Foreign Employer vs Employer of Record - What is the Difference?
Hiring workers in other countries offers key benefits for businesses. Read further to know the difference between registering as a foreign employer and relying on the services of a local Employer of Record.
Photo by KOBU Agency on Unsplash
When hiring workers in another country, companies have four main options for how those employees will be paid and legally employed: using contractors, registering as a foreign employer, employing through a local Employer of Record or becoming the official employer by setting up a local legal entity.
CONTRACTORS
Using contractors means hiring individuals or staffing agencies in a foreign country to provide temporary or project-based work. The contractors are then responsible for paying and legally employing their own staff. As a client, the company is only responsible for paying the contractors for the work performed. This provides more flexibility but less control and oversight. Contractors also typically charge higher fees to account for their costs of employment. A company that employs someone as a contractor instead of a permanent employee could incur employee misclassification and face serious fines.
FOREIGN EMPLOYER
A Foreign Employer (FE) is an entity that does not have a permanent establishment in the country but registers as a non-resident company that hires one or several employees in a target 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-resident employer.
EMPLOYER OF RECORD
An employer of record is a company that legally employs individuals on behalf of another company. The employer of record handles payroll, taxes, benefits, and other administrative tasks related to employment while the individuals perform their jobs at the client company.
LOCAL COMPANY INCORPORATION
Alternatively, a company can establish a subsidiary or branch office in a foreign country and become the official employer for any staff they hire locally. This provides more direct management and control over operations but also introduces additional legal, financial, and administrative responsibilities. The company is now legally required to pay salaries, taxes, and benefits, and ensure compliance with employment laws in that country.
There are pros and cons to each approach to consider based on factors like cost, control, flexibility, and liability. Other important questions include:
What type of work will be performed (temporary vs long-term)?
What level of oversight and management is needed?
Are there any legal or tax implications to consider?
What is the budget for employment costs?
What is the timeline for hiring foreign staff?
Choosing between contractors, foreign employer, employer of record and subsidiary registration depends on weighing all these factors and determining which option will enable a company to most effectively and responsibly hire employees in another country.
We have profusely discussed the benefits and pitfalls of Contractors and Company Registration in Portugal. Let’s now focus on the difference between registering as a foreign employer and using an Employer of Record.
What is a Foreign Employer and how is it different from an Employer of Record
A foreign employer refers to a company that is headquartered and operates outside the country where an employee is based, as opposed to a domestic or local employer that operates within the same country as the employee. Employing individuals in foreign countries provides companies with access to a global talent pool and the opportunity to build a culturally diverse team. However, it also introduces additional complexity around tax, legal, and HR compliance.
An EOR or Employee of Record is a type of co-employment model where a third-party organization acts as the official employer for tax and legal compliance purposes, while the day-to-day management of the employee is handled by another company, typically the client organization. The EOR handles responsibilities such as payroll, benefits, and ensuring compliance with labour laws in the employee's country of employment. This model reduces the administrative and financial burden on the client organization.
Some key differences between a foreign employer and an EOR model:
A foreign employer directly hires, pays and retains control over the employee. An EOR handles payroll, benefits and compliance for the employee on behalf of the client. The client organization can maintain or share responsibility for recruiting, interviewing and making the hiring decision.
A foreign employer is responsible for all employment obligations related to the employee. The EOR takes on the legal responsibility and liability as the employer of record. They ensure compliance with local regulations and shield the client from potential penalties or legal issues.
Employees of a foreign employer are managed by the foreign employer. Employees under an EOR model are managed by the client organization. The EOR does not direct or evaluate employees. They act as the legal employer only.
A foreign employer operates independently while an EOR works as a partner to the client organization. The EOR provides HR services and solutions tailored to the client's needs. They do not have a separate business agenda.
In summary, while a foreign employer and EOR share some similarities in employing individuals outside their home country, there are distinct differences in their responsibilities, relationship to the employee and operating model. Both options provide organizations with access to a global talent pool but it is important to determine which approach best fits their needs based on priorities around control, compliance, and convenience. The EOR model may be preferable for companies looking to test new markets or expand into foreign countries without establishing a local entity. A foreign employer model is better suited for those seeking greater control and independence in their international hiring and employment practices.
Setting Up as a Foreign Employer in Portugal
Setting up as a foreign employer in Portugal is possible but does entail some bureaucratic hurdles that could take up to several weeks and require the on-site presence of the managing director, or a person duly empowered to represent them. Additionally, all the documentation needed to finalise such a process is in Portuguese, making it even more difficult for a foreign company to complete without local help. Here is an overview of the process:
The first step is registering with the National Register of Legal Persons (IRN), which will assign a local tax number (NIF) to the non-resident entity. This will later allow the foreign company to fulfil its Social Security and Customs Authority obligations, as well as the monthly payroll report.
The second step is filing a “start of business” declaration with the Tax and Customs Authority. Under the Corporate Income Tax Code, companies with no installed management structure in Portugal will be subject to Corporate Income Tax on the earnings obtained in the country.
The third step is to register with the Social Security Office and obtain the respective identification number.
In addition to the aforementioned points, and assuming that any new employee will be working in Portugal, the non-resident entity will also have to comply with and be legally liable for a number of periodic social security and tax obligations.
WHAT YOU NEED TO CONSIDER WHEN REGISTERING AS A FOREIGN EMPLOYER IN PORTUGAL
SOCIAL SECURITY CONTRIBUTIONS: according to EU regulations on the matter the employee needs to be appointed as the social security representative and the official bailer of the monthly social contributions. So, the employer pays the salary and social contributions to the employee and the employee then pays the contributions to the social security. In case the employee chooses to retain the cash, forgets, and does not pay the contributions, this will result in legal liability for him and the company.
EMPLOYEE PERSONAL INCOME TAX: as the company has no commercial activity in Portugal, withholding tax can be waived. Meaning that the employee receives the gross salary and will pay the due tax in the following year, after submitting the annual tax return. This means a big lump sum tax to be paid by the employee all at once and thus requires very good personal cashflow management to avoid having mandatory taxes left unpaid.
PERMANENT ESTABLISHMENT: depending on the activities of the employee, the Portuguese Government may determine the existence of a permanent establishment for the company, resulting in additional tax and legal liability.
MANDATORY INSURANCES: even as a non-resident entity, the company must ensure the employee has labour insurance and complies with health and safety issues. Some insurers refuse to deal with companies with no permanent establishment, making it harder to fulfil statutory obligations. More specifically, in case of professional injury without labour insurance in place, the foreign employer can be liable, in case of permanent disability, to pay a lifetime salary/pension to the employee.
EMPLOYEE BENEFITS: some benefits such as private health insurance and meal allowance are highly valued by the local workforce. The foreign employer setup prevents or at least hinders setting up a benefits plan, which, for the company, represents significant tax savings.
EOR or Employer of Record in Portugal
Using an Employer of Record only requires one step: identify your local partner and employ your workforce in Portugal under their local legal entity. This will save you not only time but also a liability: any obligation related to tax, payroll and legal requirements is the responsibility of the local Employer of Record.
Using an Employer of Record arrangement has several benefits for both the client company and the employees. For the client company, it reduces administrative overhead since the employer of record handles all employment responsibilities.
For the employees, working for an employer of record means they have an established employment relationship with benefits and protections. Their jobs and income are more stable since they are employed by a local employer that takes care of all the legal aspects of the employment relationship. They also have access to resources and support from the employer of record.
In summary, foreign employer setup adds more risk, as employment compliance is more difficult, leaving you exposed to several potential pitfalls, while an Employer of Record ensures you are on the right side of compliance.
At BRIDGE IN we tailor our offer to both our clients and their staff, providing a level of local support that no global employer of record is able to offer: our in-depth knowledge about local regulations, benefits, absences, leaves, social security, personal income tax and all hr-related matters ensures both our clients and their employers are protected and satisfied.
