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What is an Employer of Record?

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Alex Margolin
January 28, 2018
Staff discussing around table

When you are growing a global business, you want to be able to hire for the best person for the job, rather than the best person in your region. However, hiring abroad can come head to head with compliance laws — as you can’t legally hire employees in a region where you don’t have a legal entity set up. Opening an entity is a lengthy and expensive process, and just doesn’t make sense for a single candidate who may not want to wait the 3-6 months it can take to get your entity up and running anyway.

Employer of Record solutions solve this problem in a unique way. Instead of you hiring a candidate directly, you enter into a relationship with a local organization in the region of choice who can hire your candidate on your behalf. On paper, the employee works for the Employer of Record, who puts them on payroll, pays the relevant taxes, and handles their pay check at the end of each month. In practice, you manage their workload and their everyday role.

EOR or an Employer of Record is an innovative employment solution that allows you to quickly and compliantly hire someone, wherever they are in the world – without opening a legal business entity in that location.

The advantages of using an Employer of Record

There are a number of reasons why companies choose to use an Employer of Record. Here are some of our favorites:

  • Avoid misclassification: When you begin to rely on a contractor who works abroad, and want to take them on full-time, it can be complicated to compliantly onboard them to the team. EOR makes it simple.
  • Speed up time to hire: When you’re opening an office in a new region, there are many hurdles to jump over, which can leave a candidate waiting – impacting confidence in you as an employer. EoR lets them hit the ground running.
  • Sidestep regulatory responsibilities: Opening an entity in a new region means complying with local laws and responsibilities from benefits and taxes to PTO and sick leave. EOR takes it off your hands.
  • Save money: It’s expensive to open an entity, and even more expensive to tear it down again if your business doesn’t thrive in the new location. EOR lets you test the waters and see if it’s a good fit, at lower costs.
  • Attract a wider talent pool: In the era of the Great Resignation, you want the broadest range of candidates to choose from. With EOR, the world is truly your oyster when it comes to attracting talent.

When does your business need an Employer of Record?

With these benefits in mind, there are a lot of reasons why your business might need an Employer of Record. EOR allows you to onboard new candidates in a brand-new location, without having to think about all the hoops involved in opening an entity, and with total compliance. You can dip your toes in the water and test a new market, even if you aren’t sure whether it will be a great long-term fit.

Employer of Record also works as an intentional short-term solution. Let’s say you want to bring a candidate over to the US, but in the meantime they will be working from their home country. EOR makes this a cinch. You can pick up seasonal or short-term workers and hire them with full compliance, or even bridge the gap while you wait for your entity paperwork to come through.

What is the difference between EOR and a domestic PEO?

You may have heard of a dometic Professional Employer Organization (PEO), and heard the term used interchangeably with Employer of Record. A domestic PEO is something entirely different, intended to be relied on for in-country employment, not expanding globally. Organizations use a domestic PEO to get a better deal on benefits like health insurance or pension schemes, as the PEO will take on multiple businesses and therefore achieve economies of scale. The company will handle benefits arrangements on your behalf, but does not take on the employment of your candidates, and does not offer a global solution with a variety of in-country partners.

What other alternatives are there to Employer of Record?

Another term you might hear is GEO, Global Employment Organization. This is sometimes used synonymously with EOR, but is often used to refer to a single company who owns EOR providers in various countries around the world. This is in contrast to an Employer of Record who aggregates local partnerships in the necessary regions.

A GEO is a more limited solution, as the local partners of a GEO can’t usually be replaced, making service levels worse, and adding a conflict of interest when it comes to data integrity and compliance. Working with an EOR provider who offers the service through external third-party partnerships will usually offer you greater flexibility and control.

The final comparison you might be making is between EOR providers and staffing agencies. A staffing agency is a solution for recruiting candidates and onboarding new hires to your business. If you’re looking to onboard a team of developers in a new region, a staffing agency might be able to find talented recruits and help you with the interview and enrolment process.

However, they won’t be able to support you in compliantly managing their employment, including withholding the right taxes or social security contributions, managing their benefits or data security, or any ongoing employment matters. In fact, once the employee is found – their job is complete.

What is the right Global Employer of Record for your Business?

There are many companies on the market who will offer Employer of Record solutions, so it’s important to establish a checklist of the most important considerations to work through when you’re making your choice. Make sure to research:

  • Experience: How long has the EoR been working in the chosen region, and do they have a local presence that understands the culture and expectations of that location?
  • Reviews: Speak to other companies who have worked with this vendor. Are they happy with their experience, and does the EoR generally have a strong reputation for the work they do?
  • Technology: What tools and processes does the EoR offer, and how will they integrate into your own? Ideally you want an all-in-one solution that covers FTE as well as PTE and EoR.
  • Benefits: The EoR may be handling benefits such as pension, insurance, and training. How are these handled, including pricing, support, and governance?
  • Communication: Does the vendor provide local support in your time-zone, or a single person to speak to across all of your offices who understands the entire portfolio?
  • Data privacy: How is sensitive information about employees protected, both for security and for compliance regulations? Are there steps taken to ensure data accuracy and anti-fraud?

 

Frequently Asked Questions

  •  What’s the difference between using an EOR service instead of an independent contractor?

    Independent contractors are self-employed and perform short-term tasks on an ad-hoc basis. While you can compliantly utilize a contractor agreement abroad without opening a legal entity, if you hire an independent contractor exclusively to work on long-term projects, you will be misclassifying them, which can come with steep penalties. 

  •  Is an EOR company internationally compliant with local employment law?

    It is legal to use an Employer of Record solution to hire in a new country, and a proven EOR will be able to show that they are compliant with local laws such as taxes, benefits, and data privacy. Remember that in some countries there are rules around how to utilize an EOR relationship. For example in Germany it must not exceed 18 months. 

  • Who manages the employees in an EOR model?

    While an EOR will usually handle payroll and some benefits arrangements, your own company will be responsible for managing and overseeing the employee’s everyday tasks. This includes workload, time management, and approving days off. Apart from on paper – you continue to act as the employer. 

  • What are the alternatives for a global Employer of Record services? 

    If you’re looking for a company to handle domestic employment matters like getting you a better rate for health insurance or employee training, you might be looking for a domestic professional employer organization (PEO). A global employer organization (GEO) is usually a single company who owns local employers in specific regions around the world, which hires your employees in a similar (albeit more limited) manner to an EOR. Finally, you can set up your own legal entity abroad, which takes time and effort, but is the traditional method of hiring globally.

  • What are the limitations of working with an Employer of Record company?

    An Employer of Record solution is a smart solution for quickly and compliantly hiring abroad. However, check the laws in the relevant countries, as in some cases once you are making revenue abroad or have entered into commerce and contracts with local customers, you will need to open your own entity. 

  •  Is it easier to register an entity in-country?

    Opening an entity is a lengthy and complex process that includes opening bank accounts, registering with local tax authorities, and more. Forming a relationship with an EOR allows you to avoid this overhead and investment until you are sure you want to grow your business into the new location. 

  • Do EORs hire independent contractors?

    No. An Employer of Record by nature hires full-time employees onto their payroll, and manages the payments and HR aspects on your behalf. If you want to hire freelancers or independent contractors, this would be completed directly by the business, not via an Employer of Record. 

 

The Papaya advantage

Papaya Global’s brand of Employer of Record solution is head and shoulders above all of the alternatives. We handle employment in any country around the world, allowing you to quickly and compliantly onboard new candidates, no matter where you find expertise and talent.

We don’t own the organizations – instead we have formed longstanding, tried and tested relationships with local, independent in-country partners, which is often superior to the alternatives. This means we can act as an additional, independent layer of approvals and checks, giving you the peace of mind that your data is secure, you’re free to choose the top level of service with an SLA that suits your requirements, and there is no fraud happening in association with your business.

Our solution brings together the technology and the people in the smartest way possible. You get the benefit of local cultural expertise to ensure full compliance and smooth onboarding for employees, alongside the automated Papaya Global platform to guarantee payroll compliance, benefit management and data privacy at the highest standard.

Want to see how it works for yourself? Schedule a demo.

 

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