According to an article by Forbes* last year, hiring the right people for your team is one of the top five challenges you are likely to face when establishing a company. Finding the right people for your teams is critical, often defining not only the success of the business, but also the organisational culture it develops. The good news for scaling businesses is we live in a more open and connected world which allows for ambitious companies to build teams across international borders and reap the advantages of a distributed workforce.
In parallel, a trend which has accelerated rapidly in recent times is the desire for skilled employees to seek fully remote career opportunities. Again, this is good news for UK based companies seeking to expand into Europe as it gives access to a huge talent pool of skilled workers from across the EU. However access to top talent across the continent does come with some challenges for UK companies to consider, primarily due to the differing employment legislation across each EU country. Much of this was easier within the European Union, where common legislation and reciprocal working rights eased the burden. Now that the UK has left the EU, here at Teamed we are starting to see the impact of Brexit on this process for UK businesses. So, what should start-ups (and other businesses) be aware of when looking to hire within our European neighbours?
The options available to scaling UK based companies
One of the primary reasons for organisations (and particularly start-ups) to use our services at Teamed is to expand their business outside their own national borders. There are a number of options available to companies looking to do this at present, and below we analyse the pros and cons of each in light of Brexit:
1. Engaging a Contractor
When establishing in a new market, particularly overseas, it’s often wise to engage someone with knowledge of the local market and an existing well established professional network. For many start-up organisations this can mean engaging a contractor initially, as this form of employee relationship offers the flexibility of only committing to a defined period. The flip side of this is the lack of certainty for the contractor may make them a flight risk in the medium term, but many organisations see this as a risk worth taking, particularly as a finite engagement term can be a good risk mitigation strategy should business in the overseas location fail to take off.
However, a word of caution. Although employment law in European countries hasn’t significantly changed as a result of Brexit, a number of the key countries (France, Germany and Holland for example), are currently reviewing their own legislation regarding the engaging of contractors, in much the same way that IR35 legislation is impacting such arrangements in the UK. As European Law firm De Brauw pointed out in a 2017 newsletter** to its clients:
“The proper classification of contractors is currently a hot political topic in all four jurisdictions, in light of concerns about the potential for abuse of vulnerable individuals.”
We anticipate that, some three years later, the finalisation of the Brexit process will only increase the push to more clearly define the contractor engagement model in many European countries. With employment law in flux in many jurisdictions, the risk of non-compliance around engaging contractors increases, and as De Brauw also notes in their conclusion to the same newsletter, “Financial penalties can be significant, and reputational damage is also a real possibility”. This risk may be too high for many start-up operations until clearer guidelines are in place across Europe, and we are already seeing an increase in clients coming to Teamed to help them convert an existing overseas contractor to permanent employment in that country to mitigate this risk.
2. Setting up a legal Entity in a foreign country
Another option when expanding into Europe or beyond is to set up a legal entity (or company) in that country, and once again we are seeing an increase in popularity for this since Brexit was announced back in 2016. On the face of it, the benefits of establishing a trading entity in the EU to either expand or build on existing business are many.
First and foremost, it will allow your organisation to hire staff in the EU, or even retain any current EU staff who may wish to relocate or are unable to work in the UK post-Brexit. In addition, an EU entity will make it easier for you to avoid tariffs, change your supply chain, operate bank accounts, pay suppliers and set up operational systems in the EU. For organisations with the capital and manpower to organise this, it is a very feasible option, which is probably why an Institute of Directors survey*** in 2019 indicated almost a third of UK businesses were considering this as Brexit approached. In our experience, some larger firms have followed through on this intention since this survey was conducted.
However, the situation for smaller companies and start-ups alike is vastly different. Navigating the bureaucracy and legal jargon of establishing a business in a country outside your own can be challenging at the best of times and for a fledgling business intent on keeping costs to a minimum, it can be prohibitive.
Another factor here is timing. Many start-ups have an advantage over their larger competitors by being nimble enough to seize new business opportunities quickly. If the process to transact that business is too lengthy – and setting up a foreign entity can take time – that advantage is diminished, thus increasing the opportunity cost. Therefore, although there is little doubt that Brexit has increased the demand from UK businesses for setting up their own operations within the European Union, the uptake on this option seems weighted in favour of larger businesses.
3. Using an Administrative Employer (also known as an Employer of Record)
What is an Administrative Employer / Employer of Record (EOR)? We’re glad you asked as many start-up organisations we deal with here at Teamed are unaware of what an EOR is, so let’s clarify that first. An EOR is a third-party organisation that hires and pays employees on behalf of another company, as well as taking responsibility for all formal employment tasks such as compliance and administration.
The main advantage of using an EOR to expand your business overseas is that it allows companies to legally and efficiently engage with overseas workers either in a new country or state, without having to set up a local entity or risk violating local employment laws. Traditionally, EOR service providers handle all payroll responsibilities as well as immigration compliance, which can be an attractive option for smaller organisations. It is also considerably more cost effective and a significantly quicker process compared to a business setting up its one legal entity in multiple countries around the world.
So, what are the down sides? Well not many actually. As indicated above, the employment administration and payroll are effectively outsourced in an EOR model. It’s fair to say in the early days a very small number of employers were initially reluctant to handover this part of its business administration to another company to manage. However, those days are long gone and it’s worth mentioning here that EOR service providers often manage all HR compliance issues, giving their employers a peace of mind that often counteracts the perceived loss of operational control.
As we’ve hopefully indicated, it’s clear that legislative change as a result of Brexit is going to impact how start-up organisations plan their international expansion and potentially source their skilled resources going forward. However, as with most change comes opportunity, and it is highly likely that the market will adapt and create solutions that are equally as attractive (if not better) than previous options.
At Teamed we are predicting that EOR services will increase in the coming years as Europe adjusts to its new paradigm, thus putting us in a great position to assist start-up businesses as they continue to expand their operations across national borders.
*** IoD Survey