The first hire outside your home market usually arrives without much ceremony. A candidate you liked turns out to live in Portugal. A client in Toronto wants someone in their time zone. A specialist you cannot afford locally costs a third as much two countries over.
Then the practical question lands. How do you actually pay this person, and what are you signing up for when you do?
There are three answers, and most growing companies use more than one at the same time. What follows is what each route means in practice for payroll, tax, risk and the day you eventually part ways.
Route one: engage them as a contractor
The default. They invoice you, they sort out their own taxes and social contributions, and you pay the invoice. No local registration, no payroll, no benefits administration.
For genuine project work this is the correct answer and nobody should talk you out of it. A designer producing a defined set of deliverables, a consultant on a three-month engagement, a translator paid per job. These are supplier relationships and treating them as anything else adds cost for no reason.
The problems start when the relationship stops looking like a supplier relationship. Fixed hours. Your equipment. Your line manager. No other clients. A rolling arrangement with no end date. At that point you may still be issuing invoices, but you are running an employment relationship, and the country the person lives in gets to decide what that means.
A CoR page can help businesses understand how a contractor of record supports compliant contractor agreements, payments, and local requirements when working with international independent contractors.
Route two: set up a local entity
You register a company in the other country, and from there you hire the way a local employer does. Local payroll, local contracts, local benefits, local filings.
The advantages are real. Complete control over employment terms, a legal presence that supports selling into that market, and a structure that does not carry a per-employee premium. Once you have a genuine team in one country, an entity often becomes the cheaper option.
The costs are equally real. Incorporation, a registered address, a local accountant, statutory filings, and sometimes a resident director. Setup is usually measured in months rather than weeks. And winding an entity down when the market does not work out is slower and more expensive than most people expect.
The rough rule people use is headcount. One or two people in a country rarely justifies an entity. Five or more usually starts to.
Route three: an employer of record
The middle option, and the one most companies have not thought about until someone explains it.
A provider that already has a legal entity in the target country employs the person on your behalf. That split is the core of how an employer of record works: the provider carries the legal employment relationship, issuing the local contract, running local payroll and handling statutory contributions and benefits, while you direct the work and the person sits in your team like anyone else. You get a single monthly invoice covering salary, employer costs and the provider fee.
The trade-off is a fee, usually charged per employee per month on top of the salary and employer costs. In exchange you get a compliant local employment relationship in weeks rather than months, without registering anything.
It suits a specific situation well: a small number of people in a country, a market you are testing, or a hire you want to make now while the entity question is still open. Some providers also combine employer of record staffing with recruitment and day-to-day team management, which matters if you need the role filled as well as employed. It is a poor fit if you already have fifteen people somewhere, because at that point you are paying a per-head fee for infrastructure you could own.
What each route means for payroll and benefits
With a contractor, payroll is not your problem. You pay the invoice and they handle the rest. Simple, but it also means you have no visibility into whether they are actually declaring the income, and in some countries that can eventually become your problem rather than only theirs.
With an entity or an employer of record, you are inside the local system. Statutory holiday, sick pay, pension or social insurance contributions, thirteenth month payments where they apply. The numbers surprise people. Employer social contributions run into the low single digits in some countries and past 30% of gross salary in others, which is why a salary comparison between two markets tells you very little on its own.
Ask for the fully loaded cost of a hire before you compare markets. Base salary alone will mislead you in both directions.
Tax residency and permanent establishment
Two separate issues get muddled here.
The first is the individual. Where someone is tax resident generally follows where they live and how long they spend there, and most double tax treaties use a 183-day threshold as one of the tests. For a person who lives and works permanently in one country, this is usually straightforward. It gets complicated for people who move around.
The second is your company, and it is the one that actually catches businesses out. If someone working for you in another country is doing something that looks like conducting your business there, particularly negotiating or concluding contracts, tax authorities can decide you have a taxable presence in that country. That can bring a corporate tax filing obligation you never planned for.
The risk is low for a back-office hire and considerably higher for a salesperson closing deals. Before you place a revenue-generating role in a new country, that is worth a short conversation with an adviser rather than a guess.
The misclassification question
Every country has a test for whether someone is genuinely self-employed, and the tests look at the substance of the relationship rather than the label on the contract. In the United States, the IRS assesses behavioural control, financial control and the nature of the relationship. European tests vary in detail but ask similar questions about control, integration and economic dependence.
The direction of travel is towards tighter enforcement. EU member states have until December 2026 to implement rules that establish a legal presumption of employment when facts indicating control and direction are present. That directive is aimed at digital labour platforms rather than ordinary contracting, but the underlying principle it reflects is not new and it is not confined to gig work.
What does a problem look like in practice? A contractor relationship ends badly. The person files a claim in their local labour court arguing they were an employee all along. If the tribunal agrees, you can face back-dated social contributions, unpaid holiday, and a severance award calculated under local rules. Depending on the country, unpaid contributions can be pursued for several years.
Notice periods and ending the relationship
This is where the routes differ most, and where companies from at-will jurisdictions get the biggest shock.
A contractor agreement usually ends on whatever notice the contract specifies, often thirty days. An employee in most of Europe and Latin America does not. Statutory notice frequently scales with length of service, dismissals may require a documented reason, and severance can be a formula rather than a negotiation. In some countries a probation period is your only realistic window for a clean, quick exit.
This is not a reason to avoid hiring employees abroad. It is a reason to understand the exit before you write the offer, and to use the probation period properly rather than letting it lapse by default.
The part that starts after the contract is signed
Whichever route you pick, the structure only gets the person onto your payroll. It does not get them productive, and it does not create the records you may later be asked for.
Onboarding across borders is harder than onboarding down the hall. There is no overhearing, no tapping someone on the shoulder, and often only a few hours of overlap. Most companies improvise it with a folder of documents and a couple of calls, which works for the first hire and stops working somewhere around the fourth.
Some of it is also not optional. Data protection basics, security awareness and, depending on the market, specific workplace training carry legal weight, and the obligation sits with whoever is directing the work rather than with the entity on the contract. Keeping that material in a learning platform that records who completed what turns a vague assurance into something you can evidence, which matters when a client audit or a regulator asks the question two years later.
It is worth deciding this before the second or third international hire rather than after, because retrofitting a training record for people who joined a year ago is considerably less convincing than having kept one from the start.
Choosing between them
Start with the shape of the role, not the cost. If the work is defined, finite and genuinely independent, use a contractor and write the contract to match. If you want someone embedded in your team on an ongoing basis, they are an employee, and the only question left is which structure employs them.
From there it is mostly volume and time. One or two people in a country where you want to move quickly points to an employer of record. A growing team in a market you have committed to points to an entity. Many companies use an employer of record for the first two hires in a market and convert to their own entity once the headcount justifies it, which is a sensible sequence rather than a failure to plan.
Whichever route you take, get three things right at the start. A written contract governed by a jurisdiction you have actually checked. Clear intellectual property assignment, because the default rules differ by country and rarely favour the company. And an honest description of the working arrangement, because the paperwork only protects you if it describes what is really happening.
Building a team across borders is no longer difficult. Building one carelessly is still expensive.