Employer of Record (EOR) to Entity Conversion

The most common solution for companies ready to commit to a new market is by establishing a subsidiary. A subsidiary will be a fully operational, self-contained business entity with shares owned by the parent company or ownership. The local names can come in many variants, but all are similar in nature and status to a US LLC. A few examples include Private Limited in the UK, WFOE in China, GmbH in Germany, Limitadas in Brazil, or Proprietary Company in Australia.

The process to establish a fully operational local subsidiary can be a complex process with many unknowns. It can often take between 4-12 months of project management across multiple vendors depending on the country.

Employing and paying your employees provides a clear milestone to work towards during the entity setup journey. Many of the setup activities will directly or indirectly feed into this process. If a local tax registration has not been completed, private pension account established or local bank account made operational then the logistics of paying employees will not occur smoothly. 

During the planning phase it is ideal to obtain documentation surrounding the current insurance plans EOR employees are enrolled under. If this is not on file then companies will need to obtain this when providing notice. Once the current plans are obtained HR teams perform a side by side analysis to match levels as best as possible. In addition to medical coverage, there may be pension accounts that require tax planning or paperwork to transfer to a new administrator. This process can prove to be tricky to manage and may extend timelines during an EOR conversion.

If you are hiring staff then the following documents will be needed in order to ensure compliance and set up your operations on the correct footing. This may include an employment agreement, contractor agreement, employer handbook, employment law compliance for your industry, union requirements, termination documents, required enrollment documents and intellectual property and invention.

A key reason that the EOR will require lead time to process a conversion is to calculate final payroll and complete separation logistics. There is a number of factors they will need to plan around so providing ample notice can make the process more smooth on both sides. This can include social insurance un-enrollment paperwork, calculating final payroll amounts due such as leave, 13th month or severance deposits. The EOR will often hold a payroll security deposit that should be reconciled and returned. Any employees on a work permit will often require a more in depth process to transfer, including tax settlement.

A clear employee communication is as vitally important when onboarding employees to an EOR as when transitioning them off. Changing legal employers is a major employee event that has legal, tax and retirement implications for employees. Working with a partner to create a unified communication plan can be the difference between a seamless and disorganized transition.

As employees are legally changing employers there is often specific legislation around this procedure globally. Performing the necessary legal analysis with local counsel well in advance can go a long way to avoiding unexpected compliance pitfalls. In many countries this will include assessing a union or collective bargaining agreement. Companies may not always be aware that an EOR, and by extension their employees, is in fact registered under certain CBA. This can increase in complexity if the EOR CBA is based on their specific labor license type and differs from your new entity industry.

When planning an EOR to new entity conversion, the actual onboarding of the employees is a centerpiece of the process. This can be an incredibly smooth process if all the up front work has been managed effectively, timelines clearly communicated and collaboration between the company HR, employees and EOR provider. HR onboarding will vary drastically across jurisdiction with some countries allowing for 100% electronic, some requiring in person medical checks and others bringing original documents for wet signature.

If all has gone to plan this should be uneventful from a logistical standpoint. HR and finance teams should pay especially close attention to the first months payroll to ensure all processes are running smoothly. The HR team can plan ahead by connecting with the local payroll vendor to receive a copy of the employees pay slip, including gross to net calculations. An added step can be to review the breakdown with the employees individually.

One key benefit of using an EOR provider is that they should provide local HR experts to provide compliance advise and act as a local HR rep for your employees. By converting to your own entity this knowledge will need to be substituted in some manner. HR teams should ensure they have access and an understanding of employment law requirements in each new country.