Making the move from an Employer of Record service or Global PEO service to setting up a legal entity in a new location can be a big step. For some, the right time to make this shift will be when the company has reached a critical mass of employees in the specific region, while for others it will come down to making significant earnings from that country. In some cases, it will be promoted by entering into a relationship with a partner who expects you to have your own local presence in the location in question.
Whatever your reasoning for moving from EOR to payroll – it can be helpful to draw up a clear path for the transition. This article will look at some of the considerations involved in transitioning workers from the EoR model to Payroll, both from an organizational and an employee perspective.
Coming up with a Timeline that Works for You
When you’re ready to transition, thinking about timing is really important. It can take months to set up a legal entity in your new location, and of course you don’t want to terminate the arrangement with the EoR until all of your ducks are in a row. Start by choosing the type of entity that you want to set up, such as an LLC or a Limited Company.
If you want to hire expats, you may need additional permissions before you can do this compliantly. In some cases, such as in India and Germany for example, you will need a physical office or location locally that has to be registered before you can open the entity.
You’ll typically need to set up a local bank account in the local currency. This may have a certain threshold for how much money has to be deposited over a certain period, In terms of registration, you’ll have to register with local authorities for tax purposes, and register to receive an employer ID number, too. Depending on what kind of business you own, you may need additional licenses and permits, for example for food safety, manufacturing, or pharma. These may all take some time to request and obtain.
Once you have a date from which you can legally hire your employees, you can then decide on the ‘final day’ of your workers employment through the EoR. Make sure to check your contract to make sure there are no restrictions on when you can make the move. Of course, you’ll have to make sure that you have paid any outstanding balance to the EoR, such as unpaid bonuses or commissions, so that you can make a clean break.
Thinking About Benefits
On or before this date, your employees and the EoR will need to complete a “mutually agreed termination” so that the EoR is not dismissing the employee, and equally the employee is not leaving their position. Remember, when your employee is terminated by the EoR, any benefits that have been provided to them will also terminate. Consider what process you will use for carrying over any benefits that are outstanding, such as paid time off, maternity or paternity leave, or education credits.
As part of setting up your legal entity, you will also need to set up your own relationships with benefits providers, such as health insurance or pension funds in the country in question. In some locations there may be additional benefits that you need to offer or account for, which may not necessarily align with your existing workforce elsewhere.
For example, in Luxembourg, workers are allowed to take up to 50 sick days per year, while in Kuwait, they are entitled to 43 paid annual vacation days. In some cases, you may not have a legal requirement to provide benefits, but if the EoR has given them up until this point, your employees may have expectations that they will continue.
The example below is specific to the United Kingdom, but can give you some idea of the details required in making the transition.
Example: UK EOR to Payroll Checklist
- Set up registered company with HMRC
- Set up correspondence address for all payroll related documents
- Set up designated payroll contact and contact details
- Employee address
- Employee National Insurance (NI) number
- Employee bank details
- Employee tax codes
- Statutory sickness records
- Statutory sickness records within current tax year
- NI deferment records for the current tax year – if applicable
- NI exemption certificates relating to current tax year
- Eligibility for employment allowance
- Any connection to a 3rd party in respect to apprenticeship levy
- Total FPS (full payment submission) figures of previous tax year
- PAYE & Accounts office reference number
- Name and address of pension provider
- Pension scheme reference details per employee
- Employee and employer pension % contributions per employee
- Confirm how pension is calculated
- Pension staging dates for each employee
- Employee opt-out pension dates
- Confirm if pension deductions are net of basic tax rate or pre-tax
- Employee signed contracts
- Proof of address
Considering the Seniority of the Employees
On day one of business from your new legal entity, your employees are technically new employees of the company. Of course, they may have worked for your organization for months or even years already. Both parties will likely want to acknowledge seniority and experience, for example if an employee needs to prove the amount of time that they have worked for you in order to obtain a mortgage, or if they want to claim certain benefits such as Equity awards or additional time off for years of service.
In Australia for example, the severance pay for an employee is tightly bound with how long they have worked at your company. Under the two-year mark, your severance package will be 4 weeks wages, while between two and three years adds an additional 50% to that total. Your workforce management software needs to be extremely flexible to handle this complexity.
Bridging the Gap with Papaya Global
As the only workforce management solution that handles the whole employee relationship, we are uniquely placed to support your enterprise in making the move from EoR to Payroll.
With local in-country partners around the globe, we can advise on the right time to make the transition, as well as local laws and regulations that you need to keep in order to onboard your employees to your local entity in a compliant way. As your data always remains within the same system, this eliminates complex data transfer or heavy operational overhead, and simplifies the process of creating a timeline for this important shift. You can also achieve ultimate flexibility from within the Papaya platform to suit your employee needs, awarding staff with the benefits and allowances that accurately pertain to their length of employment.
Thinking about non-traditional employment options, or setting up a presence in a new location? Let’s schedule a call.
