Where to start if you decide to go international for hire

U.S. companies are hiring internationally to save money and recruit people with just the right skills.

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However, international hiring is fraught with legal, tax, and cultural complexities that can come back to bite companies that aren’t careful. In this article, we’ll tell you how to avoid mistakes as you take your first steps toward international recruitment.

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Benefits and challenges of international hiring

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Hiring abroad allows companies to find rare talent, improve business performance, and minimize personnel costs.

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• Access to global talent. This is especially important given the current talent shortage, which could cost the economy $8.5 trillion by 2030. According to a survey of 40,413 employers from 42 countries, 74% of companies are finding it difficult to recruit skilled talent. Healthcare, energy, and IT are experiencing particularly severe shortages.‍
• Innovation and new perspectives. International teams bring fresh expertise and help customize products for new markets. According to McKinsey, companies with ethnically diverse executive teams are 39% more likely to financially outperform than those without them.
• ‍Lower costs. In most countries, labor costs are lower than in the U.S. For example, the average salary for an American developer (about $110,140) is nearly five times as high as in Asia ($23,790 in China) and Eastern Europe ($22,740 in Poland).

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Despite such benefits, entering the international labor market comes with challenges:

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• Legal complexities. Every country has its own hiring, tax, and worker protection regulations, as well as its own rules for dealing with employees and contractors. Violations or misclassification can mean fines for businesses. In 2021, gig economy companies faced legal challenges in 20 countries, and following one lawsuit by New Zealand Uber drivers, they were reclassified as employees, not contractors.
• ‍Payment complexities. For example, when working with a contractor from India, a U.S. company may be required to deduct tax at source (TDS) depending on the type of payment and the contractor's residency status. Another issue is the need to convert between currencies. Exchange rate fluctuations can cause losses for both the company and the employees.
• ‍Cultural differences. Once upon a time, Walmart decided to enter the German market. It tried to implement management and operational practices it uses in the U.S., including singing the Walmart anthem and having helpers on the store floor, but this made employees and customers uncomfortable. Walmart ended up shuttering its business in Germany.

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Four ways to hire internationally

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1. Direct hiring

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How it works

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A company hires employees in another country after opening a local legal entity. This means the company assumes all obligations for wages, taxes, and compliance with local labor laws.

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Pros:

• The company has full control over work processes, from recruiting employees to training and managing them.
• This model can be good for employee engagement, as workers fully participate in corporate life via internal meetups, trainings, and events.

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Cons:

• Registering a company, getting licenses, and renting an office can get expensive. Then, if the market doesn’t work out for you, closing the legal entity will mean more costs.
• Getting up and running will take months, so this option isn’t suitable if you want to test a market quickly.

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Suitable for

Committed companies with long-term plans in a given country. For example, Nestlé uses direct hiring, adjusting its operations to comply with the laws of each jurisdiction.

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2. Employer of record (EOR)

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How it works

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A company outsources employer responsibilities to a provider that takes care of contracting, payroll, and tax compliance.

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This model’s popularity is growing: the segment is projected to grow from $4.42 billion in 2023 to $8.59 billion by 2032.

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Pros:

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• The company gets access to foreign talent without spending time and money setting up a local legal entity. Responsibility for compliance with laws and tax obligations lies with the employer of record.

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• Employees hired through an EOR receive the benefits they’d get working for a typical company in their country. This makes the company more attractive to jobseekers.

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Cons:

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• Hiring procedures and compensation policies don’t necessarily translate to other cultural and business contexts, so the client company may have to adapt to solutions proposed by the EOR.

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• Employees hired through an employer of record may feel less committed to the company. Yes, the EOR will provide basic onboarding, but that may not be enough to make them feel like they’re truly part of the team.

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Suitable for

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Companies that want to hire employees in different countries but don't want to deal with the legal intricacies. For example, GitLab has hired 2,300 employees from 60 countries using EORs. This helped it accelerate recruitment while making employees feel secure.

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If the company is small and has a strong team, it might decide not to outsource key HR functions. In that case, special EOR software can help it manage employees.

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3. Contractor of record (COR)

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How it works

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CORs help companies recruit and onboard contractors and freelancers abroad. The client signs a single contract with the COR, which hires workers and handles payments in different currencies. 

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Pros:

• Flexibility: companies can grow or shrink their teams quickly as circumstances require. 

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• CORs reduce the risk of worker misclassification and help employers comply with the laws of different countries. 

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Cons:

• Not suitable for companies that want to hire full-time employees.
• CORs don’t offer health insurance, vacations, or sick days, making this model less attractive to jobseekers.

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Suitable for

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Companies that need flexible and inexpensive solutions for hiring freelancers abroad. If that’s you, consider Mellow.

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