A well-implemented global employment company can be a useful strategy for international expansion
The ability to mobilise talent around the world is essential to the growth and expansion strategy of companies.
As markets continue to become more globalised and enterprises expand their reach beyond borders, they are faced with various decisions on how to manage their global workforce.
Some of the questions that arise might include:
How do you plan to hire employees in your potential host countries?
Do you hire domestically and transition your new employees to your overseas locations? Or would it be best to hire local professionals who are already based in these cities?
Is there a key location that requires an urgent deployment of talent?
Will you or your employees have to travel between your different locations? How often will this need to be done?
Will this make them liable for a variety of in-country taxes and put your company at risk of a PE?
In the face of global business operations, the goal of any business leader is to ensure smooth employee governance as the company moves toward achieving its goals for international growth.
Under many of these circumstances, a global employment company (GEC) can help businesses meet their various objectives.
What is a GEC and what does it do?
A GEC - also referred to as a global employment organisation (GEO) - is a separate legal entity that is set up to provide a host of different employment functions for a client company for a fee. These services often entail matters relating to compensation, taxes, benefits and immigration.
In many cases, the GEC will appear as the legal employer of record (EOR) for the international mobile employees (IMEs) of the client who is relocated to or must travel frequently to the foreign subsidiaries or entities that belong to the client company. Some of the ways in which a GEC can operate include:
Appearing as the permanent legal employer for IMEs
Functioning as the payroll company for the IMEs
Appearing as the temporary legal employer for IMEs
Serving as the administrative centre for global assignments
A GEC can also be used to hire employees in a country where the client company has no legal entity and deploy them to a third country. For example, a GEC in Singapore can hire employees in the United States and deploy them on assignment to Australia.
Where a GEC is established is an important factor in the decision-making process. GECs were often selected based on their location in countries with low or zero tax rates however, this has evolved to include various other factors.
Important considerations for choosing a GEC location include access to a wide network of tax treaties, the economic and political stability of the location, availability of experienced partners, employment law and payroll legislation.
What are the current trends driving the need for a GEC?
Growing demand for international talent mobility
More and more companies are hiring talent beyond borders. As a result, companies are turning to GECs to help them manage the recruitment and retention processes.
One of the reasons a GEC is so useful is because many of these companies don’t have the employment infrastructures in place within their employees’ countries of origin. This can range from not having a physical entity set up or the required resources to transfer payment to a foreign bank account.
A GEC can be used to help these companies compliantly hire and pay employees using a common structure with a standardised compensation and benefits model. It can also help to put HR procedures such as employee onboarding and training in place.
In response to this, many organisations have begun to expand their talent search to find professionals in under-established or emerging markets where they don’t have a presence in. Enlisting skilled labour in these locations can create a lot of risks and a GEC is often enlisted to curtail these issues.
This issue can also be extended to include the increase in the hiring of third-country nationals (TCNs) – aka employees who are neither nationals of the assignment country in which they are based nor of the country in which the organisation’s headquarters are based.
Organisations faced with these issues tend to establish a GEC to help them hire these TCNs from locations where they don’t have an operational presence and then second them to foreign branches or entities owned by the organisation.
Permanent establishment risk
In a Deloitte poll, one of the most common driving forces behind setting up a GEC was its ability to mitigate permanent establishment (PE) risk. A permanent establishment risk is an international tax concept that arises when an entity is deemed as having a fixed place of business and is, therefore, liable for corporate taxes.
As globally mobile employees are often based in locations where a PE risk exists for their company, a GEC would be set up to employ these workers.
It can help to reduce the costs of PE risk as the profits of the GEC (as opposed to the much higher profits belonging to the group or parent company) will be the one subject to tax within that jurisdiction.
Increasing need for governance standardisation
More companies are increasing their international footprint and setting up entities in multiple locations. As a result, the number of employees being assigned to and travelling in between these countries is similarly on the rise.
This leads to complexities in maintaining compliance relating to compensation and employee taxes.
Companies that use a GEC can employ all of their globally mobile workers under an employment contract from the same jurisdiction. Thus, improving efficiency by centralising an employment base for mobile employees and providing some degree of consistency when managing these contracts.
Challenges of setting up a GEC
Setting up a GEC is not without challenges and one that is commonly faced arises within matters regarding social security. Many GEC employees in the past have found themselves being ineligible for social security benefits.
For many international employees, terminating their employment with other entities belonging to the business must be done in order for them to be re-employed under the GEC.
This process can be costly, especially in jurisdictions where a severance payment is mandatory upon termination. In some cases, employees will require additional compensation to make up for the loss of their social security benefits from their home country.
This can also be complex when managing employees who do not intend on being globally mobile for the long term. For those that plan to return home after their assignment has been completed, a game plan must be devised for reinstating their contract with the business once the project ends.
Businesses should also consider the regulatory risks that come with setting up a GEC. A common dilemma involves determining the labour laws that will apply to the employee. In general, the laws that govern the host country will apply to the employee instead of the jurisdiction in which the GEC is established.
As with assignments that involve cross-border travel, the risk of permanent establishment is present. Companies must be cautious of this and perform all the necessary steps to ensure which entity is the actual employer to avoid any risks of PE so that they may continue to keep their business costs low and manage their exposure to taxes.
Benefits of establishing a GEC
A well-implemented and strategically located GEC can be a solid support system for mobility and growth. It can provide global businesses with both permanent and temporary legal employment solutions for their globally mobile employees while speeding up their deployment to their assignment locations.
A GEC can also help businesses save on costs by reducing rates related to corporate and personal tax, VAT and social security by being set up in tax havens or locations with an extensive tax treaty network. It can also reduce compliance risks at a corporate and personal income tax level.
From an administrative standpoint, setting up a GEC allows companies to issue standardised pay and benefits packages to mobile employees based in different locations. This provides businesses with greater consistency and streamlines their global mobility policies.
Simplify your global mobility efforts with Airswift
Being able to hire and manage a diverse pool of internationally mobile talent is an important component for any business wanting to lay down a successful global footprint.
If your goal is to mobilise your talent regardless of where they are located, partnering with a global mobility company like Airswift can give you the flexibility you need to enter more than 140 locations around the world – ranging from major business hubs to emerging tech states.
With more than 40 years of experience under our belt, our services also come with the reassurance that our experts are dedicated to ensuring that all matters relating to HR and your employees are compliantly managed with 100% transparency.
Reach out to us today to find out more about our services and how they can be tailored to suit your business' needs.
This post was written by: Leanna Seah, Content Marketing Manager
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