An Employer of Record service is a third-party organization that takes care of all of the formal employment requirements related to hiring and compensating workers in different countries. It allows companies to legally — and more efficiently — employ workers in other states or countries without worrying about violating local employment laws.
In the era of dispersed teams and remote work, in which companies are increasingly recruiting talent beyond their borders, identifying ways to make managing a global workforce more efficient has become more valuable than ever.
In this post, we’ll cover the ins and outs of Employer of Record Services as well as some of its top alternatives, so you’ll have the information you need to decide whether to use one.
This article is part of our guide on global payroll.
What does an Employer of Record do?
An Employer of Record acts as an intermediary between companies and the employees they hire in different geographic areas. Although the original company maintains control of the working relationship, an Employer of Record (EoR) becomes the registered employer for a given employee.
It is responsible for fulfilling the company’s legal and regulatory requirements related to hiring employees in different locations, while the original employer maintains a hands-on management role, including hiring and termination, performance evaluation, assigned work, and compensation.
The Employer of Record covers the following:
- Provides a local legal entity that handles all compensations
- Ensures tax and legal compliance according to local laws
- Handles all necessary communication with government agencies
When to enlist an Employer of Record service
Your company may decide to enlist an Employer of Record if you want to hire one or a handful of employees from a different country — or another state that has different labor laws — and you don’t want to go through the hassle of setting up a local entity by getting incorporated there.
Without an EOR, you would need to establish incorporation in order to hire and pay employees in remote locations. It could be a foreign subsidiary, a foreign branch or a permanent establishment (PE) – but it must be a local office with local payroll profffesionals to assume responsiblity for handling payroll, a complex task unless you have a solid understanding of requirements for local taxes and social security contributions. Finally, you’d also be responsible for ensuring remote operations comply with local labor laws.
In the case that you intend to hire 10 or more employees in a given location, or if you plan to continue growing there, you may opt to establish a local entity via incorporation and handle the hiring, payment, and compliance yourself.
5 benefits of using an Employer of Record
Every country, as well as some states, has different requirements for non-resident companies that aim to do business there. Without guidance for addressing them, companies may face barriers that prevent them from expanding or hiring talent in remote locations.
Enlisting the services of an Employer of Record enables companies to reap the benefits of hiring a global workforce without getting bogged down by the regulatory and cost obligations that come with it.
Here are five benefits of using Employer of Record services.
1. Increases flexibility
Relying on an Employer of Record enables companies to increase flexibility by allowing them to focus on acquiring the talent they need to improve their business anywhere around the world without assuming any legal risk.
When an Employer of Record assumes responsibility for all of the financial and legal aspects of hiring remote employees, then companies can be free to hire — and fire — top talents based on their skills, regardless of where they are located.
2. Reduces compliance risk
Understanding all of the employee protections, payments, and labor laws in different countries and states is difficult without an intermediary that is already familiar with them. An Employer of Record is staffed with legal advisers, accountants, and other professionals that know how to ensure compliance with the laws of the country you wish to hire employees in. Essentially, an Employer of Record handles all compliance-related matters on your behalf.
3. Speeds up employee onboarding
Employer of Record services can also help guide new hires through the administrative aspects of starting a new role. While the original employer will be responsible for providing work-related training, the legal employer (the EOR) will be better equipped to ensure new hires fill out the right paperwork, provide the correct payment information, and understand their rights.
4. Eliminates the need to manage payroll and accounting
Setting up international payroll in remote locations can be complicated for hiring companies to do on their own. That’s because they are responsible for withholding statutory deductions from employee salaries, including taxes, health insurance, and pensions. When you hand off this responsibility to an Employer of Record Services, they alleviate you of this responsibility and ensure the payroll operations remain in compliance with local requirements for each employee.
5. Ensures cooperation with immigration policy requirements
Governments have increased their scrutiny of foreign business activity, work permits, and visas. At the same time, immigration laws and policies regarding international work often change, making it difficult for employers to remain compliant. By relying on a local Employer of Records, employees in the said region are legally considered the employees of the EOR, which avoids issues with remote payroll, immigration authorities, and overuse of business visas.
What are the alternatives to using an Employer of Record?
Companies that want to expand and hire talent in a different location need a solution for managing all of the complex legal and payment tasks that come along with it, unless they plan on establishing an incorporated entity there. An Employer of Record is one common solution, but it is not your only option.
Here are two alternatives, each of which comes with different advantages and disadvantages.
- Global Employment Organization (GEO)
- Professional Employment Organization (PEO)
Here’s a brief introduction to each of these alternatives, as well as how they differ from Employer of Record services.
Global Employment Organization (GEO)
A GEO is a third-party entity that utilizes different EORs for each country where a company hires employees. It operates as another layer of oversight between the original company and each EOR, and provides continuity between them while ensuring there are no compliance issues. It also offers global HR services in addition to overseeing the network of EORs. A GEO speeds up and simplifies the hiring process by relying on its local partners, who have expertise in the area’s labor and tax laws.
Professional Employment Organization (PEO)
Unlike GEOs and EORs, which employ workers on behalf of the client company and assume full legal responsibility for employees, Professional Employment Organizations (PEOs) are co-employment services. In practice, this means that both the PEO and the client company assume legal liability for remote employees as well as responsibility for managing their work.
PEOs are most commonly used within the US, where different states have different requirements for taxes, employee benefits, protections, and reporting.
A PEO provides the same payroll, compliance, and onboarding services and support as an EOR. However, it doesn’t assume the same legal employment role that an Employer of Record does. The other main difference is that it is more commonly used by companies that hire employees within the US, where different states have different requirements for taxes, employee benefits, protections, and reporting.
Although an employer of record often works with staffing agencies, the two are quite different in terms of their offerings.
A staffing agency acts as a middleman between the company and the worker and mostly helps with the hiring process and then assigns the worker to the company. In comparison, the Employer of Record begins its part after the original company selected the worker.
While some staffing agencies may specialize in matching international talent with companies, it doesn’t necessarily mean they are able to take legal responsibility for these international workers. If you opt for a staffing agency, it’s imperative to first make sure they are equipped to work with a global workforce through partnerting with EORs.
How to use an Employer of Record to expand globally
Relying on an Employer of Record is one way to easily overcome many of the barriers that could prevent you from expanding your team globally. Without having to learn the ins and outs of local labor laws, tax requirements, and payroll for each location where you hire, there is virtually no limit to the talent you can access.
As the competition for qualified talent and skilled workers rises, strategic companies are proactively looking for ways to overcome the obstacles imposed by geographic borders. With an Employer of Record, the talent pool is worldwide.