Today, expanding operations into new territories is more than a strategic move—it's a necessity for sustained growth and remaining competitive. The United Kingdom, with its robust economy and status as a gateway to European markets, offers a compelling prospect for businesses looking to broaden their horizons.
However, the path to establishing a foothold in this region involves making critical choices, each with its own set of implications on your business' future. Paramount among these is the method that you choose to enter the market: partnering with an Employer of Record platform (EOR) or setting up a legal entity.
An Employer of Record is a streamlined HR and payroll solution that allows you to hire employees globally without the burden of navigating complex local labor laws, tax systems, and employment regulations as a foreign entity. On the other hand, setting up a business entity in the U.K. offers enhanced control over your company, and the ability to build a substantial, long-term presence. The latter, while offering significant advantages, comes with key challenges, including navigating the U.K.’s intricate web of legal and compliance requirements.
This blog aims to review these two pathways for your business’ entry into the U.K. market. By examining factors such as time-to-market, cost efficiency, flexibility, and the level of control they offer over your operations, we'll provide the insights you need to make an informed decision.
U.K. Employment 101
Each of the approaches discussed above offers unique advantages and challenges, shaped significantly by the U.K.'s specific legal, economic, and cultural environment. So, let’s first take a look at their features before diving into which one is the right choice for your business.
Employer of Record (EOR) in the U.K.
An Employer of Record is a service that allows you to hire employees in the U.K. without establishing business entities locally. It acts as the legal employer of new hires and takes care of administrative tasks such as payroll and taxes. As the client company, you will continue to retain day-to-day supervisory control over these employees.
It's a plug-and-play partnership agreement that offers flexibility and agility, making it an attractive route to quickly tap into new markets–-without the overhead costs associated with establishing a local presence in the region.
- Less Admin Burden: The EOR acts as the legal employer of international workers, handling HR responsibilities, payroll, income tax administration, and compliance with local employment laws.
- Rapid Market Entry: It accelerates your company’s entry in the U.K. market in a cost-effective manner, by managing employment contracts, taking care of payroll processing, benefits administration and even visa processing.
- Ensures Compliance: An EOR is well-versed in navigating the country's legal requirements, which affect employment contracts and benefits.
- Scalability Options: With the help of an EOR, scaling up or down can be your priority while other legal and admin duties are handled.
Business Entity Setup in the U.K.
Establishing a legal entity in the U.K. offers a foundation for long-term operations, ensuring the growth of your business.
- Overall Control: It provides complete control over business activities, but also involves the pressure of owning all talent acquisition practices while taking responsibility for legal and accounting compliance.
- Slow Market Entry: Setting up an entity entails navigating the U.K.'s regulatory framework, including the Companies House registration process, understanding the U.K. Corporate Tax system, and adhering to the specific employment laws that govern the hiring and management of local staff. The time associated with setting up an entity in the U.K. can take several months, delaying your market entry.
- Increased Risks: If you're not fully aware of the above employment laws and regulations, you could face hefty fines and legal issues as a result of non-compliance.
- High Costs: Establishing a legal entity, including setting up recruitment and employee management verticals, requires a significant initial investment and ongoing costs for their maintenance.
Pros and Cons: EOR vs Entity Setup in the U.K.
Hiring through an Employer of Record (EOR) in the U.K. offers you a seamless pathway to tap into the local talent pool without the complexities of establishing a legal entity. This section delves into the advantages of utilizing EOR services versus setting up a local entity within the unique context of the U.K.'s regulatory and business environment.
Advantages of Setting Up a Legal Entity in the U.K.:
Full Market Access and Control
Establishing a legal entity allows for complete control over all administrative tasks and culture. Business leaders also maintain greater control over onboarding and managing employees and communicating with team members. This also allows organizations to implement and promote various aspects of the company’s culture, values, or long-term strategy into the organization’s day-to-day workflow - establishing cultural continuity across markets.
Brand Presence and Trust
Having a registered entity in the U.K. enhances your brand's credibility and trustworthiness among local customers, suppliers, and partners. It signals a long-term commitment to the market, which can be instrumental in building business relationships and customer loyalty.
Long-Term Cost Savings
If your business’s goal is to grow the team in the U.K., it might be more beneficial to set up local entity. While the initial cost to set up a business can be relatively high, in the long-term businesses will not need to pay service fees or other financial obligations to a third-party organization - resulting in cost savings.
Challenges of Setting Up a Legal Entity in the U.K.
Regulatory and Compliance Responsibilities
The U.K.'s HM Revenue & Customs (HMRC) regulatory body has a comprehensive legal framework governing business operations, including tax obligations, employment laws, and industry-specific regulations. Navigating this landscape requires significant legal and administrative expertise, and non-compliance can result in penalties and legal issues. Ultimately, this can be difficult for international companies that may not be familiar with local employment standards.
Initial and Ongoing Employment Costs
Establishing a legal entity involves initial setup costs in addition to incurring ongoing costs associated with managing operations, and fulfilling tax obligations. Recruitment of each of your HR and admin employees can cost up to $4,700, as per the Society for Human Resource Management (SHRM). There are also recurring overhead fees to consider, such as costs for equipment, supplies, and renting or buying an office space.
Time and Complexity of Establishment
As per the World Bank, it can take up to 25% of a company’s time to simply comply with the tax regulations of a foreign country. Add to it the complexity of choosing the right business structure and setting up payroll and employee management systems, and it becomes a recipe for a delayed, more expensive market entry.
Advantages of EOR
Streamlined Compliance with Employment Best Practices
The Advisory, Conciliation, and Arbitration Service (ACAS) of the U.K. government provides comprehensive guidance on employment best practices in the area. It emphasizes fair treatment, effective dispute resolution, and the importance of clear employment terms. An EOR, well-versed in these best practices, ensures that your employment strategies align with U.K. standards, fostering a positive work environment and reducing the risk of legal disputes, which can be costly and time-consuming.
Navigating Post-Brexit Regulations
Brexit has introduced significant changes that foreign employers need to consider when hiring in the U.K., particularly in terms of trade, right-to-work entitlements, and compliance requirements. For businesses aiming to employ talent in the U.K., EORs conduct thorough due diligence to navigate these changes effectively. This is vital to avoid legal complications and ensure that your workforce is employed as per U.K. regulations post-Brexit.
Access to Expert HR and Development Standards
The U.K.'s Chartered Institute of Personnel and Development (CIPD) offers insights into HR and development standards, stressing the importance of ongoing employee development and engagement. An EOR can incorporate these standards into your HR processes, enhancing employee satisfaction and retention, crucial for maintaining a competitive edge in the U.K. market.
Cost and Resource Efficiency
Hiring in the U.K. can be a complex and costly proposition. Leveraging an EOR eliminates the need for extensive HR infrastructure, accounting software, and the associated costs of employing an entire department. This also aligns with CIPD's emphasis on strategic HR management, allowing businesses to allocate resources more effectively towards core activities and strategic goals.
Challenges of EOR
Limited Operational Control
While EORs handle employment-related tasks, businesses may find they have less control over certain HR functions and employee management. This can be a drawback for companies that prefer direct oversight of their workforce.
Alignment on Values
Reliance on EOR services means entrusting a key aspect of your operations to an external provider. Leaders may find it more difficult to instill a cohesive and consistent company culture when building a talented team. It's crucial to select a reputable and reliable EOR partner to mitigate risks associated with service quality and continuity.
What Does An Employer of Record Help Me With In The U.K.?
Partnering with an EOR in the United Kingdom simplifies the hiring process by outsourcing the complexities of regulatory compliance, payroll processing, and global employee management. Here are some responsibilities that the EOR shoulders:
Employment Contracts and Documentation
In the U.K., employers must adhere to specific employment documentation requirements as outlined by the Employment Rights Act 1996. This includes maintaining records such as:
- Employee's full name and address
- Date of birth for employees under age 19
- Job title and description
- Start date
- Compensation details
- Working hours
- Holiday entitlement
- Details of any employment benefits
- Notice periods
An EOR facilitates the documentation process by ensuring that employment contracts comply with U.K. regulations. It also handles employment offers, administers employment agreements to new hires, obtains signed contracts, manages banking information, and oversees documentation for social insurance among other services. This compliance with local labor regulations helps prevent issues like the misclassification of employees, which can have significant financial and legal implications for companies.
Minimum Wage and Salaries
The U.K. has a national minimum wage and a national living wage, which vary by age and apprenticeship status. It resets on April 1 every year. You must be at least:
- School leaving age to get the National Minimum Wage
- Aged 23 to get the National Living Wage
The current minimum wage for those aged 23 and above is £10.42. For other age groups, it varies between £5.28 and £10.18 depending on the above factors. An EOR ensures compliance with these wage regulations, adjusting payroll as necessary to align with the current rates.
Overtime Pay
Overtime pay regulations in the U.K. can be complex and often depend on the terms of the employment contract. On the surface, employers are not mandated to pay workers for overtime, but the average pay for the total hours cannot fall below the National Minimum Wage.
An EOR can guide you on these matters, ensuring that your payroll practices for overtime comply with U.K. laws and relevant terms of employment.
Payroll and Taxes
All businesses operating in the U.K. have to comply with the local government's Pay As You Earn (PAYE) regulations regarding income tax. This involves understanding and implementing tax codes, managing National Insurance contributions, and ensuring compliance with HM Revenue and Customs (HMRC) regulations for employees to pay taxes. An EOR manages these tasks on your behalf, including the calculation of deductions, accurate reporting and record-keeping, and the timely submission of payroll data to HMRC.
Employee Insurance and Benefits
While the U.K. provides a public healthcare system (NHS), many employers offer private health insurance as an additional benefit. Additionally, The Pensions Regulator (TPR) works with trustees, employers, pension specialists, and business advisers in the country to offer guidance on work-based pension schemes. An EOR can assist in setting up and managing such benefits for your British employees, along with other common employee benefits like pension contributions, which are mandatory under the auto-enrolment scheme, along with supplemental benefits such as vision or dental care.
Vacation and Public Holidays
Paid annual leave is a mandated right granted to each employee, and failure to comply with these regulations can result in legal disputes. The UK stipulates a minimum of 5.6 weeks (approximately 28 days) of paid holiday per year for full-time employees, including public holidays. Upcoming bank holidays in England and Wales this year include:
- March 29: Good Friday
- April 1: Easter Monday
- May 6: Early May bank holiday
- May 27: Spring bank holiday
- August 26: Summer bank holiday
- December 25: Christmas Day
- December 26: Boxing Day
An EOR can help manage or track holiday entitlements and ensure compliance with UK regulations regarding paid leave.
Severance Pay
If a worker has been with your current employer for at least 2 years, they are generally entitled to severance pay, locally referred to as statutory redundancy pay. The amount received depends on age and length of service:
- For each full year worked under the age of 22, they are entitled to half a week's pay.
- For each full year worked between the ages of 22 and 41, they receive one week's pay.
- For each full year worked at age 41 and above, the entitlement is one and a half week's pay.
It's important to note that the calculation of years of service is capped at 20 years.
Parental Leave
Individuals expecting a child are eligible for a minimum of 52 weeks of paid maternity leave, irrespective of their tenure with the employer. Their partners have the option to take one to two weeks of paternity leave with pay under most conditions. This leave can commence as early as 11 weeks prior to the anticipated week of delivery.
Eligible employees are also entitled to take unpaid parental leave to look after their child's welfare, as detailed on the official U.K. government website. This entitlement includes up to 18 weeks of leave for each child, which can be used to spend more time with children, settle them into new childcare arrangements, visit family, or attend school events. The leave must be taken before the child turns 18.
The specifics of how this leave can be taken (e.g., in blocks of a week or all at once) and any additional conditions (such as length of service requirements) are outlined in the U.K.’s employment regulations. Employers may have their own terms which could be more generous than the statutory minimum, so it's beneficial for businesses operating in the U.K., or those looking to enter the UK market, to understand these entitlements fully.
An EOR ensures that your company's policies comply with UK laws regarding parental leave and that employees receive the entitlements they're due.
What Are My Responsibilities While Working With An EOR?
Working with an Employer of Record (EOR) in the U.K. simplifies many aspects of global hiring, enabling your business to allocate resources to more important objectives. Here's how responsibilities are typically divided:
Your Responsibilities When Working With an EOR in the UK
Search and Recruitment
While the EOR can facilitate the employment process and onboard your new hires, companies retain responsibility for identifying and recruiting talent that fits the unique needs of the business
Company Training
You're responsible for integrating new hires into your company culture and ensuring they understand their roles, contributing to a seamless transition into your organization and facilitating a more inclusive workplace.
Team Management and Day-to-Day Communications
Effective communication with your workforce and team management are crucial for maintaining a productive work environment. These daily operational aspects fall under your purview.
Progress Tracking
Monitoring the performance and progress of your team ensures alignment with company goals and identifies areas for improvement or growth.
Learning and Development Initiatives
Promoting ongoing professional development within your team not only enhances skills but also aids in retention and job satisfaction. This can also help your company address talent shortages before they impact operations.
EOR Responsibilities in the U.K.
Local Employment Law Compliance
Your EOR will ensure adherence to UK-specific employment laws, covering everything from worker's rights to dismissal procedures, ensuring your workforce operates within the legal framework when scaling operations internationally.
Global Payroll Management
Managing payroll in the U.K. involves complex calculations and strict adherence to HM Revenue & Customs (HMRC) guidelines. Your EOR will take charge of this, ensuring accurate and timely payroll processing. The EOR will also provide accurate payments in the United Kingdom’s local currency, the GBP, along with important documentation such as pay stubs.
Contracts and Benefits Administration
From drafting and managing employment contracts that comply with all relevant U.K. labor laws to calculating tax liability and administering benefits to each employee, your EOR will handle these tasks, ensuring compliance and easing administrative burdens.
Taxation and Social Security Contributions
Navigating U.K. tax laws and National Insurance contributions is a critical task managed by your EOR, ensuring your payroll reflects all legal obligations accurately.
Legally Onboarding and Offboarding Employees
Your EOR facilitates smooth onboarding and offboarding processes, ensuring they're conducted legally, including executing employment agreements and overseeing terminations.
While an EOR significantly reduces the complexity of legal and HR tasks, maintaining an active role in daily operations is crucial for success. Balancing the convenience of an EOR with hands-on engagement ensures your U.K. team is aligned with your company's vision and objectives.
How To Select The Right EOR For My Business?
Embarking on global business expansion is a significant milestone, and selecting the right Employer of Record (EOR) is crucial for a smooth and compliant transition into new markets. Borderless AI distinguishes itself as an expert partner for your international hiring needs, particularly for expanding into the U.K. market:
Global Employment Expertise with a Focus on the U.K.
The team at Borderless AI brings extensive knowledge in global employment practices, tailored to meet the specific regulatory and compliance requirements of the region you wish to hire in. When it comes to employment expertise in the U.K., we’ve helped a number of businesses looking to scale in the U.K. by providing them expert advice and setting up their U.K. teams.
Innovative and AI-Driven Global HR Solutions
Borderless AI redefines global HR management by integrating the first-ever AI-powered HR agent Alberni, offering comprehensive support without upfront costs. Alberni offers the capability of answering global employment questions, generating employment contracts, and analyzing your current employment agreements across 170 international markets.
Engage with our global workforce experts to explore how Borderless AI can streamline and accelerate your hiring process, facilitating a successful and compliant entry into the U.K. market.
Disclaimer
Borderless does not provide legal services or legal advice to customers, contractors, employees, partners, or the general public. We are not lawyers or paralegals. Please read our full disclaimer here.
