Of the series of business strategies you have created for global expansion, you should consider the issue of how to hire employees.
Does your decision depend on cost? If so, you will be happy with the Employer of Record cost.
The second approach concerns long-term marking. Establishing your entity in the target country allows you to expand and fully control all activities.
Both options have their strengths and weaknesses. This article offers an objective comparison to help you decide which suits your company’s goals and targets.
What Is an Employer of Record (EOR)?
Employer of Record (EOR) is an organization that assists companies in hiring employees abroad without setting up a legal entity in the target country.
It handles everything from employee orientation to taxes and global compliance.
The EOR acts as the person in charge of the employer and assignee of the client company, while the client only handles the day-to-day affairs of the employees.
Let’s take a closer look at its services and benefits.
1. Overview of EOR Services
EOR acts as an official employer, which is recognized on paper. As a third party, the Employer of Record cost and services handles:
- Payroll and taxes: it takes care of tax registration and payments, processes all necessary deductions, etc.
- Compliance: it deals with paperwork under local labor laws, regulations, and other vital documents.
- Benefits administration provides a compliant and attractive benefits package, registration with pension funds, work accident insurance, health insurance, and more.
- Termination: it manages the employee termination process following local standards.
2. Key Benefits of Using an EOR for Global Expansion
Leveraging Employer of Record costs and services benefits foreign companies in many ways.
EOR is a solution for those who lack the time and money to manage the requirements of operating a business abroad.
Here are the main benefits of using an EOR:
- Time and money efficiency.
- Guaranteed compliance.
- Quick onboarding.
- Excellent flexibility, as there is an exit option when testing in a new market.
- Local expertise, as it is supported by ongoing compliance.
To enter the Indonesian market, you need to be very prepared. There are many companies in front of and behind you.
That sounds reasonable because Indonesia is a growing powerhouse in Southeast Asia. Therefore, equip yourself with the best hiring options.
The Cost Breakdown of Using an EOR
The EOR market size is expected to be worth an estimated $3745.43 billion by 2030. It shows that EOR is working for many companies.
If your company partners with an EOR to hire employees, you won’t have to pay the entity’s setup fee. So how much should you pay?
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Service Fees and Operational Costs
Service Fees and Employer of Record cost are not the same. To support your new workforce, you need HR, compliance, finance, audit, and legal teams.
These payments depend on the company and the EOR policies you partner with.
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Regulatory and Compliance Savings
Managing compliance requires ongoing funding for legal consulting. EOR provides your company with in-house expertise and built-in compliance management.
The approach reduces compliance risks, fines, and related penalties.
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Costs Covered by EOR vs. Costs Covered by the Company
While EOR service and operational costs vary by provider, the upfront costs are lower than the setup costs for a new entity.
You will incur service costs per employee, which are still predictable. Meanwhile, EOR incurs compliance costs that are typically 2.71 times higher.
The Cost Breakdown of Opening an Entity
Forming an entity can be expensive and time-consuming. However, it is a traditional and effective approach to global expansion. Keep these costs in mind.
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Initial Setup and Registration Costs
Most countries require foreign companies to have a physical office.
You will need to prepare a lot of funds to set up a local business entity. Starting from real estate costs to licensing costs.
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Ongoing Operational Costs
Unlike the cost and time of an employer of record, a business entity takes several months to years.
You should be prepared to face ongoing administrative and operational costs, such as legal consultation fees and HR support.
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Compliance and Legal Fees
Maintaining compliance also costs a lot of money. Many companies need to become more experienced with foreign labor and tax laws.
So, you have to prepare for these things after entering a new market.
EOR vs Opening an Entity: Cost Comparison
When comparing an entity’s cost and the Employer of Record cost, you must consider the factors.
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Short-Term vs. Long-Term Financial Impact
Setting up an entity requires a large amount of capital, which is unsuitable for the short term. EOR, on the other hand, does not require you to invest funds right away.
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Scalability and Flexibility in Cost Management
There are additional complexities when you set up an entity, including real estate costs and taxes.
Then, EOR allows your company to grow faster without setting up a legal entity. You can also exit the country when a crisis hits.
Hidden Costs of Opening an Entity
If you are committed to building a global organization after considering Employer of Record cost versus entity cost, you must be prepared to bear all the associated costs.
We discuss two significant hidden costs below.
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Delays in Time to Market
Preparation for an entity can be lengthy, particularly when your financial resources are limited. It can lead to potential delays in entering new markets.
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Risk of Non-Compliance and Fines
Navigating a new environment alone always comes with huge risks. Your ignorance can expose your company to fines, litigation, and legal action.
To avoid setbacks, you must ensure local and global compliance.
Choosing the Right Option for Your Business
Consider Employer of Record costs if you need more experience managing employees or overseas operations, have limited market knowledge, plan to expand into multiple markets, test new markets, or want rapid expansion without significant capital investments.
However, establishing a legal entity has several advantages, such as worldwide brand recognition, full access to new markets, and better legal clarity.
Regarding global expansion, your choice depends on your knowledge, scale, and timeline of your expansion project.
Limited experience in managing overseas employees? Let an Employer of Record handle the complexities.
As an all-in-one platform in Indonesia, Abhitech allows you to manage everything in one place, from employee onboarding to legal compliance and tax fulfillment.
You can use Abhitech EOR formality services to expand your business. To talk to an expert, fill out the form, and our consultant will contact you within a business day!
