An employer of record (EOR) is an organization that legally employs workers on behalf of another organization.
Here we’ll delve into how an EOR can benefit your organization and some considerations for choosing one.
What is an employer of record?
An employer of record is a third-party organization that takes on all employer responsibilities on behalf of the client organization. This includes:
- Legal compliance
- Tax filing.
What is a global employer of record?
A global employer of record provides similar services to a standard EOR but on an international scale, managing employment tasks in multiple countries around the world. This is especially beneficial for companies looking to hire internationally.
A global EOR has expertise in the legal and compliance requirements of different countries, which is crucial for multinational operations. Most EORs operate internationally.
What does an employer of record do?
An EOR acts as an employer in a jurisdiction where you would like to hire employees but don’t have an entity yourself.
For example, if you are a UK-based company looking to hire employees in the United States, but do not have any physical presence in the United States, then an employer of record is how you can make that happen.
Unlike with a professional employer organization (PEO), the employee that you hire to provide services will actually be working for the EOR on paper, which is crucially important for international employment purposes.
Employer of record services include:
- Employee onboarding
- Background checks
- Payroll processing
- Employment contracts
- Payroll taxes
- Employee benefits
- Termination of employees and offboarding.
How does an employer of record work?
Think of an employer of record as a sort of surrogate employer in that they handle many of the traditional tasks in the employment relationship and also act as the legal employer. The employee works for you but is contracted under the EOR.
An Employer of Record handles all of the administrative tasks of the employment relationship such as payroll, employee benefits, etc. but is also legally responsible for the employees, including termination as required.
Benefits of using an employer of record
EOR services are in place to make hiring easier. No longer does a company looking to expand need to lose sleep over its liabilities in each jurisdiction it wishes to hire.
Employer of record benefits include:
- Reduce compliance risks: Organizations don’t have to worry about local labor laws, tax laws, or other regulatory challenges.
- Efficient international expansion: For businesses looking to expand internationally, an EOR can facilitate quicker entry into new markets. Since the EOR handles legal and HR compliance, companies can employ workers in new countries without the need to set up a legal entity there.
- Reduced administrative burden: Handling payroll, taxes, benefits, and other HR tasks can be time-consuming. An EOR takes over these responsibilities, allowing companies to focus on their core business activities.
- Cost savings: Setting up legal entities in multiple countries can be expensive. Using an EOR eliminates the need for this, potentially leading to significant cost savings.
- Flexibility in hiring: Companies can use an EOR to hire employees or contractors in locations where they do not have a physical office, providing greater flexibility in building a global team.
- Scalability: EORs offer scalability for businesses that are growing or experiencing fluctuations in workforce size, allowing them to easily scale up or down as needed.
Instead of looking to dispatch your existing team members all over the map, use a local entity to help get the job done.
They understand how to work best with international employees and will provide you with the working knowledge that you would not have access to otherwise.
Key considerations when using an EOR
Not all organizations use an EOR to tap into global talent, instead deciding to manage the process in-house.
Reasons some organizations choose not to use an employer of record include:
- Cost considerations: For some businesses, especially larger corporations with established HR departments, the cost of using an EOR might outweigh the benefits. These companies may find it more cost-effective to handle employment tasks in-house.
- Control and autonomy: Some companies prefer to maintain full control over their payroll, benefits, and HR policies to ensure they align closely with their corporate culture and objectives.
- Complex or unique employment needs: Some businesses may have complex or highly specialized employment needs that an EOR cannot adequately address. This can include specific industry regulations, union negotiations, or bespoke employee benefit plans.
- Desire for direct employer-employee relationship: Maintaining a direct relationship with employees can be crucial for some organizations, particularly in building company culture, loyalty, and direct communication.
The difference between an EOR and a PEO
The difference between an EOR and PEO mainly lies in the scope of services and the nature of the employment relationship they establish.
- Employment relationship: The EOR becomes the legal employer of the client's employees whereas employees are co-employed by both the PEO and the client company.
- Scope of service: EOR services are often geared towards assisting companies with international operations, facilitating employment in countries where the client does not have a legal entity. PEOs are generally more focused on domestic HR solutions within the client’s home country, although some PEOs also offer international services.
The Difference between an EOR and a staffing agency
The difference between an Employer of Record (EOR) and a staffing agency lies in their primary functions and the nature of the services they offer.
- Primary function: An EOR's primary function is to legally employ individuals on behalf of another company whereas a staffing agency's main role is to recruit and supply employees or temporary workers to client companies.
- Employment Relationship: Staffing agencies typically employ temporary workers or contractors and then 'lease' them to client companies whereas EOR is a full-time employer.
Which countries support EORs?
Employers of record are prevalent worldwide. However, they typically won’t operate in countries with:
- Strict labor laws
- Political or economic instability
- Limited market demand
- Regulatory restrictions
- Complex bureaucracy
- Sanctions or trade embargoes.
In terms of pricing structure, EORs commonly use one of the following models:
- Percentage of employee salary
- Flat fee per employee.
Instead of using an EOR, organizations might want to:
- Set up a local entity
- Hire freelancers
- Form a joint venture or partnership
- Outsource a business process.
How to choose an employer of record
When deciding to use an Employer of Record (EOR), several key considerations should be taken into account to ensure that it aligns with your business needs and objectives:
- Legal and compliance expertise
- Geographical Coverage
- Cost Structure
- Reputation and reliability
- An employer of record is a great option for organizations that want to expand their talent pool to new territories and quickly enter new markets.
- An employer of record will take full legal responsibility as an employer
- An employer of record might not be the best option if you want tight control over the employer-employee relationship.