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What Is An Employer Of Record And How Do They Work?

When your business first opened its doors, your team was likely hyper-local.

You had close relationships with your first employees, and you maintained peace of mind knowing that they have your best interests at heart.

Yet, as your business grew, staying local was no longer practical. You now need to expand your talent pool by searching in new regions, or possibly even a new country.

The challenge is that, as a full-time business owner, it can be difficult to navigate employment laws in a foreign country, and to onboard new employees without having a close face-to-face relationship with them.

Enter an employer of record. 

How does an Employer of Record work?

Think of an employer of record (or "EOR" as it is commonly known) acts 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.

Note, there are also global employment organizations ("GEO"s) that act as a liaison for EORs on an international scale. The GEO will connect with EORs in various countries where hiring is required, and the GEO will help to facilitate global expansion by connecting with this network of EORs. 

EORs sound similar to professional employer organizations (or "PEO"s), but there are some key differences. A PEO acts as a sort of co-employer, where the PEO is handling most of the administrative tasks of the employment relationship (such as payroll, taxes, and other employment tasks).

The other key difference between an employer of record and a professional employer organization is geography. If you are established in only one country and looking to hire more employees within that country but eliminate some of the administrative headaches, then a PEO might be the right solution. However, if you are looking to expand your business into another country, an EOR is your ideal solution.

What does Employer of Record do?

An EOR acts as an employer in a new country 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 you do not have any physical presence in the United States, then an employer of record is how you can make that happen.

An employer of record provides many of the same services as a PEO, but they function as an independent legal entity for employment purposes. 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 commonly include:

  • Employee onboarding
  • Background checks
  • Payroll processing
  • Employment contracts 
  • Payroll processing
  • Workers' compensation 
  • Payroll taxes
  • Employee benefits
  • Termination of employees and unemployment

Employers of record operate in different sizes and at different capacities. If you're looking to hire workers in a nearby state, for example, there are services that can assist, while if your aim is to expand internationally then a global employer of record may offer the right solution. 

Why use/what are the benefits of an Employer of Record?

EOR services are in place to make international hiring easier. No longer does a company looking to expand need to lose sleep over their liabilities in each country where they wish to hire. 

Using an EOR means that businesses do not have to worry about local laws such as labor laws, tax laws, or other regulatory challenges.  Depending on the country that you're expanding to, the legal system may be significantly different than your own, and so staying in full compliance with all of the local laws can be a challenge.  

For example, while Canada and the United States share a border, their labor laws are vastly different, and an unsuspecting US-based employer looking to have the same working relationship with Canadian employees would quickly find themselves in non-compliance with the local regulations. 

Using an employer of record can be a cost-effective way to enter new markets. Trying to amass all of the necessary resources in-house is a costly headache, and only makes things more complicated for business operations. There is simply no need to reinvent the wheel when somebody else is already zooming down the highway!

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. 

What are some key considerations (disadvantages)?

An EOR might not be the right solution if you're just looking to hire independent contractors. 

Independent contractors work for themselves, and they may be performing work for your business as well as several other client companies as well. They are effectively in business for themselves, and a contract that you form with them is just like any other contract you would have with a supplier or vendor. 

Some employers have a hard time giving up control. An employer of record is its own business entity, and they handle the working relationship for better and for worse. If you do not have experience outsourcing your human resources entirely, then it may be difficult to wrap your head around having another business handle your payroll, or issuing discipline for 'your' employees. 

The reality with an employer of record is that they're not 'your employees,' at least not in the legal sense. Hiring an EOR is more than just taking on a staffing agency or outsourced hr services—the EOR maintains control, and employers need to know that before making any key decisions. 

Related: 10 Contractor Management Software For Scheduling & Paying Contractors [2022]

Conclusion 

An Employer of Record lets your business expand beyond its current horizons. Whether you're looking to hire across state lines or across an ocean, an EOR can help make the process seamless so that you don't have to lose sleep over your business expansion. 

Remember though that an employer of record functions differently than a PEO, and can mean giving up some of the human resources control that you may be used to. Do some deeper digging to see what the right solution is for your business.

Something also worth checking out are HR tools and software. Learn more about it here: How Contact Management Software Can Benefit Your Business.

Related Read: PEO or EOR: Which Is Right For You?

By Tim Reitsma

Tim is the co-founder and General Manager of People Managing People, an online publication focused on building a better world of work. He is experienced with people & culture, leadership, business strategy and operations with a focus on building great teams who are excited about their craft and their organization. With over 15 years of leadership experience, Tim has always been guided by his core values: faith, family, curiosity, and fun. He is a coach, mentor, speaker, advisor, and an active volunteer in his community. Tim loves spending time outdoors with his wife and two kids as well as mountain biking in the north shore mountains.

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