Think an Employer of Record That Owns the Local Entities is Superior? Think Again.
Erez GreenbergNovember 10, 2021
Global companies generally work with two kinds of Employer of Record (EoR) providers. The first type offers an Employer of Record solution by forming relationships with existing local in-country partners to handle employment in a specific region on the customer’s behalf. Spoiler alert: that’s what Papaya Global does. (More on that later.)
For this article, we want to dive into the other approach to Employer of Record. This kind is often called “wholly-owned”, because it opens and owns the entities itself, rather than working with third parties.
We hear a lot from newbies in the EoR space about how using a wholly-owned approach is better because then the global payroll company has overall control over all the locations, can dictate the terms of the arrangements, and more.
Well… here’s what they don’t tell you.
An EoR that owns the entities can’t act in your best interests as their client
Bold statement, but we’re going to back it up with the facts. Let’s break it down with seven examples.
Conflict of interest:
If your EoR provider also owns all the entities that employ your workers – this creates a clear conflict of interest. We’ve seen cases where the entities are even owned by the family members of the founders of the company! If there is a dispute between you and one of your regional or international employers, how can you trust that the EoR provider will have your best interests at heart when their own business is seated at the other side of the table?
Global compliance is complicated, but for ease of understanding let’s look at just a single example. In Germany, you are only allowed to use an Employer of Record solution for 18 months. That’s it. If your EoR provider owns the local entity, then after this period, you would need to re-hire your local employees under a totally different vendor to remain compliant, (plus deal with a three-month employment gap where the employee in question wouldn’t be allowed to work in Germany at all.)
Switching to a different entity which is owned by the same company would not suffice, as this would be considered the same Employer of Record.
There are no existing Employer of Record solutions that have full coverage globally through self-owned entities, and can compliantly take on employment on your behalf anywhere in which you do business. That means you are likely to still be working with third parties when you need to expand into certain locations, negating the very “benefits” of a wholly-owned approach which they sold you on in the first place.
Often, when setting up a new location abroad, your goal is to set up a regional entity with workers from abroad, who will be sent from headquarters to get the ball rolling. These staff will need sponsoring as overseas workers, and as a newly set-up business by the EoR, the wholly-owned entity isn’t likely to fulfil all the necessary criteria.
For example, in Brazil, a residence permit can only be provided under an employment contract if two thirds of the company are already Brazilian employees and two-thirds of the payroll is being paid to them.
That means a new company would need 2 existing Brazilian employees before they could bring over an employee from abroad, and even more if the overseas worker is being paid a higher salary. In reality, the employee being transferred is likely to be a manager and therefore at a higher salary, exacerbating this problem.
It can take time and effort to set up an entity abroad – and that’s before we mention all the tribal knowledge, and both cultural and local expertise! With the best will in the world, many EoR providers will make mistakes, and some of them aren’t trying to be that thorough to begin with.
The necessary processes include initiating employment licenses, registering with local tax and benefits companies, opening the right bank accounts, and more. If these aren’t taken seriously and completed successfully, your employees could be out of a job overnight if something goes wrong.
Lack of detailed contracts:
We often see that wholly-owned Employer of Record providers are incentivized to keep employment agreements to as basic a standard as possible. This is because the EoR provider is paying the operating costs of managing the local employment providers. They can’t be an impartial third party that offers legal counsel or business advice, and will naturally want a standard contract for all customers – rather than looking at what each customer really needs for that location.
Difficult termination processes:
No matter what, you have less flexibility and choice with a wholly-owned EoR provider. If you’re unhappy with the local partner, or you want to terminate an agreement, you can’t just switch to a different entity for a single location, as they are one and the same. No matter what kind of SLA you have with the EoR provider, they are ultimately going to look out for their own interests, which are the interests of the local business, too. That means the costs will be your own.
Local in-country partners and why it’s a whole different ball game
Papaya Global’s approach is all about the customer’s needs. Our first and only priority is getting you the compliant local employment that you need for your workers, with your interests front and center. We have dozens of relationships with local in-country partners who have been compliantly set up according to best practices, and have all the local insight and knowledge that you need.
Think about that same example of employment in a country that has serious limitations on using EoR – Germany. After your initial 18-month period is up – no problem! We can sign the documentation on your behalf via any one of our other EoR entities, so that your employment is extended for another 18 months, without the 3 month break. We can also repeat this cycle indefinitely, to ensure continuous employment with no business disruption. You and your team get the most seamless experience possible while operating in Germany.
If at any point you aren’t happy with your EoR partner in a specific region, you can simply switch to a new partner, with no conflict of interest. In fact, as Papaya audits the information coming from the local partners, keeping an important layer of separation between the two parties, we might inform you of a problem before you even know it exists! As we’re working for you, we’re always going to help you get the most detailed and accurate employment contract in place for your workers, and we’ll naturally be your best advocate for growth and success.
Of course, it’s natural to feel like having many different partners in multiple regions can add complexity – and that’s exactly why we use our aggregator model. Thanks to our uber-cool technology, your business has one dashboard for global payroll, one point of contact for all of your global employment, one SLA that we guarantee ourselves, and essentially – one view of everything that’s happening in your business on a global scale.
Simply put? We manage any complexity on your behalf, providing you that single pane of glass.
Had enough of EoR providers that look out for themselves? Let’s schedule a call.