What is an Employer of Record?
Alex Margolin| Jan 28, 2018
Employer of Record Defined
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 often 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. That is when you need an Employer of Record (EOR) also known as a global PEO.
What is an EOR? it is a solution that solves this problem in a unique way. Instead of hiring a candidate directly, you enter into a relationship with a local in-country partner in the country where you wish to hire who hires the candidate on your behalf. On paper, the employee works for the Employer of Record, who puts them on their 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.
An Employer of Record is an 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.
What services does an employer of record offer?
An EOR takes on the hiring of a company’s employees in a new location, allowing the company to remain legally compliant with all local employment laws, and sidestep the complexities and risks of establishing its own presence. The EOR provider is the employer “on paper”, while the company remains in control of the day-to-day workload of the employees.
In terms of the relationship, the company will retain regular communications with their employee, and will usually have a traditional line manager or hierarchy for work-related matters – similar to if they worked for the same organization. However, if there is an issue regarding payroll processing, taxation, contracts, or other employment law – the employee would need to take that up with the representative from the Employer of Record. Tasks that an Employer of Record will generally take on include:
An employer of record is responsible for payroll taxes, registering with the local tax authorities, filing all documentation, and ensuring legal compliance. They will also manage the minutiae of a payroll process, collecting forms like W-2 or I-9 forms, taking deductions, sending payslips and tax returns, and any other documentation necessary.
Onboarding employees through an Employer of Record service should heavily simplify the process of setting up contracts. An EOR will run background checks to look out for any red flags and create employment contracts that are fully compliant with local laws. For example, if you want to hire in a certain region, you need to know its regulations for PTO, sick days, and more.
The same is true for employee benefits, with expectations varying widely from location to location. EORs will make relationships with various benefits providers, from pension funds to health insurance providers, and sometimes even training companies, supporting the employees under their responsibility with all their benefits, both mandatory and non-mandatory.
Working with local authorities
An employer of record will need to work very closely with the local authorities in each region where your company has employees, dictating the need for a “boots on the ground” approach. They will need to obtain local insurance, bank accounts, registration, and more, and will need to have relationships with local authorities where they understand the language, culture, and expectations, making sure that you hire in compliance.
In some cases, you might need your Employer of Record provider to support termination or switching contracts to a new arrangement. This could be because an employee is relocating back to HQ or to a new region, or because they are being promoted for example. If an employee is being fired or is leaving the company, you’ll want the EOR to support this without heavy termination fees or waiting until a contract has finished its term.
Your EOR is your expertise on the ground in the new region, so they will be your first port of call for all local questions and challenges. This could be getting visas for employees, creating equity arrangements, ensuring local holidays and expectations are met, or anything else under the sun. With all these issues, local labor laws experts can be very significant.
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 an international contractor and want to take them on full-time, it can be complicated to compliantly onboard them to the team as an employee. 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. Using an EOR speeds up the hiring of overseas workers.
- 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. If a company located in the US opens an entity in Australia, an EOR will ensure full local compliance.
- Save money: It’s expensive to open an entity, and even more expensive to close it down if your business doesn’t work 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 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 domestic 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.
U.S 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.
The different models of an EOR
EOR services come in two types. The aggregator model involves an EOR provider working with local independent in-country partners (ICPs). In collaboration with the ICPs, the client works with the provider in foreign countries.
A second EOR model is a wholly owned infrastructure. With this model, the global EOR provider owns its own local offices in various countries, whether he opens them or acquires them. By doing so, the different branches are part of a global company, with central offices located in the company’s headquarters.
Both types have their own pros and cons. The aggregator model can provide a customized plan, and flexibility for employees’ compensation, due to its accessibility to different providers. whereas the wholly owned can offer more of a stable process to rule all of their foreign subsidiaries, with no forthcoming changes.
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 service 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 that 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 do an 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 a 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 understand the entire portfolio?
- Data privacy: How is sensitive information about employees protected, both for security and compliance with regulations? Are there steps taken to ensure data accuracy and anti-fraud?
How much does an employer of record cost?
An EOR solution is intended for risk-free expansion into a new market, so the price is always going to be a factor. A company is attempting to avoid the heavy expansion costs, not just set up in a new region quickly. As well as speed, Employer of Record pricing needs to be considered seriously.
To start with, the cost of an EOR should always be less than opening your own entity. This is because of the costs of opening and maintaining premises for the business, holding bank accounts, local insurance, and paying local taxes.
An Employer of Record pricing model usually works in one of two ways.
Percentage pricing model
With this pricing model, the company pays a percentage of the salary that you provide to your employees. This can often be the cheapest way of using an EOR service, but it is best used when you’re hiring junior staff abroad. This is because the higher the salaries, the more you’ll be paying your Employer of Record. Every time you offer a pay rise or a competitive entry package, you need to think about how this will impact your ongoing labor costs. It can be hard to calculate ahead of time.
The flat fee pricing model
The flat fee pricing model is exactly what it says on the tin. You pay the Employer of Record a fixed price per employee, and that doesn’t change whether the employee is an executive or an entry-level hire. Watch out for EOR providers that add hidden costs such as termination fees, insurance fees, or others. This is a good model because you get a lot of transparency about costs, both current and forecasted when expanding your workforce in-region.
At Papaya, an employer of record service costs $770 per employee (see our pricing here). That is a simple fixed fee with a flat price, no hidden costs involved, and you obtain all the benefits of working with a technologically advanced payroll platform that has direct EOR relationships.
The Papaya advantage
Papaya Global’s brand of Employer of Record solutions 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.
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.
Who assumes the risk as a 1099, the company or the employer of record?
For 1099 workers, an Employer of Record solution is unnecessary. The EOR takes on the equivalent of W2 workers – payroll employees who live in a location where your company does not have a presence. If you are correctly classifying 1099 workers, these are independent contractors who can work globally. However, if you are misclassifying 1099 workers who should be considered employees, this risk will fall on your company.
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.
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.
Is it easier to register an entity in-country?
Opening an entity can be 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.
What are the limitations of 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.
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.
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