Recorded on 1st December 2020. (UnaTerra regularly hosts webinars on a range of international expansion topics – to sign up for the next one, visit our Webinar page.)
Budgeting for international hires can be difficult when you’re not familiar with the local labor market and HR law. This recording is from our webinar as we detailed the things you should know when hiring workers in another country.
Hello, my name is Andrew Laing. I’m a business manager with UnaTerra, also with me is Julian Christmas our Chief Revenue Officer. At UnaTerra we specialise in helping our clients expand internationally, understanding those costs and helping them implement their plans so they can focus on their business. You can listen to previous webinars on our website.
We’ve done some on the basics of international expansion, international payroll services and on other subjects as well. If you have any suggestions on webinar topics that you’d like to see related to international expansion, send them to us by email.
In this webinar, we’ll go over:
We’ll look at these at a really high level. Obviously, it’s going to be tough to fit all countries into a half hour presentation, but if there’s any specific questions you have, we’ll have a Q&A toward the end.
What those costs look like for the employer and the employee. Costs don’t often drive expansion, but they can certainly be a consideration. Usually companies decide to expand, because they are looking for less expensive talent or getting into a market for sales purposes or maybe hiring a team of customer success folks. There are a lot of different reasons. It’s rarely because it’s less expensive to do business somewhere and therefore we’re going to hire there, but it’s definitely a consideration.
If you’ve attended one of our previous webinars, this is going to look pretty familiar, but it’s a way of budgeting for costs and then using different methods of employment to control that.
If you have any questions save them for the end or put them in the chat and we’ll answer them toward the end of the presentation.
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One of the things that is really high level to look out for when you’re looking to hire in a different country, is obviously salaries, as these vary by country. The US is going to be on the higher end, some European countries are on the lower end. Asia and South America are pretty variable. But this can definitely play a factor in where to hire if location is a concern. This is happening more and more frequently these days with remote work being a more viable option for a lot of teams. Certainly COVID has made us realize that.
The total cost of employment looks at costs beyond the salary, this can include benefits. That is statutory benefits, which are the standard in many countries, unlike the US. With statutory benefits the cost burden is placed more on the employer, this includes things like healthcare and pension. Even where statutory benefits are the norm, supplementary benefits can help make a company more attractive for potential employees. So, you might want to work with a benefits broker or someone like UnaTerra to scope those in whatever countries you’re going into.
We’ve talked about different hiring methods. A little later in the presentation we’ll go over what the costs of those look like. Those are going to sit on top of the benefits costs and the salaries. But we’ll have more information on those in a little bit.
I want to do a regional overview looking at different parts of the world. What the landscape looks like in terms of difficulty and how costly it is to hire and the extent to which there is flexibility around solutions. Let’s look at some different aspects of hiring internationally.
What we’re talking about here is the extent to which you have to jump through lots of hoops to hire and onboard first employees. They’re on a sliding scale, on one end where you have the US where an offer letter is more or less all you need in order to get somebody on board. The scale goes all the way through to some of the more complex areas of the world, where you have to have very complicated employment contracts, where you have to consider collective bargaining agreements. An employment contract has to be registered with the local social security and so on.
When looking at the actual financial cost of the business of employing a person on an ongoing basis, so not just their salary but the wider cost of employment. This means taking into account social costs, statutory benefits and other things. How much does your employee cost your business?
We do a lot of solutioning with our clients. If they want to employ somebody in a new country we work with them to understand and inform their decision making about which solution they want to implement. The complexity piece is really looking at how complex and difficult is it to get the infrastructure in place in order to be able to hire and onboard employees in a new country.
This is considering all the multiple solutions available in particular parts of the world in order to employ people. Is it simply you have to do it through a legal entity or are there other alternatives and which gives a little flexibility to an employer?
Running through the different regions is really helpful because sitting in Europe as I do, it’s interesting to consider what does it look like to hire on the other side of the Atlantic. It is also interesting to see the corresponding hires that are made across Europe and in other parts of the world.
In terms of ease of hiring it is easy as offer letters and employments contracts are generally straightforward. There are a few barriers to physically onboarding the employees. The cost of employment is low because social costs are low, although wider supplementary benefits can be quite expensive. So typically, medical insurance. The actual fundamental cost of employment, so salary plus mandatory social costs are low in the US and Canada. In terms of complexity, it is a medium, because in the US you do have to have a legal entity to hire but it’s not that complex to set one up. In terms of flexibility, they have relatively low flexibility because in the US there is the need to have a legal entity set up. That’s not the case in Canada, but we do as much work in the US as we do in Canada. Taking North America overall it is relatively straightforward and relatively rigid in terms of in terms of how we hire people.
These countries are typified by high complexity, high cost and a lack of flexibility. In most Latin American countries a legal entity is required to hire locally. The employment landscape is very complex and it’s backed heavily in favor of the employee. The social cost of employment is high, not only the social cost, but the wider benefits landscape in Latin America also leads to a lot of extra costs to the employer.
Europe is a bit more variable, hiring is somewhere between medium and complex, depending on which countries. The UK is quite straightforward but some of the countries that border the Mediterranean, Italy and Spain for example are more complex. In Italy and Spain there is the absolute requirement to follow the letter of the employment law, which is complex. The law is stacked in favor of the employee rather than the employer. Cost of employment is variable and social costs are actually quite high. However additional costs are relatively minimal because social costs capture a lot of, for example pension savings. Employees and employers are required to contribute towards unemployment insurances and therefore are often covered by social costs. So, the social costs are relatively high, but the cost beyond those tend to be relatively minimal. There is not much complexity and lots of flexibility across the European hiring landscape. It is possible to hire in almost every European country without having a legal entity in place. This is what makes Europe a relatively attractive place to hire one or two people, either on an opportunistic or strategic basis. Hiring one or two people can be relatively straightforward and relatively inexpensive, just because there isn’t a need to have any entity in place.
The Middle East is a quirky part of the world because hiring is straightforward and the cost of employment is relatively low, taxes and social security broadly speaking are non-existent. The complexity level is high and the and the flexibility is low because the requirement to have either a legal entity or a branch, something fairly complex in place. It is a difficult process to get these in place in the Middle East, there’s no flexibility around it. So the middle East is an interesting conundrum when it comes to hiring.
In China, Hong Kong, Singapore, Malaysia, Thailand, and Australia the ease of hiring is relatively variable, it is not as complex as a Central or South America. The cost of employment is medium and social costs are broadly in line with global averages. Complexity is relatively high in the Far East, because there is quite often the need for a legal entity. There are lesser registrations that are an option, but generally only for very specific activities, usually pre-commercial activity. So very early stage investigation of the markets, and not many of our clients fall into that category. They usually give rise to the need for a legal entity. Flexibility is low simply because more often than not the requirement is to have a legal entity or a branch in place.
So that gives an interesting overview covering most parts of the world. If anybody has any interest in specific countries please email us, we’ll be happy to chat about specific countries.
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We can’t really go into a country by country comparison of actual salaries. However, we do quite a lot of work with clients in terms of benchmarking salaries in specific countries for specific roles. It’s not as straightforward as taking a specific role, benchmarking that salary and particular benefit expectations in filling the role in a specific country. We do this as part of our HR consulting work. We’re still seeing hiring patterns which take account of not just skills, but also earnings. So, the cost of employment which, varies across the world, means that a lot of our US clients are hiring in other parts of the world. Sometimes they do this on an opportunistic basis. However, there’s still a link with certain types of skill and activity and an attractive cost base in other parts of the world.
We certainly still see sales and marketing activity in Europe, engineering functions in R&D in Eastern Europe. Countries like Ukraine and Poland are popular locations for R&D and low cost technical skills.
There are some countries in the Far East, such as the Philippines and Indonesia, where we still see they’re favorable in terms of setting up customer support facilities. Increasingly also software engineering and technology engineering are becoming popular in that part of the world. In Asia and South America, there is quite a lot of variability because, there are some very big metropolitan areas. The cost of living in these areas is high, skill levels are high and of course salaries are high as well. But there are plenty of locations where salary expectations are low.
We see a lot of opportunistic hiring all around the world, although there is still a propensity for more of a strategic building of sales and marketing activities in specific countries to address specific markets.
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It is critical to think beyond the salaries themselves, this is a conversation that we have to have almost on a daily basis with clients and prospects, which is to think beyond the salary cost and consider the total cost of employment. The total cost changes depending on where you’re looking to hire, it’s so variable across the world.
In the US the social costs are quite low, so the total cost of salaries plus social costs are aligned quite closely. For our US clients it’s difficult to conceive of different parts of the world where social costs and all-in costs of employment can run to 20%, 30%, 40%, and in some extreme cases 50% to 60% and beyond.
In Europe social costs are actually relatively high. By social costs I mean statutory costs, which are incurred by the employer over and above the cost of the salary, which are required by law. So social costs often capture national medical support, retirement benefits, unemployment insurance, and various other components. You only have look at a French payslip to understand how complex the social systems can be in some countries. So social costs in Europe are relatively high and average about 23%, which is quite a lot higher than the global average of 15%. Non-statutory benefits are minimal, most of the extra costs will be social costs. There aren’t many benefits which are required from statutory point of view.
Things get more complicated in South America. I don’t want it to be quite so generalist to refer to South America as a complex area, but social costs and the total cost of employment are very high in South America.
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In preparing for this webinar, I’ve found that it’s quite difficult to establish through some simple research on the internet what is the total cost of employment in a particular country. We’ll be taking Brazil as the example because of all the countries in the world, it’s the one that I know has an extremely high total cost of employment.
From my research I established from the KPMG website, that social security cost for the employer is 29%. This is relatively high but not extraordinary compared to a lot of the costs see in Europe and other places around the world. It doesn’t appear on the face of it that the cost of hiring in Brazil would be stratospheric, but in fact it is stratospheric.
There are so many aspects that you have to add on top of social security cost, layering on the 13th month salary and there’s some vacation loading. This is when employees take vacation, you have to pay them extra. On top of these, all employees are entitled to meal vouchers to pay for their lunch, to travel vouchers to get to work and back and there are various other aspects.
So there is a layering effect, because the social costs can layer on top of these extra elements. What we end up with in Brazil, dependent on salary, varies from between 75% and 85% as the typically quoted total cost of employment in Brazil. If you’re planning to take on somebody in Brazil and you want to pay them $100,000. It’s important to understand that the real cost to your businesses is going to be in the region of $180,000.
A further consideration if you are planning to hire one person in Brazil, because it’s a very complex place to set up a legal entity, I would always recommend to use a PEO or an employer of record provider. Bear in mind that their fees, which are generally calculated as a percentage of the earnings, don’t just apply to the salary, but also to the on costs. So if you’re engaging for an employee of record service, they may charge 20% of salary. In this example where the employee has a $100,000 salary, it wouldn’t actually be 20% of a $100,000 it would actually be 20% of $180,000. So it’s important to consider that is typically the way things work in the employee record and the PEO world.
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On top of social costs and taxes there are other costs, like meeting compliance obligations. This includes things like VAT filings, annual statutory audits, local legal and in the case of Spain fiscal representation. These obligations can add on top of what it costs to do business in a country. Some countries are really difficult with compliance and require a lot. It varies by country and some don’t have as many requirements, so you’re not budgeting as much of a cost.
A lot of companies are taken aback at the idea of establishing a local legal entity when they’re looking at doing business somewhere else. It can seem like an administrative burden for them, a large cost burden, but working with a partner or someone who knows what they’re doing can help mitigate that.
There are a lot of different ways to hire people in different countries. And Julian went over some of them in that table a few slides ago, talking about the flexibility of employment options.
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There are some employment options which are largely dependent on what the head count of your team is going to be in the country. This includes: the kind of role the team is performing, whether there are senior people on the team and if there are fixed places of business. If you have attended any of our previous webinars you will probably be familiar with these as the criteria for permanent establishment risk. I am going to go over four main mechanisms that we see for hiring in different countries. I will look at how they interface with PE risk and in what their use cases are.
When hiring independent contractors, a lot of people do this when they are looking at dipping their toes into the pool in another country. It is very fast to do and there are no additional administrative costs. This means you are not paying payroll taxes, social costs etc; these are placed on the contractor to remit to the government. This is not available everywhere, it is a legal mechanism in some countries, for example, within the US and India. It is important to note that in a lot of countries it actually depends on the work that the person is doing. It is sometimes necessary to bring them on as an employee. A typical scenario might include hiring people to work on a specific project. For example, in the case of software development or hiring on a temporary basis. This strategy can be used when other options are too expensive. However, be very careful about triggering permanent establishment risk as you can open yourself up to a lot of liability.
You can utilise international PEO’s to hire employees. This involves another company hiring an employee and then leasing them back to you for a monthly fee. The fee is typically a percentage of the employee’s wage. This can be anywhere between 15% to 20%. It is common to hire someone through an EOR as this is compliant with HR law. However, this depends on what the employees are doing. If you have salespeople who are generating revenue, or senior people who are directors or at VP level, this can act as a trigger to the government indicating that there may be significant commercial activity happening within a country. They need to collect their piece of the pie on that.
This can be used to hire someone quickly within countries such as Brazil, China or Japan, where it can take a long time and be difficult to set up an entity. However, you need to be careful with the head count. Once you get over four or five employees this will indicate to the government that there may be significant commercial activity and they may attempt to collect taxes. A typical use for this (PEO/EOR) would be getting an entity set up or if you have a small team of software engineers or support staff who are not generating revenue directly.
This is what we call a payroll registration. It is typically a European solution, there are a couple of other countries that allow it, for example Canada and Australia. This is similar to an international PEO/EOR as it is compliant with HR law. You need to make sure that employees that aren’t generating revenue, they are not senior level staff. This option allows you to have a direct employment relationship with the employee instead of another company hiring them and leasing them out to you. In Europe, if their paycheck is coming from another company than the one they are working for, it can sometimes make employees feel like a company is not really dedicated to them or the market. This allows you to register your domestic entity, such as a US HQ, to provide payroll in that country. This option involves directly hiring employees. They will have an employment contract and a paycheck which comes from you. It is less of an administrative burden and costs less than establishing a legal entity. Again, be careful about permanent establishment risk. This can be a good way of testing out a market.
This option is fully compliant with both HR and corporate law. You can have an unlimited number of employees in commercial activities. This means sales staff and senior level are okay. There will be a higher administrative burden and upfront costs. There are some savings available if you are going to be in a market for a long time and if you are dedicated to that market, it is a more cost-effective option than utilising a PEO.
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This slide considers which business costs are involved in implementing and supporting each particular solution. Independent contractor, PEOs are a third party employer option. The non-resident employer is typically a European option where you can employ in a country without having to establish a legal entity and the last option is the legal entity option.
In terms of different types of costs and initial setup, an independent contractor is a simple column to discuss because there are few costs to the employer beyond what you are paying the contractors as a day, hourly, or weekly rate. There are no costs beyond it.
The setup costs are low, it does not usually cost a lot to get somebody on to an employer of record. However, although we do recommend it frequently for some of the complex markets like Brazil or China, the monthly costs can be quite high. This is typically a percentage of the total package that the employee is earning. This is subject to a de minimis of between a $1,000 and $2,000. For our typical client base, higher salaries can mean that the monthly cost per person could be between $2,000 and $3,000. There is no annual compliance attached to this model.
In order to clarify what the total costs associated with each of these different models is I will look at what the year one costs would be for each solution. If you were hiring one employee or perhaps building a small team of three employees. For a PEO your year one cost based on a $1,000 set up and a $2,000 to $3,000 month fee. With this option your year one costs, which would be the same as your year two costs, would be between $25,000 and $37,000. This is multiplied by three if you have three employees.
We often talk to new prospective clients and companies who are not aware that they are able to hire in a lot of countries without having a legal entity. The setup costs are relatively low between $1,000 to $3,000. The monthly cost is between the low to mid hundreds per month in terms of running a monthly payroll. Compliance costs can be between $0 and $500 typically. Your year one cost for one employee would be $4,000 to $9,000. The year one cost for three employees is between $6,000 to $13,000. There is a clear efficiency with this option that you don’t achieve with the employer of record model.
With this option there are some situations where we recommend registering a branch instead of incorporating a subsidiary. However, from a cost perspective they are similar. The initial set up and monthly costs are high because a legal entity requires payroll costs as well as accounting. Often there are the localized accounting requirement which needs to be done locally. We take care of all of that including the local requirements and ongoing compliance, including both VAT and GST compliance. Annual compliance is relatively expensive. This includes financial statements, corporate tax returns which can be between $5,000 to $10,000. When we come to the year one cost: One employee can cost between $19,000 to $44,000. This is quite a large cost and more than you might incur under the employer of record model. If we look at three employees, it is still expensive but not much more expensive than the year one employee cost. I think it is fair to say that if you are looking at one employee in a complex country, and you are deciding between a PEO or setting up a subsidiary, I would always recommend a PEO because it is immediate. You can switch it on and you can switch it off without leaving the legacy of a legal entity in a country where you did not intend to have one. If you are looking at building a small team of three or more people then, in every location I would always recommend setting up a legal entity and employing them directly. This will allow you to own the employment relationship.
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This slide is a quick overview of what some of the employment costs are as a percentage of salary as well as the total. This is excluding some of the supplementary benefit costs. The USA is on the lower end but this relates to what we have been talking about. Brazil is quite high. Some of the European countries such as Italy, France, and Austria are relatively expensive as well. This gives you an overview of what you may need to budget for each market.
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I cannot claim to have a full understanding of global hiring trends but this is a comment on what we are seeing with our clients. With international expansion 10 years ago, there was a big focus on sales, marketing and building offices. In the last 12 months, due to COVID and technology, there has been a propensity for all business roles to be a lot more flexible around where certain roles can sit. Cost is a factor, but the fact the remote working landscape has changed so much in the last 12 months, it has certainly kept us busy. We did have a little bit of a lull over the spring and summer when lockdown was in full flight. We are very busy now with new work with new clients. There is a lot of opportunistic hiring going on wherever the talent is available. In terms of geographic focus, the work we do now is very similar to the work we did one or two years ago. We are not seeing a massive shift into new and exotic markets. I would say our top 20 countries are broadly similar to a couple of years ago.
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As of now the amount of hiring that we are seeing is going very well, there is a lot of hiring going on. It is difficult to unpick. We have undertaken some interesting new marketing initiatives. We are seeing more opportunity than we were before. Our client base has been relatively static over the Covid months are now back on the move and we are seeing international hiring moving forward again. Our existing client base is back in expansion mode and we are seeing a lot of new business coming in. Some of it is opportunistic hiring. However, in some situations, there is a more strategic approach to expanding into multiple countries within a fairly short space of time. We had a lot of exploratory calls earlier in the spring and summer. A lot of people were trying to fact find and were not necessarily willing to pull the trigger. We have seen a lot more companies that are starting to expand.
I wonder whether this is a question about where it is easy to find IT engineers. Whether it is easier to find and hire them, or from a practical point of view, how easy is it to hire in Mexico and Brazil? From a practical point of view, in terms of the need for a legal entity and the relative complexity of the HR landscape, certainly Mexico is easier than Brazil. There is a trend we have seen in which there is more of a mood to hire engineers and technical IT teams in South America. The advantage from a time zone perspective is that it is similar to the US. In terms of ease of hiring and payrolling, they are both relatively complex, but Mexico is certainly more straightforward than Brazil.
I would say we have a pretty large tech client base and they do not have much of a footprint in Africa. We do have some one-offs of companies that are doing work there that are involved in infrastructure developments or are trying to tap into that market. I have not seen a lot of expansion for talent reasons, for hiring development teams or customer service teams, but we have seen one-offs here and there.
Where we have seen expansion into Africa it is usually around areas such as oil and gas. This is an area in Africa which is very interesting. We have seen quite a lot of interest in agritech, although agritech is not a big part of our client base. With telecoms we were dealing with quite a large opportunity from a telecoms company who needed to hire engineers in a number of African countries. These are definitely the exceptions rather than the norm. We do support African expansion, but it is less common in our client base than expansion into more common markets of Europe and the Far East.
If you have any questions my information is up on the screen. Please feel free to reach out if you have any specific questions on any countries, hiring mechanisms or costs of doing business in another country. These are all questions that we are happy to field. If there is anything we can do to help we would love to hear from you. My email is Andrew.Laing@unaterra-global.com or you can call me on +1 408-221-3746.