A US startup has three ways to bring on someone who lives in another country: engage them as an independent contractor, hire them through an employer of record (EOR) that employs them locally on your behalf, or set up your own subsidiary in that country to employ them. A contractor arrangement works only when the person genuinely runs their own business. For a first employee or two in a country, an EOR is usually the fastest compliant option, and a subsidiary makes sense once you’re building a team there. Whichever you choose, the law where the person lives and works applies, so plan for local employment rules, an IP assignment that works under local law, NSOs rather than ISOs, and the risk of creating a taxable presence abroad.
Key takeaways
- Local law governs the relationship. At-will employment is rare outside the US, and notice periods, severance and mandatory benefits usually can’t be contracted away.
- Whether someone is a contractor is decided under their country’s rules, not yours.
- Make sure every IP right reaches your US company, including through the EOR, and check local rules on employee inventions and moral rights.
- Grant non-US hires NSOs, and check local securities, tax and filing rules before the first grant in a new country.
- An employee who signs deals or runs the business abroad can create a taxable presence there, even through an EOR.
Whose law applies when I hire abroad?
The law of the country where the person lives and works, almost always, whatever your contract says. Most countries don’t recognize at-will employment. Employees are entitled to a written contract with mandatory terms, a minimum notice period or pay in lieu of notice, and often statutory severance, and in many countries you need a valid reason to dismiss someone at all. In the UK, for example, the statutory minimum notice grows to one week for each full year of service, up to twelve weeks, and many contracts give more. Some countries also have industry-wide collective agreements that set pay and terms on top of the statute. Paid leave, pension contributions, health coverage and payroll taxes are set locally too.
That’s why a US offer letter can’t simply be reused abroad. It’s built for at-will employment and US law, and it will be both incomplete and partly unenforceable elsewhere. See Startup Employment Contract Guide.
Contractor, EOR or subsidiary: how do they compare?
| Local contractor | Employer of record | Your own subsidiary | |
| Who employs the person | No one. They run their own business | The EOR’s local entity | Your subsidiary |
| Time to start | Days | Usually days to a few weeks | Often several months |
| Ongoing cost | Their fee | Salary, mandatory employer costs and the EOR’s monthly fee | Salary, mandatory costs, plus local accounting, filings and tax compliance |
| Misclassification risk | Real if they work like an employee | Low | Low |
| IP ownership | Only as good as your contractor agreement | Runs through the EOR, so check the chain | Assigned to the subsidiary, then up to the parent |
| Taxable presence risk | Lower, but not zero | Not eliminated by the EOR | The subsidiary is taxed locally by design |
| Best for | Genuinely independent specialists and short projects | First one to a handful of employees in a country | An established team in one country |
When does a contractor arrangement work?
When the person really is independent: they have other clients, control how they work, use their own tools, invoice you and could hire help. A full-time developer who works only for you, on your schedule, in your Slack, using your laptop, is likely an employee under most countries’ tests, whatever the contract says. If a contractor is later treated as an employee, you can owe back payroll taxes and social contributions, benefits, penalties and severance on termination. A contractor agreement for someone abroad also needs an express IP assignment, payment terms in a named currency, and a governing law and dispute process you could actually use. See Startup Contractor Agreement and Independent Contractor vs Employee.
How does an employer of record work?
The EOR is a company with local entities in many countries. It becomes the legal employer, signs a local employment contract with your hire, runs payroll and benefits and handles local filings. You direct the person’s day-to-day work and pay the EOR their salary, the mandatory employer costs, and a monthly fee. List prices from the large providers run around $600 to $700 per employee per month, and negotiated rates vary.
An EOR doesn’t make local law go away. Terminating someone still means following local notice and severance rules, through the EOR. Read the EOR agreement for three things before signing: that it assigns to your company all IP the employee creates, that it requires the employee’s local contract to include confidentiality and IP terms you’ve reviewed, and what you owe if the EOR has to terminate the employee on your instructions.
When should we set up a subsidiary?
Usually once you have several employees in the same country, when EOR fees start to exceed the cost of running your own entity, or when you need a local presence to contract with customers, hold licenses or lease an office. A subsidiary takes longer and costs more to maintain: formation, local directors in some countries, bookkeeping, statutory audits in some places, and local tax filings.
It also needs intercompany agreements. The common structure for a startup is that the US parent owns all the IP and pays the subsidiary its costs plus a markup for research or services, with all IP the subsidiary’s people create assigned up to the parent. The markup has to satisfy transfer pricing rules in both countries, so set this up with tax and accounting advisors before the subsidiary starts paying people.
What is permanent establishment risk?
If your company’s activities in another country are substantial enough, that country can treat you as having a “permanent establishment” there and tax part of your profits. What matters is what the person does, not who issues the paycheck. A remote engineer or support person working from home is usually low risk. A salesperson who negotiates and signs customer contracts, or an executive who effectively runs your business from abroad, can create a taxable presence even if they’re employed through an EOR. The consequences, which can arrive years later, include back taxes, penalties and filings. Before you hire anyone abroad with sales authority or a senior title, talk to a tax advisor about that country.
How do I make sure the company owns their work?
Don’t assume US rules travel. Many countries don’t recognize “work made for hire,” so you need an express assignment of all IP, signed by the person and governed by terms that work locally. Some countries give authors moral rights that can’t be fully waived, and some require extra pay for employee inventions. Germany, for example, entitles an employee inventor to reasonable compensation once the employer claims the invention. Through an EOR, the chain has two links: the employee to the EOR, and the EOR to you. Have local counsel confirm the documents work, because buyers and investors will check. See Who Owns Startup IP?.
Can I give equity to non-US hires?
Yes, and you should, but grant NSOs. ISOs give their tax benefits only to US taxpayers, so they do nothing for someone taxed abroad. Each country then has its own rules. Some tax options at grant or vesting rather than exercise, many require the local employer, including an EOR, to withhold and report, and some require a securities filing, a local-language notice or a country sub-plan under your equity plan. A few countries offer tax-favored option schemes that need special documents. Check the rules before the first grant in each new country, and make sure your plan allows grants to non-employee service providers if the person is a contractor. See NSO vs ISO and Stock Options.
What else should I check before hiring abroad?
Confirm the person has the right to work where they live, especially if they’re not a citizen there. Don’t hire or pay anyone in a country subject to comprehensive US sanctions without specific legal advice, and check export controls if they’ll work on sensitive technology. If they’ll handle personal data of people in Europe, your data transfers and privacy notices need to comply with GDPR. See GDPR Basics.
Also expect diligence. Investors and acquirers look closely at international contractors, EOR arrangements and subsidiaries: whether contractors are really contractors, whether the IP chain is complete, whether equity grants complied with local rules, and whether there’s unpaid tax exposure. Keeping signed agreements, local IP assignments and grant records in one place makes that review short.
For more on building your team, see Should My Startup Hire Someone as an Employee or a Contractor?, What Agreements Should Startups Have With Their Employees? and Startup Due Diligence.
If you’re hiring outside the US for the first time, contact us before you sign anything.
