EOR vs setting up an Australian entity

Three ways to employ in Australia

An overseas company that wants employees in Australia has three practical options:

1. Employer of Record. A provider employs your staff and handles payroll, super and compliance. You need no Australian registration.
2. Australian subsidiary. You incorporate an Australian proprietary limited company (Pty Ltd), owned by your parent company, which employs staff directly.
3. Registered foreign company (branch). Your existing overseas company registers with ASIC to carry on business in Australia and employs staff through an Australian branch.

Contractors are a fourth option for genuinely independent work, covered separately in employee vs contractor in Australia.

At a glance

What setting up an entity involves

Registering the company or branch is only the first step. To employ people in Australia you will typically also need to:

• Obtain an Australian Business Number (ABN) and a tax file number for the entity.
• Register for PAYG withholding so you can withhold income tax from wages.
• Register for GST if your turnover meets the threshold or you choose to register.
• Set up payroll software that supports Single Touch Payroll reporting to the ATO and Payday Super.
• Arrange a way to pay superannuation each payday, through a clearing house or your payroll system.
• Take out workers' compensation insurance in each state or territory where you employ people.
• Register for payroll tax in a state once your Australian wages exceed its threshold.
• Open an Australian bank account, which can take time if directors and owners are overseas.
• Put in place compliant employment contracts, policies and the Fair Work Information Statement.

Then there are ongoing obligations: annual financial reporting where required, company tax returns, BAS lodgements, ASIC annual reviews, payroll compliance and record-keeping under the Fair Work Act.

What an EOR replaces

An EOR takes care of almost everything in the employment column above: payroll, PAYG withholding, super, workers' compensation, payroll tax registration and employment contracts. It doesn't replace the corporate and tax side, because you aren't trading through an Australian entity at all.

That is why the EOR route is so quick. You are using the provider's existing Australian entity, registrations, insurance and payroll systems.

Comparing cost honestly

EOR costs are easy to see: a fee per employee, on top of salary and on-costs. Entity costs are more spread out and easier to underestimate. When comparing, include:

• Set-up: legal and accounting advice, registrations, bank account, payroll software set-up and contract templates.
• Ongoing fixed costs: accounting and tax compliance, company secretarial work, director services if needed, audit if required, software subscriptions and insurance.
• Internal time: finance, HR and leadership time spent running a second legal entity.
• Risk: the cost of getting employment compliance wrong without local expertise.

Because entity costs are largely fixed, they look expensive for one or two employees and cheap for twenty. EOR fees scale with headcount. The crossover point depends on your fees, salaries and how much in-house capability you have. See EOR costs and pricing models explained.

Signs it's time to set up an entity

• Headcount is growing steadily and you expect a permanent team.
• You need to sell locally, sign Australian customer contracts, issue invoices with GST or bid for government work.
• Permanent establishment risk is rising because Australian staff are negotiating and concluding deals.
• You need visa sponsorship and your EOR can't act as sponsor.
• You want an Australian brand presence, such as a local office lease or local banking.
• EOR fees exceed what it would cost to run your own payroll and compliance.

Moving from an EOR to your own entity

Transferring employees from an EOR to your new entity is common and manageable with planning:

1. Give the EOR notice under your service agreement and agree a transfer date.
2. Offer new contracts from your entity, at least as favourable as the current terms.
3. Decide on continuity of service. Recognising prior service protects employees' leave balances, notice and redundancy entitlements. In some circumstances the Fair Work Act's transfer of business rules apply anyway.
4. Handle accrued leave. Either the EOR pays out accrued annual leave or, with agreement and where the rules allow, it is carried over to your entity.
5. Set up payroll, super and insurance in your entity before the transfer date so there is no gap.
6. Communicate clearly with employees about what is changing and what is not.

Check your EOR agreement for any conversion or transfer fee before you sign it.

A common middle path

Some companies set up an entity early but keep using an EOR for staff in other states or other countries. Others use an EOR for the first hires while the entity is being established, then transfer everyone once payroll and banking are ready. There's no single right answer, but deciding your likely path at the start makes each step easier.

The bottom line

For the first few hires, especially while you test the market, an EOR is usually the faster and simpler choice. Once you have a growing permanent team, need to trade locally or face permanent establishment risk, your own entity starts to make more sense. Plan the switch from day one. For the Australian rules that apply either way, see Australian employment essentials.