What is a Foreign Employer & how is it different from EOR?

Foreign Employer, Employer of Record, Professional Employer Organization… There are many different terms and concepts organizations come across when they first start hiring talent globally. All these terms describe different solutions that are designed to suit the different hiring needs businesses have depending on their global expansion strategy.

Deciding which option to go for isn’t always easy, and businesses often struggle to understand the differences between the available solutions for hiring employees abroad and their respective limitations. This is especially true when it comes to the Foreign Employer approach. 

But what exactly is a Foreign Employer? When should businesses choose this approach? And how does it differ from other global employment solutions such as Employer of Record?

A Foreign Employer (FE) is a non-residential entity that hires one or several employees in a target market without a permanent establishment in said market. The employee is thus hired directly under the foreign entity, which means that the employment contract is concluded between the resident employee and the non-residential employer.

For example, if a German company needs a software developer and happens to find a suitable candidate in France, they can hire that developer via a direct employment contract without having to open an office or any other type of permanent establishment in France by registering as a Foreign Employer with the local tax and social security authorities.

A Foreign Employer is sometimes also called a special-purpose entity which is used to process payroll for employees in the respective target market in accordance with local rules and regulations. However, it’s worth noting that organizations that are registered as a Foreign Employer are not fully operational in that country, since they don’t have a real local legal entity.

In a nutshell, a Foreign Employer is a non-residential entity that is only registered in a country for the purpose of processing payroll for resident employees, but doesn’t possess a local branch, representative office or subsidiary.

The Foreign Employer approach to hiring abroad has two significant advantages. First, it’s significantly cheaper than setting up a foreign legal entity, which can cost up to several thousand dollars. Second, it’s a lot faster, since the set-up process only entails registration with the local tax and social security authorities—and maybe registering the new employees.

But there also are some significant downsides, the main one being the fact that a Foreign Employer is not fully operational in the target market. Without a proper legal presence, the organization is unable to engage in certain business activities, especially those that would generate revenue.

This leads us to the second major handicap of operating as a Foreign Employer. Not being properly incorporated in a country means that the business opens itself up to permanent establishment risk (PE). If the local tax authorities find that the non-residential entity has an ongoing presence in the country and generates revenue there, this will trigger tax liabilities and possibly also back taxes, financial penalties and a legal obligation to incorporate.

In addition, being a Foreign Employer also comes with the risk of not complying with local employment laws and payroll regulations. Employment and payroll are highly regulated, and the risk of violating existing rules is high without proper local knowledge and expertise. Plus, liaising with authorities in the local language isn’t always easy.

Given the various compliance risks that come with hiring talent as a Foreign Employer, businesses that lack the necessary expertise and knowledge often search for expert support in the form of Foreign Employer services, also known as non-residential payroll services.

Running a non-residential payroll is the main challenge when hiring talent under the Foreign Employer model. A non-residential payroll is a payroll in a country where the organization has no legal entity and no official representation, which can make registering and liaising with the local tax authorities difficult.

Non-residential payroll services can solve this problem. Their service consists of registering the client business with the local tax and social security bodies as a Foreign Employer to get the necessary employer tax and social insurance numbers. Depending on the country-specific regulations, they also take care of registering the business’s new employees.

Once the initial set-up process is completed, the payroll provider takes charge of the local payroll and calculates the tax and social security liabilities that need to be settled. In addition, the payroll partner acts as the client business’s official representative in the country, hence serving as a point of contact for local authorities.

Some service providers even handle payments to employees and authorities. In countries where the law mandates payments to local employees and authorities to be made from a local bank account, fund management may even be a necessity. In other cases, however, the opposite might be the case, making it compulsory for payroll liabilities to be paid directly by the employer.

Here are the different non-residential payroll services at a glance:

• Registration as a non-resident entity for payroll purposes

• Registration of employees with the local authorities (if required)

• Payroll processing and preparation of payslips

• Determining outstanding payroll liabilities

• Payment of employee wages and salaries (optional)

• Payments to local tax and social security authorities (optional)

• Preparation and submission of mandatory payroll reports

• Official representation of the client business for tax and social security purposes

• Provision of a localized employment contract template (optional)

Especially for businesses that are pressed for time, the Foreign Employer model often seems tempting because it’s quick and relatively cheap to set up and maintain. But since there are various limitations to this model, organizations should analyze their short- and long-term goals in the new target market carefully to make sure the FE approach is suited to their individual needs and goals.

Possible questions to answer in this process include: 

• What activities will the employees engage in?

• What’s the purpose behind hiring the employees?

• Where will the employees work from?

• Will important management decisions be taken by the employees?

• How many employees will the business employ in the beginning and in the long run?

The number of employees is a significant factor when evaluating the risk of the business being classified as a permanent establishment. Usually, the recommended number of employees hired under Foreign Employer shouldn’t exceed 5–10. Otherwise, the PE risk becomes too substantial.

Also, hiring employees in a new market under the FE model is not recommended for businesses that plan to rent an office space or establish a commercial presence in the target market. It should further be noted that FE is mainly interesting for EU businesses hiring within the EU.

An Employer of Record is a global employment solution that sits between registering as a Foreign Employer and establishing a subsidiary—or any other type of legal entity. Using an Employer of Record often is a good alternative for businesses that cannot follow the Foreign Employer route. 

Employer of Record services enable businesses to hire full-time talent anywhere in the world without creating a local legal entity. Their service consists of hiring employees in a different country through on their client’s behalf, using their own legal entity. This means that they become the employee’s de jure employer and that the employment contract is signed between the EOR and the employee directly.

In addition to acting as the official employer in the eyes of local authorities, the EOR takes over all the legal and administrative responsibilities that surround the employment relationship, from registering the employee with local authorities to drafting a compliant employment contract to processing payroll and paying the employee’s salary.

Here is an overview of the different services included in an Employer of Record solution:

• Localized, compliant employment contract

• Hiring, onboarding, offboarding and other HR-related duties

• Registration with local authorities

• Employee benefits management

• Payroll processing and salary payments

• Tax and social security administration

• Compliance with the country-specific labor and payroll laws

Meanwhile, the business contracting the EOR service remains in full control of the employee’s day-to-day activities. They’re the ones transferring the money for salary and benefits to the EOR who then proceeds to issue the payment to the employee. 

Interested in learning more about EOR solutions? Here you read how an Employer of Record simplifies global expansion and how to use an EOR in times of crisis. 

Foreign Employer and Employer of Record are two different ways to hire talent abroad without opening an entity—two different routes to compliant global hiring, so to speak. However, they work in very different ways. Here is an overview of the differences as well as the respective advantages and disadvantages.

Every business’s situation is different and requires an individual approach to hiring talented workers in multiple jurisdictions. Foreign Employer and Employer of Record are two sound solutions for businesses that want to build a global team. However, since both approaches have their limitations and drawbacks, it’s best to consult an expert to evaluate which option to go for.

Lano not only helps businesses find the best solution for hiring remote employees all over the world, but also provides Foreign Employer and Employer of Record solutions. Through our network of experienced Employer of Record partners, businesses can hire and onboard new employees in over 170 countries worldwide in record time.

And if you decide to hire remote talent as a Foreign Employer, we can connect you with one of our local payroll partners to set up your non-residential payroll and take the payroll burden off your shoulders. Book a demo with our expert team to learn more.