Simon Gleeson of Blick Rothenberg talks about different ways that startups can pay workers in other countries

Simon Gleeson of Blick Rothenberg - Podcast Transcript

Scott:	Welcome to Founders and Friends podcast. Before we get to our guests, special shout out to Kruze Consulting. We do all your startup accounting, startup taxes, and tons of consulting work, whatever comes up, like financial models, budget actuals, maybe some state registration, sales tax, VC due diligence support. Whatever comes up for your company, we’re there for you. 750 clients strong now, $10 billion in capital raised by our clients, I can’t believe it. 2 billion this year. It’s been a crazy, awesome year. So, check us out at kruzeconsulting.com. And now onto our guest.
Singer::	(Singing) It’s Kruze Consulting Founders and Friends with your host Scotty Orn.
Scott:	Welcome to Founders and Friends podcast with Scott Orn at Kruze Consulting. Today my very special guest is Simon Gleeson from Blick Rothenberg. Welcome Simon.
Simon:	Thanks Scott. Thanks a lot for having me here.
Scott:	My pleasure. You are like a worldwide expert on employers of record, PEOs, benefits, structuring for companies, especially US Delaware C-Corp companies that are going to have entities throughout the world. This concept of global PEO, global employer of record has gotten pretty big. A lot of the Kruze clients are asking you about this. We actually have a decent amount of content on this, but I wanted to have an honest-to-God expert on the podcast so that people, I can just send them this podcast, they can just listen to this. So, Simon, maybe you can start just by introducing yourself and retracing your career a little bit and tell us how you got to Blick Rothenberg.
Simon:	I’ve spent 25 years in this space working with US headquarter companies expanding internationally. I started out at ADP, worked my way up. I helped a lot of US headquarter companies expand into Europe, into Asia. And I spent some time there cutting my teeth, just understanding all the various different options which are available to them. I thought, do you know what, a lot of big four, a lot of CPAs on the other side advising on this stuff. So, I thought I would switch career paths, get into more advisory side. One of my mentors at the time, who we both know well, a guy called Nimesh Shah, who was the CEO of Blick Rothenberg said, “You should come over here.” We often joked about keeping the seat warm. So that’s how I [inaudible 00:02:27] and we remain very good friends to this day. But at Rothenberg-
Scott:	He’s a legend. He’s a gentleman, he’s a scholar and super nice guy. And super smart. What a great mentor to have. We’re very fortunate. I know you feel fortunate too. So, Nimesh lured you over to Blick Rothenberg.
Simon:	Well, yeah he did. The only downside is I support Tottenham Hotspur, he supports Arsenal and they just both hate each other. The one thing-
Scott:	Was that Champions League or whatever? Soccer reference for those-
Simon:	In the premiership.
Scott:	Premiership, yeah.
Simon:	So I’m a partner here working with USA quarter companies, just explaining to them what their options are when coming overseas and not just in UK, where we’re based, but within Europe and Asia. We’re very similar to you guys, that we work with early stage companies. So, early seed right to series C, series D. And we help, not just on the compliance piece, but on accounting, on global mobility. So, it is a really eclectic place to work and I think where I’ve landed in the last two, three years is just this whole thing around PO, employer record, global payroll. People often say where do I sit? What should be my strategy and what should be my approach? And it’s just become quite an area of fascination for me around how this market’s playing out now, particularly in the current economic environment and especially in the last few weeks with a little bit the downturn and everything else we can see.
Scott:	Well also it feels like the world’s waking up to compliance risk with the FTX blow up and all that kind of stuff. So, this podcast being recorded in middle of November probably will run the first week of December or something like that. So, who knows what’s going to happen and change there. But I think we’ve been in this huge growth mode, especially the startup ecosystem for a long time and not everyone paid attention to compliance. So, this is also a super, super good conversation to have. Now, maybe the first thing, we had a call last week and surfaced some ideas and one of the things that you clarified to me, which was is I’ve known it, but I think we need to dig into this a little bit. How employer of record outside the US is different from PEO used inside the US. And by the way, Kruze, we mix that too. We’ll say global PEO when we’re talking about globalization partners, or deal, or remote, or some of these other services. But you can really speak to this, there’s actually a difference between an employer record and PEO.
Simon:	Yeah, I think it’s quite fundamental and I think a lot of US, North American companies, feel like it’s like Starbucks, McDonald’s, it’s just the same everywhere you go. And really-
Scott:	Yeah, that’s a good analogy. I like that.
Simon:	And I think it’s just unintentional naivety, I’ll put it down as that. But the whole concept of PEO in the US is just co-employment. So, you and a PEO are both employing the same individual. And in the US right now there are 980 PEO providers and it’s like a $60 billion industry. Everyone gets it from your ADP’s, your TriNet’s, right down to your local providers. So, everyone, when they talk to an international employer record, they’re like, “It’s the same, but it isn’t.” Because the real concept of co-employment, it just doesn’t exist. So, when you’re hiring in different countries, you’re being hired on a third party employment contract on their ID, on their paperwork. So for someone, particularly in Europe, looking at that, they’re like, “You’re saying that you’re my employer, but my first paycheck has their logo, not mine. So, what’s going on?” And a lot of US pay on HR people. Yeah, you’re right, what is going on? Because they’re so used to seeing this whole two logos, or just their logo and they then realize actually this is quite different.
Scott:	And that’s such a great description of it, because in the US, if you’re TriNet, or Rippling, or Justworks, co-employment is the key word here. It’s like a partnership between the PEO and the employer, the startup. You’re co-employing that employee even though the TriNet, Justworks, Rippling is taking a lot of the compliance burden, but the company still has the startup in our case, because we focus on startups, is still active, has an active role in that. And what you’re saying is outside the US, even though it’s sold by some of these firms as PEO, “PEO, co-employment,” it’s actually not co-employment.it is you are working for this other entity that is the employee of record and there is no co-employment relationship there, right?
Simon:	Yeah, you put that to me and I remember we just googled it live and it was coming up international PEO and it was just a page on Google, and it was like actually this is a bigger thing than we thought it would be. And we do a lot of work with companies who are employing in Europe and in Germany they even class as employee leasing. And I think of car leasing, aircraft leasing, stuff like that. But in Germany they even class as employee leasing. So they’re giving an even a different description around that. So, I think it’s just something that really, the countries are still learning themselves, but for the audience of doubt that individual’s not employed on your paper, it’s employed on somebody else’s, and that’s where it starts.
Scott:	If we dig into that a little bit that has liability, that has potentially tax ramifications. And maybe one of the things I’ve heard, and this is scuttlebutt, so you’re actually a good person to dispel this or not. You said the countries, the European countries, we’re just talking Europe because you’re in Europe, but probably all countries are getting used to this. It’s kind of a new concept. It’s almost like regulatory arbitrage in a little while. By the way, we should, before we get into that, I should just say the other way, the traditional way that you employ people throughout the world is you start a subsidiary in that country, you have a bank account, you run payroll, you pay payroll taxes. So, there’s like this revenue stream for the countries. Whatever the equivalent of state municipalities are in these other countries. But there’ tax revenue at risk here. And so, this is why. And also, social safety net things. If you’re in a European country that has a strong social safety net, there’s probably a lot of taxes being paid from a normal person living in that. And so, if there’s regulatory arbitrage at work here where people are trying to avoid some of those taxes, then those governments have a really strong vested interest in figuring out what’s going on and coming after. And I’m never really sure if it’s regulatory arbitrage, or if it’s simplicity, or just speed, or tax avoidance, but how do you see this relative to the setup of subsidiary and just run it you normally would?
Simon:	So we’re independent, we’re regulated to and our role as advisory, and I often explain to people that apparel company will say, “Have an entity, have a bank account, that’s how we work.” Employer of record will say, “Well you don’t need any of that, just work through us.” But no one ever really talks about the third option, which is becoming a bit more popular now, which has been the non-domiciled employer. So, when you look at some countries, if the role is ancillary in nature, you don’t necessarily have to have an entity. There’s actually quite a lot of countries that will allow you to payroll only individuals. And if I just take Germany as an example, it has a strong safety net from a social welfare perspective. And they’ve got a tolerance of four or five people to be just on payroll only, where you can pay all those individuals and you can even pay the taxes from overseas by electronic funds transfer. So, really, probably the more complicated part is setting up an employment contract that will cost you about a thousand dollars, maybe 1200. But then after that you’re often running. So, really, it’s that third option that we sometimes help companies explore. And where some countries have less of a tolerance and they check out the risk a bit further, we might do a memorandum, or review with them just to say, “Look, this is above board, represents the local authorities,” and we just do payroll only.
Scott:	Got it. So, there’s employer of record, there’s set up a subsidiary and do it yourself. And then there’s this non-domiciled employer or employee?
Simon:	Employer.
Scott:	So employer, okay. So, a company has not domiciled in Germany so to speak, but still has some people there. They can actually run payroll and not have a subsidiary there?
Simon:	Yeah, we see it a lot within the talent play. So, your software developer, your data scientist, someone who’s literally just going to sit at home, they’re not going to go out and write contracts or try and engage a local business. They’re really working on the back office and the ancillary side. So, we have quite a lot of clients with that and that’s been quite a big thing, the pharma and biotech space as well.
Scott:	So on the employer of record stuff. And I think when we are saying employer of record, we’re we’re talking about companies that are selling that service to US based Delaware C-Corps and saying, Hey, come use our kind of corporate shell corporate structure, we’ll be the employer of record. But there’s a little bit of a gotcha there. Isn’t because what I’ve heard, and maybe you can dispel this too, is there’s a lot of outs for the company offering the employer record service. They sell it, but they’re not necessarily taking the liability and they’re actually defaulting the liability back to the startup, or the corporate client that’s engaging them. And I don’t think any of this stuff is tested, this is what’s so interesting is it’s not really tested to my knowledge, but maybe stuff that has been tested.
Simon:	Well, to answer your question bluntly, the answer’s yes, there’s so many kind of, “We’re not responsible for this, we’re not responsible for that.” In some cases, they want to be indemnified to against any kind of future employment claims. So that’s the piece I struggle with personally, that you’re putting out 140 pages of content on, “You’ll take care of this and you don’t need to do that.” Papers that actively promote how to avoid creating a permanent establishment, which is bordering on tax evasion. But then when it comes to the contract or certain items in the terms of service or conditions, they say, “Well we’re not responsible for that. We are not taking your tax or any other legal responsibility.” So where does the law lie then? And when it dos go south and it has started to, you’re then getting into this myriad of who’s blaming who with the work of council involved. And the employers are working out that actually this doesn’t feel right. And I want to be clear, I said as more mature employer record organizations versus some of the newer entrants. But the reality is I’m just stunned myself how these situations are arising. And then the signal actually in section 7.2, item B, we did say we’re not taking any responsibility for tax related items outside of employment. So that says to me, well this is just glorified payroll then what are taking? And yeah, we’ve come across those cases too.
Scott:	Hey it’s Scott Orn at Kruze Consulting, taking a quick pit stop to give some of the groups at Kruze. A big shout out. First up is our tax team amazing. They can do your federal and state income tax returns, R&D tax credits, sales tax help, anything you need for state registrations. They do it all, and we’re so grateful for all their awesome work. Also, our finance team is doing amazing work now. They build financial models, budget actuals and help your company navigate the VC due diligence process. I guess our tax team does that too on the tax side. But the finance team is doing great work. And then I think everyone knows our accounting team is pretty awesome, but want to give them a shout out to thanks and back to the guest. Do you thik that the startup ecosystem’s turning down now a little bit? We’ve seen the big layoffs from Meta and Amazon and all the big companies, but we are seeing a tinge of startup laying off or small layoffs, things like that. It seems like this structure, or it’s almost like it’s almost two different things. It’s what they’re selling and then what they’re actually delivering, or the caveats and identifications, all that kind of stuff. I feel like the downturns, when this stuff gets really explored or tested, is that your sense too like, “Hey, if things pick up the acceleration and the downturn picks up, there are going to be some negative stories coming out and people who are companies thought they were covered but not really covered.” What’s your read on that?
Simon:	Well I think anything in the downturn it will come and we saw that with the contract to model and these personal service companies and umbrella agreements, they were quite similar. You’ll definitely see companies maybe potentially say, “Well if I’m using a third-party company, they can just fire and they can take care of it.” And I just wonder how much that can go full circle. Cause we both know European laws are very different and in Asia some countries will automatically side with the local resident rather than the international employer. We’ve seen that too.
Scott:	Interesting.
Simon:	There was an [inaudible 00:16:33] for today in Bloomberg about some concern in Ireland about how exposed they are to the tech scene, a quarter of their revenue and their workforce is [inaudible 00:16:44]. So how many of those are hire directly or through contractors or this type of model? I mean when people start to lose their jobs, they’re going to look at what kind of notice period they’ve got, reasons why, final payments, who’s responsible for what and who’s firing them. Is it the employer, or is it the third party? I think it’s going to create some interesting discussions for employment wise.
Scott:	Well also in the US there’s the concept of class action lawsuits and contingent fee lawyers. And what they kind of look for is a pattern that they can be applied over hundreds, thousands, tens of thousands of people. And it feels like this could be one of those patterns, maybe it doesn’t happen in the US, but if the German government, or French government, or whatever European government sees there’s a pattern of this, or maybe independent lawyers isn’t this, I almost feel like it’s a choke point. It’s a point where they could go in and subpoena and get a lot. Discovery would be really interesting. Does that make sense?
Simon:	It does. We are a little bit different to us in terms of our, the way we look to litigation opportunities. I think if the workers councils and the local authorities start to see more and more of this, then that’s probably when they would start to investigate these arrangements further. In some countries a business can be investigated two or three times over a seven year period. It still feels like it’s relatively new for some more than others. But I think he raised a good point. I think its unharted territory, because a lot of these models have been around for three or five years and this is probably the first time that you’re going to start seeing the same kind of redundancies and terminations that we saw 10, 15 years ago. So, it’s something to look out for. Someone said to me, I thought it was a bit strong, but this could be the crypto, the HCM kind of marketplace. But I mean I’m not an expert in that space. It just seems that when those things blow up, they blow up big. I think there’s probably going to be more scrutiny. I think there’ll be more rules around how long you can have these types of arrangements in place.
Scott:	It kind of reminds me of, and this is complete speculation, but five years ago we noticed a really interesting pattern in our customer base, which was we had a lot of customers that were based in San Francisco working out of a WeWork and they would not register to do business. And this is again, speculating on what happened here, because we don’t actually don’t know, but it seemed like we saw, they weren’t really registering in San Francisco, they weren’t telling us, or they’d come to us, and when we would register them, but they’d been working in a WeWork for a couple years and things like that. And, all of a sudden, we saw a flurry of San Francisco tax things to them and we assumed that potentially San Francisco got together with WeWork and was like, “Hey, give us a list of all the companies working in the WeWorks so we can run it against our system and who see who’s actually registered and who owes.” And it had a little bit too strong of a coincidence to be a coincidence. And it feels like the same thing could happen here. Someone could be like, “Hey, we’re worried about tax of evasion, or tax arbitrage, or regulatory arbitrage. Can you give us a list of all the companies that are using your employer of record service in Germany?”
Simon:	They could probably say, “And can we have a copy of their contracts and can we see specifically what are the roles and responsibilities of that individual with your clients?” And if they then see where that role business development, commercial, or revenue generating, you could come across a client base of 300 people, there might be 140 there of sales people and that could be a hundred countries. And we are just hypothesizing here.
Scott:	Total hypothesis. But this is the kind of stuff that comes out when you start laying off 25% of your team, or you decide to close the German, French, UK office or whatever. And then all of a sudden, because we talked about the safety net a little bit, but if there’s a lot of unemployment claims, or benefit claims, or things like that, those patterns become a little clear for the government agencies. So, I don’t know. This is why I wanted to have you on, because you’re so smart about this stuff and know it better than I do, but I just feel like it’s still, it’s an innovative approach. And like you said, there are employer of record companies have been around for a long time and do it well. And they’re not arbitraging anything. They know exactly what the legal constraints are, but it’s just something to think about. And you have made the point earlier, and we kind of didn’t cover this too much, but actually starting a subsidiary isn’t the worst thing. It’s not super expensive from a tax perspective for us filing the tax return, annual tax return in the US actually does add some complexity at the file 5471, which is a foreign subsidiary state. It’s basically a document that tells the IRS what the financials look like for that subsidiary and telling them about it. We don’t file that, there’s a pretty big penalty, it’s like 20K a year. We have a lot of companies that don’t know about that incorporate it, start a subsidiary somewhere, don’t file their tax returns until right, until they come to us and then we have to break the bad news. But outside of that, it’s not too bad. How expensive is it relative to the other offerings?
Simon:	Well, you can set up within a matter of days for a couple of weeks depending on which country you use. I think the two that remain most popular with the USR Australia, if they’re looking at Asia and UK, and the Netherlands as well. There’s that bit about good corporate citizenship. But also, a lot of countries, they offer tax incentives if you, you’re going to offer stock options to your staff.
Scott:	Interesting.
Simon:	If you have an entity rather than paying full income tax on any kind of vest or gain, that could be up to 50%. You could pay as little as 10% by having an entity in place and registering that scheme. So, a lot of our tech clients will pay relatively low salaries sometimes compared to say a Silicon Valley, but they’ll offer stock if the company is successful. And if you don’t have an entity in place and you don’t register that, then the employee pays income tax on any game they make rather than a reduced tax rate.
Scott:	Oh, interesting. Instead of capital gains, they’re paying income tax on it.
Simon:	And then you also have R&D tax incentives. If you create IP internationally, you can play reduced corporate tax. So, there are these things that the UK and other countries like the Netherlands, France, they’re all promoting to attract foreign investment. But if you don’t have an entity, or skin in the game bricks and mortar, then you can’t get it. So, there’s actually a bigger financial implication to an individual and the company by not considering whether it’s worthwhile actually setting up and then [inaudible 00:24:09]. And then the scond thing I would add is that I think where companies have used it as a bridging solution, they’ve got with employee of record eyes wide open, they’ve shut it down and then set up properly. But then there are others that have been carrying it for two, three years and they have like 20, 30 employees. And then when they look at what the cost savings would be, had they done that properly from the beginning and had an entity, then, really, it’s just an unnecessary kind of, it wasn’t really a hedge, it was just more the fact that it’s a cost in the middle. And I think something that has probably triggered this is where they’re going through a sale or a funding round. Part of the due diligence. The buyer looks at this and says, “Well, what’s that individual doing? You might have a taxable presence. What’s going on with stock options? And also, if you think we’re going to go through with this, I want indemnification in the future from any penalties that might arise. And that’s slowed down some processes by about 8 to 12 weeks.
Scott:	Wow, that’s amazing.
Simon:	I’d say that’s more of a newer trend that’s coming through now, where companies are going for series A and onwards, or you have a larger multinational buying up a tech disruptor, the employee status has been questioned a lot more, whether it’s EOR or using practice.
Scott:	That makes so much sense. Also, what happens if you’re subscribing to one of this kind of newer employee of record services and then you just stop, you cancel? Or are you close the office and so you stop paying the subscription? Are you not? I’m just wondering, are you not covered in perpetuity, or how does it work? I can see them saying like, “Oh, you stopped your subscription, we’re not really liable for this anymore.” How does that work?
Simon:	Yeah, it is exactly that. That’s what we’ve seen. And some companies have said, well, you’re signed up for 12 months so you only another six months or others have fine and drawn the line.
Scott:	So the moral story here is be very careful. There is a huge difference between employer of record services and PEOs, what we call PEOs in the US. There’s also this concept of a non-domiciled employer that you can actually run payroll in certain countries if you don’t have them actually doing certain tasks, you can actually get by that way. And then people should actually think about the subsidiary approach maybe more than they are right now, because it actually is not really more expensive and keeps you buttoned up on compliance, right?
Simon:	I think you have options and talk to someone, whoever they are, about what those options are and take your time, because the house isn’t on fire, but it could be in 9 to 12 months time if you haven’t addressed the fundamental compliance option, or the permanent establishment risk that you weren’t aware of at the very beginning.
Scott:	I know someone they can talk to. It’s you, reach out to you. Maybe you could tell everyone how to get ahold of you, how to reach out to Blick Rothenberg if they want a consultation on this. And by the way, you folks are really good about just talking to the companies. We send our clients to you all the time just for our conversation. And if it goes further, that’s great. If not, you guys are always very generous with your time, so we appreciate that. But maybe tell them how they can reach out to you.
Simon:	Well look, we’re always happy to act as a sounding board and we’re happy to introduce anyone to other clients who have been through this journey. I’m at Blick Rothenberg, I’m on LinkedIn, I’m Simon Gleeson and if you want to share my contact details at the end, please feel free to do so. I think where we add value is just talking to you about what do you think about doing, what type of people do you want to hire, what could be the best approach, and what could be the best employer of record who’s actually suited for you too? So, you can’t really discount it, because in some places it really does have a fit, but you have options. So, I always say don’t rush in, because there’s been too much of that now, but start to see two, three years later the impact of that. And as you said, we’re at a moment of inflection there where people are thinking costs.
Scott:	That inflection needs to be taken seriously. This is the kind of stuff that comes out when you start laying off people and the social nets invoked, safety nets invoked, and the governments are looking around saying, “Why were we not collecting taxes, but we’re still liable for unemployment benefits,” and things like that. So be very, very careful. It’s always hard as a startup, but having trusted advisors like Simon and Blick Rothenberg is an awesome first step.
Simon:	Yeah. Thanks very much for the opportunity, Scott. I love talking about-
Scott:	My pleasure.
Simon:	It’s great.
Scott:	My pleasure man. I appreciate it. All right buddy, thank you so much for coming by. Appreciate it.
Simon:	Cheers, bye.
Singer::	(Singing) It’s Kruze Consulting. Founders and Friends with your host Scotty Orn.

Simon Gleeson of Blick Rothenberg talks about different ways that startups can pay workers in other countries

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