We should start with a definition of "Employment Outsourcing". We refer to this as outsourcing much of the administration of the employment process. i.e. having an external provider run payroll, do tax reporting, social security filing and processing of expenses. Often it also involves sponsoring a work permit or visa for the employee. This is quite different from outsourcing employment function - where an employees job is replaced by a service provided by an external company.
Employment outsourcing is another name for some of the services offered by Management Companies and Professional Employer Organizations (PEO). You can find a case study of how we helped outsource the employment of some staff based in China here.
We typically find the following scenarios with companies looking to outsource employment of their staff:
1) Establishing in a new country or location
Outsourcing employment administration means companies can setup and shut down in new locations more quickly and with less exposure. Costs are agreed in advance which helps for budgeting and certainty. Is it in a companies best interest to register and run a local payroll when servicing new clients or a fixed term project? Is there sufficient time to setup an appropriate entity and register with all necessary authorities before staff need to be on the ground? The responsibility on HR departments dealing with international assignments cannot be understated.
We helped an Italian consulting company outsource the employment of their consultants on an Oil and Gas project in Algeria. Their staff all required work visas for stays over 90 days. Given the political climate in the aftermath of the Arab Spring one of the "unofficial" criteria the Algerian authorities were using to evaluate work permit applications was how long the sponsoring company had been incorporated in Algeria. This meant even if the Italian company setup a local entity they would not be able to get their staff on the ground in time without using a third party sponsor. Read more about how we helped them here.
2) Reducing cost and administration
To run compliant employment and payroll operations most HR departments lean heavily on specialist providers for immigration, employment and tax advice. Each additional location increases cost, administrative effort and potential exposure. Companies need to assess whether the benefit of keeping employment administration in-house justifies the cost.
Nigeria for example is one of the worlds most difficult countries for compliance with labour and payroll tax (ranked 180th by the World Bank by the average time required). The burden of labour and payroll administration is so crippling that it can be a full time job just in itself. We recently helped a consulting company service their clients in Nigeria without running their own payroll for the consultants. Their HR department could focus on finding, retaining and developing talent. Read more here.
3) Regulatory concerns
Outsourcing to a specialist provider ensures compliance with local tax, employment and immigration regulations. It removes the burden on internal HR to be up to speed on all applicable legislation in all the locations you operate. This is especially relevant in locations such as Asia and the Middle East where the employment regulations can be quite different. In most countries tax law generally changes each year and the rules relating to employment and immigration also shift regularly.
For example in China any employee who has 3 consecutive contracts with one organisation is deemed a "permanent employee" for the rest of their working life. They cannot be made redundant without a retirement package. Furthermore retrenchments are often required to be negotiated with the local authorities. We helped an American company setup an office in China where all administration of the employees was outsourced to one of our partners. Read more here.