Companies expanding internationally often need to hire staff before completing entity registration. Setting up payroll without a registered local entity, however, is not straightforward. You cannot legally run payroll or sign employment contracts in most countries without a legal employer presence. Therefore, many companies reach for workarounds, some compliant, most not. This article explains the legal requirements, the risks to avoid, and the structured path forward.
Why setting up payroll without a local entity is complicated
When you enter a new market, local employment law applies immediately. Each country requires a registered employer to process payroll, file taxes, and pay social contributions. Without a local entity, you have no legal employer status. Therefore, you cannot process payroll, issue compliant employment contracts, or register staff with tax authorities.
In the Netherlands, for example, employers must register with the Chamber of Commerce, open a local bank account, and complete notarial procedures before hiring a single employee. This process typically takes 8–12 weeks. Yet many companies need staff on the ground far sooner.
The result is predictable. Companies reach for a quick fix, most commonly, classifying workers as independent contractors. This is where the risk begins.
The contractor workaround and why it fails
Hiring independent contractors may seem like a practical employment solution for companies without a local entity. However, it carries serious legal exposure in most jurisdictions.
First, tax authorities actively investigate contractor arrangements. If your contractor works exclusively for you, follows your schedule, and uses your tools, authorities will likely reclassify them as an employee. This is misclassification, and the financial penalties can be substantial.
Second, using contractors creates permanent establishment risk. If a contractor negotiates contracts or makes decisions on your behalf, your company may be deemed to have a taxable presence in that country. As a result, you could face unexpected corporate tax liabilities, even without a registered entity.
In the Netherlands specifically, enforcement against bogus self-employment intensified significantly in 2025. New legislation under the Wet VBAR is tightening rules further in 2026. Therefore, relying on contractors is not a sustainable employment solution for companies without a local entity. It is, in most cases, a compliance risk in waiting.
Setting up payroll through an employer of record
An employer of record (EOR) provides a legally compliant route for setting up payroll in a new country without registering your own entity first. The EOR becomes the legal employer of your staff. In turn, they manage all employment administration, contracts, payroll processing, tax filings, and statutory benefits, while you retain full operational control.
For companies that need to move quickly, an EOR compresses onboarding timelines considerably. Rather than waiting months for entity setup, you can hire compliantly within one to two weeks.
Setting up payroll through an EOR means your employees receive locally compliant contracts from day one. Moreover, the EOR manages monthly payslips, social security contributions, and all statutory filings on your behalf. You decide salary, benefits, and working arrangements. The EOR handles the legal complexity.
This is precisely why EOR has become the preferred international employment compliance solution for organisations entering new markets across Europe.
What setting up payroll with an EOR actually covers
EOR-based payroll setup is comprehensive. A structured EOR engagement covers the following core services.
Contract administration: The EOR drafts and manages locally compliant employment contracts, including extensions and amendments.
Payroll processing: Monthly payroll runs, payslip generation, tax calculations, and salary payments all happen under the EOR’s employer registration.
Statutory filings: The EOR submits all required tax and social security filings to local authorities on the correct schedules. Your company is never directly exposed to filing risk.
Sick leave liability: In the Netherlands, employers must continue paying at least 70% of salary for up to 104 weeks during illness. The EOR assumes this liability. You do not.
Visa and permit support: Recognised EOR providers already hold IND Recognised Sponsor status. This enables fast-tracked processing of Highly Skilled Migrant visas in approximately two weeks.
Together, these services represent a fully structured employment solution for companies without a local entity. Furthermore, they eliminate the misclassification and permanent establishment risks that contractor arrangements create.
When setting up payroll under your own entity makes sense
An EOR is not always a permanent arrangement. Once your team reaches a size that justifies entity registration costs and internal HR administration, setting up payroll under your own local entity becomes viable.
At that point, your EOR provider should support a clean transfer of employment contracts, payroll records, and statutory obligations to your new structure. A well-managed transition protects continuity for your employees and avoids compliance gaps.
For market entry, pilot teams, or cross-border project hires, however, an EOR remains the most practical and compliant employment solution for companies without a local entity.
Start with the right partner
Octagon Professionals International has supported international organisations with setting up payroll and compliant employment across Europe for over 38 years. We reduce compliance risk, remove administrative burden, and ensure your staff are properly employed from day one. You retain complete control over compensation, benefits, and working arrangements. We handle the complexity.
