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Global Workforce Expansion: Strategies, Considerations, & Employment Models
Insights from EY, Deel and Velocity Global
Expanding your workforce internationally can open access to new talent pools, help you tap into lucrative global markets, and support retention efforts with employees who want to live abroad. However, there are several things to consider when evaluating the many paths you can take.
It’s easy to underestimate the amount of planning and collaboration required, from understanding the local tax and regulatory policies of each market to determining the correct classification of workers and designing compensation and benefits packages for your international workforce. At the same time, there are many tradeoffs to consider when deciding whether to go it alone or partner with a consulting firm or international professional employer organization (PEO) for added support.
International expansion is always a hot topic among our CFO and CHRO Circle communities, grappling with a hyper-competitive talent market and rising employee demand for remote work around the globe. To help provide some insights and best practices to both communities, we brought in experts that regularly support the global expansion efforts of public and private companies: Philippe Bouaziz (CFO) and Chris Lee (Head of North America Sales) from Deel; Alexandria Warren (VP of Sales Solutions) and Sarah Fern (Chief People Officer) from Velocity Global; and Juliette Meunier (Partner) and Tatyana Kovalchuk (Partner) from EY. Here’s a recap of the conversation.
The Framework – Strategy, Risk, & Cost
Globally-distributed workforces are more common than ever. 65% of the companies represented during our discussion had at least 10% of their workforce outside their primary headquarters country, and about 73% were planning to expand into a new country in the next 12 months.
According to our experts, for every country you’re expanding into, there are three questions you’ll need to consider:
What is Your Overall Business Strategy?
International expansion should be tied to a core business need for having a presence in that location. Some of the common needs include:
- Market Expansion – Your company sees a potentially strong business growth opportunity in a specific region, necessitating either a physical office or one or more workers in that country.
- International Acquisition – Your company has acquired a company with a contingent of workers located in a different country.
- Employee Relocation – An existing employee or employees have expressed a desire to relocate abroad, and you are trying to retain them.
- Expanded Talent Access – You want to expand your talent pool beyond the geographical limitations of your home country and/or attract remote workers.
While each of these business needs may be enough to consider expanding your workforce into a new country, it’s essential to think about the long-term implications of the decision.
What’s the Level of Risk Involved?
Whenever you’re expanding into new territory, you will need to consider different tax, regulatory, and labor laws. The extent to which you’ll need to adhere to them will largely depend on whether you have a legal entity or subsidiary established in that country, the number of workers you have there, and whether your workers are classified as full-time or independent contractors. Using a PEO can also change your level of exposure and liability (more on that in the next section). All of these factors can impact your overall risk exposure, which is essential to keep in mind before you plan to expand internationally.
How Much Will Expansion Cost?
Cost can be a huge factor in determining whether it makes sense to have a presence in another country. There’s the initial cost of setting up and maintaining the entity, as well as the variable cost of recruiting and managing your international workforce. There is also the cost of using a PEO, global employment organization (GEO), or another expansion approach.
Four Models of International Employment
Alongside weighing your company’s expansion strategy, risk tolerance, and available resources, it’s important to leverage an employment model that suits the needs of your business and workers. Our experts walked through four options, none of which are a one-size-fits-all approach to every market or mutually exclusive of each other:
1. Independent Contractor
As the name suggests, independent contractors maintain a large degree of independence from their employers; they can work for multiple companies at the same time and exercise control over their service fees. Independent contractors are responsible for obtaining their own work permits and meeting their tax obligations, which can lower the liability to your organization. However, they may not be as fully integrated into your organization or have access to the same benefits as full-time employees.
2. Foreign Legal Entity
If you are planning to establish a physical office or subsidiary in a foreign country, or have acquired a foreign company with workers that you do not want to relocate, you’ll likely need to establish a separate legal entity in that country to avoid any regulatory or financial issues. Foreign legal entities can be expensive to set up and about three times more expensive to break down if your expansion plan doesn’t work. This is why it’s important to consider your long-term plans and whether there is a critical mass of employees to warrant establishing a legal entity.
3. Professional Employer Organization (PEO)
An alternative to establishing a legal entity is leverage a PEO. PEOs act as co-employers that assume responsibility for things like distributing benefits and compensation, payroll administration, and providing ongoing HR and compliance support. They are a popular option for companies that want to test expansion to a new market without high costs and burden of establishing a legal entity in that country.
PEOs can be a bridge solution when you need to quickly hire in a given location or provide work authorizations to employees that relocate abroad. However, while PEOs are recognized in the United States, they are not always recognized or legal in every country, creating some degree or “co-employment risk” for companies that use them.
4. Global Employment Organization (GEO)
Larger, multinational public companies with long-term global expansion plans might consider forming their own GEO – a separate subsidiary within their corporate structure that acts as the legal employer of record (EOR). Like a PEO, a GEO will often outsource administration of the HR, payroll, tax administration and compliance functions for an international workforce to a third-party. However, the fundamental difference between a PEO and GEO is that a GEO takes on the legal liability, whereas the liability is shared between the company and a third-party through a PEO.
GEOs are considered more appropriate for a long-term expansion plan because they help mitigate tax and legal risk and allow companies to provide equity compensation and other benefits to employees. They tend to be more expensive than a PEO and take longer to set up and execute fully – frequently up to six months.
What are the Thresholds for Expansion?
In the conversation, many CFOs and CHROs had questions on whether there is a certain threshold for when it makes sense to expand into new territory formally (and under which employment model). Our experts agreed that it depends on three considerations:
- How many employees do you anticipate having in a specific geography?
- What is their value to the growth of the organization?
- What level or kind of risk is their contribution worth generating?
Companies can use those three factors as guardrails for expansion, but our experts cautioned that every situation is different. It’s essential to think about your short- and long-term talent needs and weigh the overall benefits and risks to the organization.
As companies continue to weigh the pros and cons of international workforce expansion, there are many different paths and partners at their disposal. Understanding the risks and having a business strategy is essential, as is ensuring there is collaboration between the legal, operations, finance, HR, and tech teams.
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