Today tech company executives have more choices than ever regarding international hires – no longer is outsourcing their only option. These alternatives can provide them with tailored solutions that ideally match their budget and needs. You can hire engineers directly while keeping complete control over them, compared to hiring through an outsourcing intermediary, who can transfer the talent you hired for yourself to another product.
Since companies are increasingly looking for a way to save money, we’re seeing layoffs and the repurposing of expensive positions filled by cheaper alternatives. As a result, Latin America is an attractive option for finding skilled engineers without breaking the bank.
Below, we discuss five alternatives to the outsourcing hiring model – direct contract, hiring via payroll service providers, talent leasing, hiring via employer of record, and registering a local legal entity. Sure, you’ve heard about them earlier – but you can lack clarity about what features and risks each model carries. So we’ll help you consider every angle to ensure you can choose the best model for your case.
In this article, we provide each model cost explained. For example, let’s take as a base annual salary for a senior developer from Brazil with eight years of experience in tech startups or companies like PayPal, ranging from $70k to $90K per year.
Direct Contract
This model allows you to hire contractors directly and pay them in international currency via the payment method negotiated by the parties. The company engages team members through individual B2B or B2C contracts, receiving monthly invoices for each team member. Unfortunately, it doesn’t provide contractors social benefits such as paid days off, sick leaves, severance packages, etc. Still, you can replace these benefits with custom options, for example, offering contractors stock options through Carta (ensuring an eligible way to do so in your location first to avoid employee misclassification.) With that, you’ll have greater control over the work and can hire contractors for specific purposes.
Meanwhile, to hire directly, you must spend time sourcing, interviewing, testing, and onboarding such talents, which may take significant time and comes with hidden threats of job fraud and misqualified candidates. The other risk you may face is being fined by the local government bodies if your cooperation would be qualified as full-time employment. Also, this employment form envisages contractors’ responsibility to pay taxes from the sum they’ll get, so you must collect Internal Revenue Service (IRS) forms, such as W-8BEN and W-8BEN-E, and run payments over different payment systems and methods by hand.
Despite any risks, many companies and talents prefer this cooperation model.
In this form, contractors have the flexibility to work directly with the company they like, can negotiate their own rates, and receive payments in USD, which is particularly important for regions with high inflation levels (such as Argentina, Brazil, etc.) Most Latin American talents we interviewed preferred the direct contract model.
Nathalia, a Brazilian Javascript developer for over 11 years, says direct contracts are better because they are the easiest way to get money. In addition, the local government provides help with taxes; in particular, they reduced the tax rate for tech professionals to 2%.
Vinicius and Guilherme, Brazilian DevOps engineers with six years of experience, say that they usually work as contractors, so they are used to this type of contract, which they feel comfortable with.
Platforms. There’s no need to use any intermediary for hiring direct contractors. However, you can hire them through recruitment agencies like Globy, remote job boards like WeWork Remotely, or professional social media platforms like LinkedIn or Polywork.
| The base annual gross payment that hired developer gets to their bank account: | $84,000 |
| Local taxes & contributions: | $0 |
| Total annual cost per hire for the Company: | $84,000 |
Pros:
- No extra fees (the cheapest model)
- Flexibility
- Great control
- A vast pool of talents
Cons:
- Employee misclassification
- Contracting and payroll hassle
Payroll Service Provider (PSP)
In this option, you may hire talent through a payroll service provider, which handles payroll, taxes, and benefits for the talent and reduces administrative costs.
This model brings the benefits of having direct relationships with each team member without an intermediary while eliminating the need to handle international payments. PSPs provide an intuitive software platform for managing payroll in one place, integrating all popular payment methods and systems. The fees start at range from $20 to $49 per contractor per month, while there are no additional costs or taxes beyond the gross payment and PSP fee. Contractors pay taxes by themselves.
Usually, PSPs have contract templates designed in collaboration with local experts to minimize compliance risks, process all contracting hassle on your behalf, and provide you with some basic guidance over paperwork. Still, they do not guarantee that you won’t have any compliance problems and you take full responsibility as you sign direct contracts with workers.
Depending on what other benefits PSPs provide, talents may access group health insurance, retirement plans, and other extras they might need access to as contractors. In addition, some platforms provide convenient options for getting paid, such as, for example, Deel Card.
Platforms: Deel, Oyster, Lano, Ontop, Omnipresent, etc.
| The base annual gross payment that hired developer gets to their bank account: | $84,000 |
| Local taxes & contributions: | $0 |
| Payroll services: | $240 – $588 |
| Total annual cost per hire for the Company: | $84,240 – $84,588 |
Pros:
- Small fees
- Flexibility
- Great control
- A vast pool of talents
- Easy payroll and invoicing
- No paperwork
- Compliance support
Cons:
- Employee misclassification risks
Talent Leasing
Some hiring partners suggest signing separate contracts with talents to avoid the risk of employee misclassification or complex taxation. You sign only one contract providing these talents in a lease. In this model, they save you time and resources by providing access to a pre-screened talent pool and handling administrative tasks like onboarding and payroll. Compared to outsourcing companies, this form enables payment transparency without excessive intermediary margins. Also, if you have a large team, paying all the contractors’ compensations in a single invoice is cheaper (e.g. $50 per month) than making separate transactions for every contractor (e.g. 10 talent x $50 = $500 per month.) Having a team of 10 software talents, you can spend $5400 fewer transaction expenses annually ($600 instead of $6000).
TL;DR – this form retains all the benefits of direct contracts with talents and hassle-free payroll while covering all the risks.
Regarding disadvantages, you won’t have direct contracts with talents and won’t be able to provide them with stock options or similar.
Platforms: Deel Shield, Ontop, Globy, etc.
As for the cost, fees for signing through the partners’ costs are bigger.
| The base annual gross payment that hired developer gets to their bank account: | $84,000 |
| Local taxes & contributions: | $0 |
| Talent management & leasing: | $6,000 – $12,000; sometimes, a deposit of one month of a contractor’s salary is required. |
| Total annual cost per hire for the Company: | $90,000 – $15,000 |
Pros:
- Indemnification of compliance and taxation risks
- Bulk transaction economy
- A vast pool of talents
- Flexibility
- No payroll and contracting hassle
- No hiring and onboarding hassle
- Pre-vetted candidates
Cons:
- Hiring partners’ fees
- No direct contract
- Can’t provide stock options
EOR (Employer of Record)
EOR enables you to hire talent through an entity that acts as the local legal employer, handles payroll, taxes, benefits, and other HR functions, and ensures full compliance. In this scheme, your company issues payments in USD to the EOR, which then disburses payments to individual team members in their local currency (Brazilian Real, Argentine/Mexican Peso, etc.) through its local entity. Team members hired this way will be your full-time employees, not contractors, and you don’t have to establish a legal entity in a foreign country by hand.
There are several locations where the EOR entity or contract format is not recognized by the law, which means that the responsibility for their employees lies solely with the EOR provider according to the local regulations. Therefore, the employment relationship between you and the employees you hired through the EOR provider may not be acknowledged by local law, so make sure your EOR provider adheres to the regulations correctly.
On the flip side, income tax rates for employers tend to be higher than the taxes paid by individual contractors. The entire social insurance package, including vacation, severance pay for 3 months at termination, and so on can add up to 50% over a flat rate. As a result, the EOR scheme can hardly help you optimize employment costs – another reason why tech companies choose other hiring options.
Talents get access to benefits and protections as an employee, including unemployment insurance and workers’ compensation. However, it’s important to note that finding senior engineers who desire to work with a local EOR can be extremely difficult, especially in countries like Argentina, where the yearly inflation rate is an alarming 100%. Many seasoned engineers prefer working for US companies as contractors and receiving their income in USD – and most of the talent we interviewed in Argentina and Brazil agreed with this.
It is possible to reduce the potential inflationary threats and retain the workforce’s interest in this category of employment through certain mechanisms. For instance, if the local currency devalued, the salaries can be indexed to the US dollar equivalent in the local currency every 3-6 months. This approach can aid in preserving the purchasing power of employees and ensuring that their remuneration remains in line with the fluctuations in the exchange rate.
However, some economically stable locations like Mexico have a way higher tolerance for official employment. For instance, Tony, a Mexican full-stack developer with ten years of experience, chooses EOR:
“I prefer direct employment from a Mexican company gaining Mexican pesos; it’s easier for me since our taxes are super high.”
Another Mexican developer Luis, a full-stack developer for over six years, says he doesn’t have a preferred method, but working as an employee would be more interesting for him if he chose.
Platforms: Deel, Oyster, Lano, Ontop, Globalization Partners, Papaya Global, Velocity Global, etc.
Cost comparison by location (numbers are exemplary and based on online calculators data provided by Deel and Oyster):
| Argentina | Brazil | Mexico | |
| The base annual gross payment that hired developer gets to their bank account: | $84,000 | $84,000 | $84,000 |
| Local taxes & contributions: | $30,517 – $32,449 | $33,054 – $54,061 | $17,491 |
| Annual platform fee: | $7,188 – $8,388 | $7,188 – $8,388 | $8,388 |
| Total annual cost per hire for the Company: | $116,449 – $122,905 | $123,042 – $145,255 | $109,882 |
Pros:
- Indemnification of compliance and taxation risks
- No payroll and contracting hassle
Cons:
- Vast extra costs
- Hiring platforms fees
- Limited control
- A smaller pool of talents
- Hiring, onboarding, and terminating expenses
Registering Local Legal Entity
If your goals require establishing a subsidiary or legal entity in the target country and hiring talent directly, consider opening a local LLC. This model gives you complete control over the work and can establish a long-term presence in a foreign country, whereas talents get access to job opportunities with a stable employer.
This method is the most expensive: it includes legal, notary, and other registry-related fees, hiring local staff, renting a physical office, maintaining its operations, etc.
Any taxation and misclassification risks aren’t covered.
For a technology startup, it can only be profitable if you need to hire a large team of tech talents in one particular area for a long period (more than two years.) EORs, for example, provide the same service starting from $500 per employee/month, which makes do-it-yourself LLC registration impractical.
Pros:
- Full control
Cons:
- Inflexible
- Vast extra costs
- A smaller pool of talents
- Compliance and taxation risks
- Hiring, onboarding, and firing expenses
- Payroll and contracting hassle
Summary
As economies confront recession, your tech business needs savvy recruitment choices. According to an analysis of 100,000 workers’ contracts provided by Deel, global hiring increased by 145% in 2022. Embracing international talent through one of the described cooperation models best fitting your development needs can become a winning strategy for you. These five options will provide a good starting point as you embark on your journey to building a productive, globally connected workforce.
