Ask an engineering leader which countries their next hire is allowed to sit in, and most of them do not know. The answer lives in a payroll contract Finance signed three years ago, back when everyone worked out of one U.S. entity. That contract now shapes your hiring plan more than your hiring plan does.
TL;DR
- A PEO covers U.S. employment only. It bolts onto your U.S. entity and cannot put anyone on payroll in Bogota, Sao Paulo or Buenos Aires.
- An EOR hires people through its own local entity where you have none. Budget $500 to $800 per person per month on top of salary and local employer contributions.
- “We don’t have an entity there” is a hiring veto nobody voted on. It reaches recruiters as a locked location field in the ATS.
- Your own entity pays off around 15 to 20 people per country, not at the four or five where the fee math first looks favorable.
- Direct contractor agreements are the cheapest and most exposed option. LATAM labor courts weigh how the relationship works daily, not what the contract says.
- Finance owns the vendor, People Ops owns the process, Engineering owns neither and absorbs every consequence.
What a PEO is, and why it stops at the U.S. border
A PEO (Professional Employer Organization) is a co-employment arrangement. You stay the employer for most purposes, and the PEO becomes co-employer for payroll, benefits, workers’ compensation and state tax filings. You get group health rates you could not buy alone and one dashboard instead of fifty state registrations.
The structural point: a PEO plugs into your existing U.S. entity and state registrations. It has no standing in Colombia, Mexico, Chile or Argentina. It cannot enroll a Brazilian engineer in social security, pay a Colombian prima de servicios, or file with the Mexican IMSS. When People Ops says “our provider can’t onboard him,” that is true, and it describes one vendor’s limitation, not your company’s.
An EOR (Employer of Record) solves the opposite problem. It already owns a legal entity in the target country and becomes the full legal employer of the person you selected: local contract, local payroll, local withholding, local severance rules. A PEO shares employment inside a country where you already exist. An EOR supplies existence in a country where you do not.
How “we don’t have an entity there” becomes a silent veto
Watch the path the restriction takes. Finance signs a PEO contract in 2023. The ATS requisition template gets a work location dropdown listing the states the PEO is registered in. A recruiter opens a req, picks from the dropdown, and the posting reads “US-based, remote.” Six weeks later Engineering complains about pipeline quality and nobody connects the two.
Nobody decided Latin American engineers were out of scope. A vendor coverage map became a sourcing filter, and repetition turned the filter into policy. I have watched a team drop a finalist in Medellin after four interview rounds, because the offer stage was the first moment anyone checked whether payroll could process him. That is roughly $15,000 of recruiting spend written off by a constraint that costs about $650 a month to remove. The tell is the word “can’t.” Legally prohibited is rare. Not currently plumbed is common, and plumbing takes days, not quarters.
PEO vs EOR vs direct contractor vs your own entity
| Model | Legal employer | Reach | Cost per person | Time to first hire | Fits when |
|---|---|---|---|---|---|
| PEO | You, co-employed | U.S. only, registered states | ~$100 to $180/month, or 3% to 10% of payroll | Already live | U.S. headcount, benefits, state compliance |
| EOR | The EOR’s local entity | 100+ countries, all major LATAM markets | $500 to $800/month, plus local employer contributions | 3 to 10 business days | 1 to 15 people in a country you are staffing |
| Direct contractor | Nobody, service agreement | Anywhere the person can invoice | $0 to $50/month in platform fees | 1 to 3 days | Genuinely scoped, short, independent work |
| Own entity | You | One country per entity | $6,000 to $20,000 setup, then $15,000 to $35,000/year | 2 to 6 months | 15+ people in one country, long horizon |
Read that as a sequence, not a menu. Start with an EOR in one country, then evaluate an entity. Opening an entity first is how companies end up maintaining a Mexican subsidiary for three engineers.
What an EOR really costs per head
Take a senior engineer in Colombia at $70,000. Local employer contributions (health, pension, payroll taxes, mandatory bonuses, severance accruals) add roughly 35% to 45%. The EOR fee sits on top at $500 to $800 a month, so $6,000 to $9,600 a year, plus a deposit of one or two months of payroll. Loaded cost lands near $102,000 to $106,000. A comparable U.S. senior hire at $185,000 base before benefits makes the fee the wrong line to argue about.
Now the entity math. A Colombian entity costs something like $12,000 to open and $25,000 a year to maintain, including local accounting, statutory reporting and a labor lawyer on retainer. Against $7,800 a year in EOR fees, that breaks even on paper at three or four people. In practice it breaks even between 15 and 20, because an entity also creates work for your controller, a local bank relationship, transfer pricing documentation and terminations you own directly.
A working rule: 1 to 5 hires per country, use an EOR and skip the debate. 6 to 15, keep the EOR and start modeling. Past 15, put the entity question on the CFO roadmap.
The misclassification risk nobody prices
The contractor model is popular because it is fast and shows up as one line in the vendor budget. The exposure is that Colombia, Brazil, Mexico, Argentina and Chile all apply a substance-over-form test. If the person works your hours, uses your equipment, reports to your manager and has no other clients, a labor court can reclassify the relationship whatever the agreement says.
Reclassification is retroactive. In Colombia that means back social security contributions, unpaid cesantÃas, prima, vacation and interest, plus penalties. In Brazil a CLT claim can reach 13th salary, FGTS deposits and vacation premiums for the full term. In Mexico, the 2021 outsourcing reform narrowed what can legitimately be subcontracted. These claims arrive right after a termination, when goodwill is lowest. Contractor agreements fit genuinely independent, scoped work. They fit poorly for someone in your standup every morning for two years.
Who owns this decision in the org chart
Usually a Controller or a Director of People Ops, measured on cost per payroll transaction, audit readiness and vendor consolidation. Nothing in that scorecard rewards making a candidate in Buenos Aires hireable. Adding an EOR means a new vendor, a security review and an unfamiliar compliance surface, so the default answer is no, and it never escalates because nobody frames it as a hiring decision.
Engineering is absent because the decision looks administrative. It happens in a vendor renewal cycle, not a headcount planning meeting. The fix is not to seize the decision, it is to attach a number to it: two roles open more than 90 days, $180,000 in delayed delivery, three finalists lost at offer stage over payroll geography. A Controller moves for that, because it converts an ops preference into a P&L item.
The questions to put to Finance and Legal
Send these as written. Vague questions get vague answers, and vague answers preserve the status quo.
- Which countries can we legally pay today, and through which vendor for each?
- Does our PEO agreement contain exclusivity language that blocks a parallel EOR?
- What is the all-in monthly EOR quote for one senior engineer in Colombia, Mexico and Brazil, including employer contributions and any deposit?
- How long from signed offer to first payroll run in each of those countries?
- How many contractors have we had for more than 12 months, and has Legal reviewed them for classification risk?
- Who approves adding an EOR vendor, and what is the real approval path and timeline?
- At what headcount per country does Finance want to revisit opening a local entity?
Two of those usually get answered the same week, which is enough to reopen a pipeline that has been closed for a year.
Frequently Asked Questions
Can a PEO handle international hires if we pay a premium?
No. A PEO depends on your U.S. entity and its state registrations, so no version of it reaches a Colombian or Brazilian employee. Some PEO providers resell an EOR as a separate product line at different pricing, so ask which country entities they own outright.
Is $500 to $800 per month the full EOR cost?
That is the service fee only. You also pay local employer contributions, roughly 25% to 45% of salary depending on the country, plus statutory bonuses and a deposit of one or two months of payroll. Get a written all-in quote for a specific salary and country before comparing vendors.
How many hires justify opening our own entity?
Around 15 to 20 people in a single country, assuming a multi-year horizon. The fee arbitrage looks favorable near four or five, but that ignores the internal cost of a subsidiary: accounting, statutory filings, banking and direct responsibility for terminations.
Can we keep engineers as contractors if they agree to it?
Their agreement does not settle it. LATAM labor courts assess subordination, exclusivity, schedule control and tool ownership, and workers cannot waive statutory protections in advance. If someone works full time under your management for over a year, that is a risk you carry.
Should Engineering own the EOR vendor decision?
No, and asking for it stalls the conversation. Finance keeps the vendor relationship. Engineering makes the restriction visible in roles unfilled, time to hire and finalists lost, then asks for one country as a test.
How fast can we go from no coverage to a signed LATAM hire?
Vendor selection and security review take two to four weeks in most companies. After that, hires move from signed offer to first payroll in three to ten business days. The bottleneck is procurement, not the country.
