Hiring Contractors vs. GEO/PEO/EOR Employees
Learn about what GEOs and global PEOs do and whether your company can instead hire contractors and freelancers.
Working with international freelancers and contractors provides your company with access to a larger talent pool, often at a lower rate than domestic freelancers. But hiring foreign freelancers can also increase legal risk if not managed correctly. One solution to mitigate risks is to hire individuals (as employees) through an international PEO or GEO. But does your company need to hire foreign talent through a GEO, or can it engage the talent directly as contractors?
If you are engaging foreign workers for project-based work, where the worker is independent and controls when, where, and how the work is done, then usually a GEO or global PEO is more than your company will need.
What is an international PEO or GEO or EOR?
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An international or global PEO is a Professional Employer Organization. A global PEO provides ‘employer of record’ (EOR) services for companies that want to engage talent in another country without establishing an in-country entity. An international PEO differs from a domestic PEO in the US in that there is no co-employment with the client company. The global PEO is the sole employer of record for the engaged workers.
An international PEO is also commonly called a GEO, which stands for Global Employment Outsourcing.
What services do GEOs provide?
The GEO will handle all the HR responsibilities associated with hiring workers in another country. The GEO’s services include hiring, benefits management, payroll and tax management, and compliance. As the registered in-country company, the GEO is the Employer of Record (EOR).
The client company will retain control of direct supervision of the worker employed through the GEO. The client determines the responsibilities and performance expectations. Additionally, the client can set salaries and decide to terminate services. The GEO would be responsible for the termination of employees, following local laws and regulations.
The GEO or global PEO is also responsible for staying up-to-date with regulatory changes.
Does your company need a global PEO or GEO or EOR?
Whether or not a company needs the EOR services of a GEO or international PEO depends on the specific needs of each company and the local laws and regulations of the potential worker’s country. When your company is engaging workers who clearly meet the requirements for contractor classification you can engage the worker directly, rather than engaging a GEO to hire the workers as employees.
Benefits of a GEO or EOR services
Hiring through a GEO is much faster than setting up a business entity and then hiring employees. Establishing a business entity can take months as well as incurring costs. So if your company wants to rapidly hire foreign employees and offer benefits, a GEO can be a great solution. This structure also works well if you need to engage sales or market development talent — these types of roles generally cannot be classified as contractors.
Using a GEO or EOR to hire employees reduces potential compliance risks related to worker misclassification. Worker misclassification occurs when a worker has been incorrectly classified as a contractor rather than an employee. Compliance laws and regulations regarding worker classification vary by country.
Disadvantages of a GEO or EOR services
Although engaging workers through a GEO mitigates classification compliance risks, costs are much higher. It is much less expensive to engage workers directly as contractors.
In addition, a GEO or global PEO does not mitigate all compliance risks. If you are engaging more than five employees through the GEO and/or have more than $1M in sales in the country, you should consider setting up a business entity due to permanent establishment risk.
Engaging International Contractors and Freelancers
Engaging freelancers and contractors for project-based work provides companies with skilled, on-demand talent at a lower cost than hiring full-time employees. Contractors are an ideal solution for providing agile, flexible support.
When engaging foreign contractors and freelancers, your company needs to ensure that workers are correctly classified as contractors and that all required documentation has been completed and collected.
While laws and regulations vary by country, the general factors to keep in mind are similar to the IRS test for contractors. Clear independence is required — which is why using foreign contractors for sales roles is problematic. Some of the key independence versus control considerations:
- When: Who controls when and how many hours worked per week?
- Where: Who controls the work location? Will the individual work at the company’s office?
- How: Who controls how the work is done or who does it (like a subcontractor)? What’s the payment structure — is there a regular base payment? Is this an exclusive relationship, or does the individual also engage with other companies?
As is the case in the United States, working with freelancers who have an entity through which their contracts and payments flow through may offer some additional risk mitigation, provided the freelancers / vendors are also properly paying all taxes via that entity.
Our guide to working with international freelancers walks you through the key tips you’ll want to know, like making sure you have an executed contract. US-based companies need to collect Form W-8 from foreign contractors and freelancers before starting work.
What happens if there is potential misclassification in a foreign country?
If there is an issue with misclassification in foreign country, you may be subject to fines and lawsuits. You may have to engage attorneys to represent your company in that country. If you don’t pay the fines, the likelihood of those penalties reaching your company in the United States is relatively low.
However, if you intend to expand to that foreign country in the future you will have to face the consequences of those penalties (as well as additional interest and other penalties) at the time you set up shop in that country. For that reason, it’s best to comply with misclassification investigations in foreign countries that you may want to expand to in the future.
Simplifying Engaging International Contractors and Freelancers
Liquid makes engaging international freelancers, contractors, and vendors fast and easy. In just a few minutes, you can quickly and efficiently onboard new vendors. Liquid’s built-in features help your company mitigate compliance and permanent establishment risk. And with our secure payments, paying freelancers and vendors in 175+ countries is simple. Liquid provides complete vendor and contractor support, with contracts, compliance, and payments all in one system, making it easy to engage and manage foreign contractors.
Updated: June 22, 2021
Quick note: This is not to be taken as tax advice or legal advice or payroll advice. Since tax rules and laws change over time and can vary by location and industry, consult a CPA / tax advisor and/or attorney for specific guidance.