Employment models: Aggregator vs. direct entities

Global employment solutions can choose one of two different service models. They can either use their own legal entities to hire employees on behalf of their clients, or they can work with a network of in-country partners that offer employment outsourcing services in the respective country. 

Both global employment models have their pros and cons, but upon closer inspection it becomes evident that one of them has the upper hand. Let’s take a look at how the two models compare and where their respective strengths and weaknesses lie.

A global employment solution that follows the aggregator model cooperates with existing in-country partners (ICPs) that are specialized in providing employment services in their jurisdiction. Before being added to the partner network, local service providers are carefully vetted by the aggregator to make sure they are up to standard.

Information about the different ICPs is openly shared with client businesses, the latter being guided by the aggregator throughout the selection and onboarding process with each new provider.

Advantages of using a solution that operates through a partner network:

• Local expertise: In order to guarantee global employment compliance, organizations must comply with the employment laws in each geography. This can only be guaranteed if local expertise is available which, in return, requires local partners.

• Proven track record of ICPs: The aggregator carefully vets service providers before adding them to its partner network. In order to qualify, potential partners need to have long-standing experience and a deep understanding of complex legal, fiscal, and HR matters so that they can protect both the client business and its employees from costly compliance risks.

• Broader country coverage: Building a global network of partner organizations that have legal entities through which they offer employment outsourcing services is easier and quicker than setting up own legal entities. The result is a wider range of countries in which the employment services are available.

• Several ICPs to choose from: A global employment solution that works with a network of in-country partners usually has more than one partner per country. Clients can hence choose which local service provider they want to work with—and switch to a different one should they not be happy with the one they are currently using. This also comes in handy in countries where there are labor leasing licenses that limit the duration of employment outsourcing arrangements (e. g. AUG in Germany). Rather than having to come up with a completely new solution on how to hire local employees without opening an entity, businesses can simply switch providers. 

• Better employee experience: Under the aggregator model, employees are hired via an experienced local partner. Any questions the employee might have can be addressed directly by the ICP. Also, since the service providers come with years of experience, the likelihood of errors that could have a negative impact on the employee is low—a lot lower compared to scenarios where the employees are hired through a service provider that operates with its own entities that have only just recently been set up.

• More options regarding contracts, packages, and more: While global employment solutions that operate through their own entities only offer standardized employment contracts, benefits packages and compensation options, solutions that work with a wide network of ICPs allow for personalization and enable businesses to adjust the packages they want to offer local employees in order to attract the best talent.

• Increased data accuracy: Under the partner-based model, employment and payroll data is checked in two different steps. First, it is collected and processed by the ICP. Then, it is audited and checked by the aggregator, which ensures data accuracy and protects the client business from mistakes.

• Higher quality of service: Since an aggregator usually has more than one partner per country, the different providers have to make sure to meet the expected service quality levels. Otherwise, they risk being replaced by a different ICP. This results in a higher quality of service compared to the owned-entity model where there is no pressure on the different entities, since they have no competition.

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(Perceived) Disadvantages of using a solution that operates through a partner network:

• Need to go through an intermediary: Global employment services that follow the aggregator model act as an intermediary between their clients and their service partners, which is sometimes thought to be more complicated than communicating directly with the service provider.

• Reduced contractual transparency: Since service contracts under the aggregator model include three parties (i. e. the client, the aggregator and the respective ICP), organizations often perceive the aggregator model as less transparent and more complex to handle.

• Varying SLAs: Especially when they first start hiring employees abroad via an Employer of Record solution, businesses are often concerned about the fact that services are offered by different providers and that this might lead to different service-level standards in each country.

• Need to manage multiple ICPs: Another aspect businesses often worry about when deciding between the aggregator and the owned-entity model is the need to coordinate multiple local partners.

However, these worries are often unwarranted, since they can all be resolved with an experienced aggregator that puts the needs of its clients first. Communication and the management of multiple different ICPs can be facilitated through technology, i. e. a global employment platform that provides a centralized interface through which different ICPs can be managed and processes streamlined.

SLAs can be negotiated and standardized to ensure that the service quality is consistent across locations. And as for contractual transparency, a good aggregator will provide a Master Service Agreement (MSA) that outlines the terms and conditions that govern all future agreements.

The second service delivery model in global employment services is to work exclusively with owned entities, which is why this model is often referred to as “wholly-owned”. Under this approach, the service provider only uses its direct entities instead of entering into partnerships with already existing local service providers. Just as with the aggregator model, the owned-entity approach has its pros and cons—its downsides unfortunately outnumbering the advantages. 

Advantages of using a solution that operates through its own entities:

• Direct relationship: Hiring international employees through an employment solution that works exclusively with its own legal entities means that there is one central point of contact, which is often perceived as a major advantage in terms of simplicity.

• Cost efficiency: Using a global employment solution that follows the owned-entity approach might be more cost effective, since there are no additional costs that result from having a third party in the arrangement that expects to be paid for its services.

• Full control over the entities: Since the service provider owns the legal entities through which it hires employees on behalf of its clients, it is often thought that the provider has full control over the entities and can hold them accountable for any mistakes.

In reality, however, these perceived advantages of solutions that own the local entities through which they operate in the different countries often fall short. 

Disadvantages of using a solution that operates through its own entities:

• Lack of accountability: Accountability is a major pain point when hiring employees through a wholly-owned global employment solution. Since the local entities are essentially owned by a single service provider, there is no third party that holds them accountable for potential mistakes. After all, the different entities belong to the same company, which means that calling one of the entities out for a mistake is a conflict of interest that will usually result in the customer’s interests being compromised.

• Regional hub structure: Entities and employment services under this model are often grouped into regional hubs that cover several different countries, which makes it difficult to ensure first-hand local knowledge and expertise. In the end, this could lead to the client business having to hire additional external consultants to advise them.

• Inability to adapt: A global employment solution that follows the owned-entity approach typically uses the same infrastructure and operating model in all locations. Since employment and everything related to it is inherently local, following the same approach everywhere may not always be the best option.

• Lack of flexibility: The same holds true for service offerings, contracts, employee benefits, and more. Opting for a wholly-owned infrastructure could mean having to work with standardized offerings that leave little to no room for customization. 

• Limited number of countries: Setting up a foreign legal entity is a long, complex and expensive process. The country coverage of solutions that operate with the owned-entity model is therefore limited. What’s more, adding new countries upon customer request is usually not possible or simply takes too long and is therefore not compatible with the hiring and expansion targets of fast-growing businesses.

• Higher compliance risks: Using an Employer of Record solution that operates through its own entities is less equipped to protect the client business from compliance issues. Firstly because the entity that is responsible for the employees might not even be situated in the country where the employees are hired (see regional hub structure). Secondly, even if the entity is really local, its lack of experience due to its short operating time makes it a liability with regard to compliance.

As we’ve seen, both the aggregator and the owned-entity model have their pros and cons. But upon closer inspection, it becomes evident that the partner-based approach offers not only a greater number of advantages, but that the pros of the aggregator model are simply more significant compared to the benefits of the owned-entities approach.

Decisive arguments in favor of the aggregator model are the local expertise and knowledge of the vetted ICPS and their long-standing experience in all things employment, payroll, and compliance. In the end, the most important aspect is to ensure global employment compliance on all levels, and that’s where the aggregator model clearly has the upper hand.