An employer of record (EOR) is an outsourced service that oversees a business’s employee and human resources administration. Hiring an EOR shifts the legal responsibility for many personnel actions from the core business to the third-party provider. There are many reasons a company might engage an employer of record, including expansion into international locations with different laws and regulations.
Key Points
• An employer of record (EOR) manages employee payroll, taxes, and compliance for businesses that expand to new regions.
• EOR duties include tracking and reducing legal and compliance risks in other states and countries.
• An EOR saves time and money when a business enters a new market because the EOR has already established itself as a legal entity in that location.
• An EOR can standardize global employee experiences, ensuring consistent treatment of all workers.
• Although an EOR typically manages the onboarding of new hires, it usually does not handle recruitment or candidate vetting.
Understanding Employer of Record Services
By hiring an EOR service, a business can focus on its main operations without having to learn employment laws, particularly those in jurisdictions far from the company’s home base. The business itself continues to manage its employees and day-to-day operations, but employment-related compliance is in the hands of the employer of record.
Delegating personnel and payroll tasks to an EOR might well save time and effort for entrepreneurs starting a small business.
Definition and Core Functions
So what is EOR for your business? Employer of record services can handle almost all of the administrative aspects of hiring, firing, and paying employees. Companies may choose to outsource various HR-related tasks and responsibilities, including:
• Employee onboarding
• Payroll (domestic and international)
• Employment taxes
• Benefits and compensation administration
• Employee terminations
• Workers’ compensation
• Unemployment
• Regulatory compliance with local and national employment laws
Every company’s needs will be different, of course, especially if overseas employees or contractors are involved. EOR services typically handle employee or contractor onboarding, but not recruitment or candidate vetting.
EOR vs PEO vs Staffing Agency
EORs are just one type of personnel-related service agency. Growing companies may want to engage different types of employment-related services, depending on their needs. Three common types are EOR firms, professional employer organizations (PEO), and staffing agencies. Any of these could be a prudent way to spend some of your startup business loans if warranted.
It’s important to understand how they differ in order to hire an agency that can deliver what you need. Here’s a breakdown of their various responsibilities.
• Employer on record (EOR): An EOR is the legal employer of the workers at your company. It is responsible for keeping your business in compliance with all of the relevant labor laws. It is most useful for companies that have a multinational workforce.
• Professional employer organization (PEO): A PEO offers administrative services similar to an employer of record, but the legal responsibility is different. When your company partners with a PEO, your business remains the legal employer of your staff. The PEO is considered a co-employer, and both parties share legal responsibility for abiding by employment law.
• Staffing agency: A staffing agency offers completely different services from an EOR or PEO, focusing on recruitment rather than employee administration. The staffing agency helps with tasks like creating job listings, sourcing candidates, and even negotiating contracts. But once your company hires the new employee, the staffing agency’s work with that person is done.
How an Employer of Record Works
As a business grows, whether through profit reinvestment or loans for business expansion, an employer of record can provide support in many ways.
Legal and Administrative Responsibilities
An employer of record is responsible for all of the legal and compliance duties that go with employing workers across multiple jurisdictions. In addition to administering many HR processes, an EOR also oversees complex legal matters, including:
• Labor law requirements
• Tax regulations
• Mediation
• Workplace safety
This means that the client company can manage the employees’ work without having to spend its own resources tracking states’ or countries’ regulations and reporting requirements.
Global Employment Considerations
Businesses commonly engage an employer of record to help manage some sort of international expansion. Perhaps your business plan involves entering a new global market. Or maybe your company has decided to hire a remote team in another country.
While such moves can be beneficial for business growth, they add the burden of having to manage multiple unique labor laws and tax rules. An employer of record service can handle areas of risk mitigation and compliance that may be entirely new to you. You can turn your attention instead to finding the small business loans your company needs for expansion.
Another plus: You can stay onboard as the legal employer of your U.S. staff and use an EOR solely for international employees.
Benefits of Using an Employer of Record
Hiring an employer of record can give you several advantages.
Risk Mitigation and Compliance
One of the biggest benefits of an EOR is risk mitigation. The EOR, not your company, will be responsible for understanding and implementing local labor laws. An EOR reduces your risk of misclassifying independent contractors and employees; it can ensure that correct payments are made for taxes and benefits.
An EOR is also designed to stay on top of regulatory changes to make sure your company stays in compliance with the latest requirements. Also, many countries have different termination requirements. In the U.S., for example, termination laws are more relaxed and employees can be let go “at will.” But in other countries, employment law may require a notice period of several months depending on tenure.
Cost and Time Savings
In addition to lowering your business’s risk, using an employer of record can save both time and money. For starters, it can gain you entry into a new country or other jurisdiction much faster than if you decided to take on that responsibility internally.
An EOR service already has its own legal entity established, which gets things moving more quickly and saves your business upfront registration and administrative fees. Plus, managing compliance risk means there’s less chance you’ll be unexpectedly fined.
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When to Consider Using an EOR
There are several scenarios in which it could make sense to use an employer of record:
• Expanding hiring into a new region to test a new market
• Growing a remote team internationally by seeking out top talent overseas
• Changing workers’ status from independent contractor to employee
Expansion Scenarios and Use Cases
Here are a few examples of how an employer of record could assist a business’s move into new jurisdictions.
• Filling skills gaps: Companies needing specialists can turn to an EOR to hire workers with niche skills in one or many locations.
• Enabling temporary work: Rather than opening an entire regional office in a new location for what may be a limited time, your company can hire an EOR to have a presence in that place. Your business can operate on its own timeline, without the burden of having to create a permanent legal entity.
• Easing international acquisitions: Quickly onboard staff from a newly acquired overseas company while complying with all relevant labor laws.
• Minimizing financial commitment: Using an EOR is a way to get established in a new region without making a sizable investment or tapping into a business line of credit. It gives you time to evaluate the success of the new venture before you decide to make it permanent. Your company will have the option to take over employment contracts in the future if desired.
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The Takeaway
Using employer of record services comes with major advantages. An EOR can help speed up the process of hiring people in another country. The EOR also assumes employment risk in any new jurisdictions, which can save time and money. EOR services include payroll, tax, and benefits administration, all in compliance with the local regulations.
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FAQ
What’s the difference between an EOR and a PEO?
What an employer of record does is not quite the same as what a professional employer organization does. An EOR acts as the sole legal employer in a specified jurisdiction, while a PEO is officially a co-employer of your staff. Both offer similar administrative services, but an EOR bears more legal responsibility.
How much does an Employer of Record service typically cost?
The cost of an EOR varies depending on location and the breadth of services you require. Typically, a business will pay a one-time setup fee (which may be higher in more complicated jurisdictions) as well as an ongoing monthly fee. The monthly charge for baseline EOR services can range from $199 to $650 per employee — or more.
Can an EOR help with international hiring compliance?
Yes, one of the main functions of an EOR is to help companies stay in compliance with international employment and tax laws.
Do employees know they’re hired through an EOR?
Yes, employees will know they’ve been hired through an EOR because the EOR is their legal employer. Even so, they’ll expect to work directly with your company on daily tasks and responsibilities.
How does using an EOR affect company culture and employee experience?
Using an EOR can be beneficial for employees because it ensures their benefits and compensation are handled fairly and legally. An EOR can also standardize processes so that the experience of employees around the globe remains consistent.
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