you can put the person on your payroll or you can “second” them to an affiliate or business partner.” 

Pros

This way of hiring foreign workers can be effective where the local partner has sufficient knowledge of compliance issues and how employment is viewed in the local market.

Cons

One obvious disadvantage is where a company does not have any partner or other affiliate in the host country, and will have to use another approach.  In cases where only one or two foreign workers are on assignment, there may be more efficient ways to handle their payroll that do not involve the supplier or partner.

Outsourced Employment Through a Third Party (GEO)

Hiring foreign workers without setting up a company can be accomplished by using a GEO or professional employment organization as the local employer of record.  Although the GEO is a third party to the primary employment contract with the worker, it handles all aspects of in country compliance with established local partners

Pros

By engaging local partners, the GEO ensures full compliance with all employment and payroll laws.  The GEO can usually set up local employment more quickly than the process of company incorporation, saving both time and expense. It is a good solution for any number of employees and length of assignment.

Cons

Although there is a cost for GEO services it should be less than registering and incorporating a local entity. The GEO is the primary point of contact in-country  which may reduce personal contact between the employee and employer. Of necessity, the GEO is a part of handling notice, termination and any disputes, as a third party with compliance responsibilities.

The Option of Independent Contractor Employment

If a company hires an independent contractor to perform work then there is no local compliance obligation, since the contractor handles their own work status, benefits, immigration and tax withholdings.

Pros

When hiring a contractor, there is no employer-employee relationship and no company liability or responsibility other than paying for the services.  The contractor can be paid remotely in any location they choose, and there is no need for a local corporate entity in the host country.

Cons

The contractor relationship may limit the scope of activities since they cannot play a management or supervisory role without risk of being classified as an employee.  It is best suited for short term contracts and defined projects, and often cant be used as a substitute for regular employment roles. “Many new hires do not like this option, as they have to secure their own benefits and manage the filing of their personal taxes.”

Case Studies of Employment Without Legal Entity

The ability to hire workers without a legal entity will depend entirely on the employment laws of the host country.  The following few illustrations show how different each country will view this practice, and how this could limit some approaches.

• Employing in Canada without a legal entity

Hiring foreign workers and running payroll in Canada without a local entity could pose problems, since there must be some means of withholding tax.

“Canada has strict regulations when it comes to non-resident (“NR”) employees or independent contractors…working or providing services in Canada.…Non-resident companies carrying on business in Canada are subject to the same obligations as Canadian resident companies to withhold tax on the salary of a non-Canadian resident employee who performs services in Canada.”

These rules make Canada an ideal location to use a GEO service for local employment and withholding purposes

• Employing workers in China without a legal entity

Although the Wholly Owned Foreign Enterprise is the most formal corporate form in China,  “…under Chinese law a Joint Venture may employ both Chinese and foreign workers. Individual labour contracts are required and must be submitted for approval to the local labour bureau.” 

Independent contractors may not be hired in China in lieu of employees, so that is not an option for a foreign company.  Many companies use a third party employer in China, such as a FESCO or GEO to comply with local employment laws.

• Employing workers in Mexico and Japan without a legal entity

In these two popular business destinations, it is not possible to hire foreign workers without incorporating, so the use of a local partner or GEO service would be necessary to avoid the expense setting up a full company.