Today, more than ever before, the global economy is an open book. To truly establish yourself as a major player in whatever industry your company operates in, limiting yourself to the confines of one country is rarely sufficient to achieve your personal and organisational ambitions. Indeed, in the light of new trade deals between Europe and Mercosur and the CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership) which will open up Peru, Chile and Mexico to unprecedented trade opportunities with Asia, expansion into Latin America is an increasingly popular option for many, with exciting opportunities across the region.
However, company formation in Latin America, despite the fruitful benefits in the long-term, is not a quick, cheap or straightforward process. This article will explore some of the associated benefits and drawbacks of using PEO services (Professional Employer Organisation), also known as ‘Employer of Record Services’, whilst also providing a comprehensive comparison to advantages that may exist through a full company incorporation into a new market.
What is a Professional Employer Organisation in Latin America?
A PEO service company can prove to be a very useful tool to facilitate the expansion of a business into new markets as it allows companies to hire personnel in a foreign country, whilst removing the necessity to form a local legal entity (company). This sounds very complicated but is simply achieved by outsourcing or devolving all employer responsibilities (payment of wages, management of taxes etc) to the PEO, who will register your employee with their company. This saves you the hassle of having to register a whole institution in a country, a process that can take a very long time and cost a great deal.
It means that as an employer, you will maintain full day-to-day management of your employee, and will be the person that directs and encourages your staff, however, you will not be burdened with the difficulty of registering a local legal entity and hiring staff in a country where you do not understand the rules and requirements for employment (not to mention the administration involved in running a company).
Advantages and Disadvantages an Employer of Record in Latin America
- Time and money: The first and most important advantage of using PEO or an Employer of Record Service provider is they can save you large amounts of time and money. Especially if you are a small to medium-sized company, or equally if you are only seeking to hire a few members of staff to carry out more specific tasks abroad, the cost and time involved with forming a legal entity in Latin America can be quite problematic.
- Localised support: Another major issue that can be resolved by utilising the services of a PEO, is navigating and overcoming the various niches that are present in each country when it comes to hiring employees. Each country will have different employee benefits that must be paid; a PEO will ensure that you are fully compliant with local legal requirements and reduces the risk of mitigation.
- More time to do your job: One of the most tangible benefits you will experience from using a PEO service provider is the freedom you will have to directly manage your employees that are working abroad. With much of the administrative burden undertaken by the PEO, you will be able to focus your time and effort on working directly with employees.
- Loss of Control: Despite the advantages involved with using a PEO, in certain cases, it can lead to having slightly less control of your employment strategy. As well as taking care of your employee’s payment and benefits scheme, a PEO can sometimes take this one step further and dictate the tone of such schemes. This means that it can be different, for example, to replicate a system that works very well in your head office in subsidiaries that are located elsewhere.
PRO TIP: Make sure to clearly establish the different responsibilities and tasks that you want your PEO to do from the beginning of the contract. This will help to avoid situations like the ones outlined above.
- Lack of Personability: Another associated problem with using a PEO is that on occasions, the HR services provided to employees may lack flexibility and personability. A PEO is not always the perfect alternative to on-site employee support, and in the event of personal problems, may not be ideally suited to dealing with welfare issues of employees.
PRO TIP: It may seem obvious, but maintaining a constant dialogue with employees that are hired by PEOs can be incredibly important to maintain positive relations and attitudes with those working abroad. Why not try introducing employees working abroad to the HR team at head office?
Hiring Staff Through the Formation of a Local Company
The other option for employers that do not want to use a PEO or Employer of Record Service is to form a legal entity in the country of operation, and then use the company to hire local staff. The complexity of this process differs through each country across the Latin American region. Despite the bureaucratic issues involved in forming a local company, there are many advantages that must be taken into account. The first is that you will not need to pay a PEO service provider to manage and organise staff payment and therefore could make considerable long-term savings in your budget.
Furthermore, through company incorporation, you will not have the issue of potential ambiguity that can surround the responsibilities of the PEO and your company. By being directly responsible for all aspects of staff management, including payroll and benefits, there will be less opportunity for misunderstandings between the employees and the employer.
Additionally, there are many local companies who you can partner with to assist in the formation of a local company who can manage everything from the incorporation of the company, registration with local tax authorities to the opening of a corporate bank account. In fact, this process can even be performed through a Power of Attorney (POA), allowing for a company formation to be completed without the need for you to physically be in the country.
Hiring through a PEO or a Local Legal Entity?
For any company looking to profit from the rapidly expanding opportunities in Latin America, the two main options available to hire staff are to form a fully functioning legal entity or to use the services of a Professional Employer Organisation. By properly establishing the terms of conduct with your PEO and by ensuring the inclusion of employees hired under the PEO structure into your support networks, a PEO solution can be a very attractive option for staff companies looking to engage staff in a country where they do not have a presence.
Biz Latin Hub provides PEO services in Latin America because of our specialised knowledge of the local markets in the region. We have offices in 10 countries in the region and we are expanding each year. Having such localised expertise will ultimately advance your business needs, and at BLH, we will do everything in our power to establish fair, balanced and compromised terms of agreement with our clients that seek PEO services. For any queries regarding PEO services, for advice on whether it is the right option or any other business services, do not hesitate to contact our CEO, Craig Dempsey.
Want to learn a bit more about business in Latin America? Have a look at the following video: