An employer of record (EOR) lets companies hire and pay employees abroad without opening a local entity in a new country. It also ensures you’re complying with local tax and employment laws that may differ from those in the jurisdiction of your company headquarters.
Instead of an employer going through the lengthy process of establishing a new business presence overseas, an EOR hires employees on the client’s behalf. It also handles country-specific payroll, employment contracts, vacation, leave, and taxes, allowing you to focus on managing employees’ day-to-day work.
But is an EOR the right solution for your global workforce? Follow along to help determine whether you need it, the pros and cons of using it, and how to choose the best global EOR partner for your business.
Hiring through an EOR vs. your own entity
If you’re looking to hire employees in a foreign country, you’ll need to either set up a legal entity in that country or use an EOR. While they both allow your business to expand into a new market, they’re set up differently:
- Legal entities. Entities need to be set up from scratch by registering with local authorities and opening a local bank account. You’ll also need to independently monitor compliance with tax, immigration and local employment laws, as requirements will vary from your company’s country of origin.
- Global Employer of Record services. These third-party providers serve as the legal employer on a company’s behalf. In addition to allowing you to legally hire in a new country, an EOR takes care of all the regulatory requirements for payroll, employment contracts, and employee benefits. This can include automatically calculating and withholding taxes, distributing forms to onboard employees, and paying international employees in their local currency.
Keep in mind that an EOR is different from a professional employer organization (PEO), which requires a company to set up its own entity.
Pros and cons of EOR services vs. setting up a legal entity
Cost & Implementation
✔ Less time-consuming to set up.
✔ You can start hiring within days instead of months.
✘ Becomes costlier as your headcount increases.
✘ Takes up to six months to set up—and requires registration fees.
✔ More cost-effective once you’ve hired enough employees in a foreign country.
✔ Quickly set up new hires, often within 1-14 days, depending on the provider.
✔ Supports large-scale global expansion in a new market.
✔ Manages all of your compliance work for you, takes on liability, and provides localized employment contracts.
✘ Can’t tailor certain policies, and other HR/legal processes, to your business needs.
✘ Requires expert knowledge of local laws and tax regulations and internal legal resources, as your company is liable for all legal and compliance infractions.
✔ Can tailor certain policies, and other HR/legal processes, to the needs of your business.
Payroll & Benefits
✔ Quickly pay and insure employees around the world.
✔ Taxes are filed for you.
✘ Must manually keep track of statutory deductions and employee entitlements for every hire.
✘ Responsible for filing & paying taxes with local tax agencies.
5 questions to ask when choosing an EOR
Make sure to have these answers before deciding to buy an EOR, and before choosing which option is best suited for your business.
Does the EOR own its own entities in the countries it services?
If the EOR doesn’t have its own entities, it’s partnering with third-party providers. This can lead to slower payroll processing times, mistakes, and an inability to manage your global team in sync with your local employees. You’re also left vulnerable to security risks. On that note…
How does the EOR protect your sensitive and confidential information?
While outsourcing your payroll management to an EOR can speed up hiring, sharing your data with payroll aggregators who use third-party vendors leaves you exposed to data breaches from manual uploads.
You should seek out EORs with a proven track record of data protection, including:
- Compliance with privacy regulations in different countries, like the General Data Protection Regulation (GDPR) in the EU
- Secure infrastructure with around-the-clock maintenance
- Carefully vetted personnel
You can also establish a Data Processing Agreement (DPA) with a payroll service that mandates sound privacy practices and provides legal protection.
Does the EOR offer automated solutions?
At minimum, an EOR lets you legally hire and pay employees in a new country. But standout solutions can function as extra arms of your HR and IT departments. Rippling, for instance, lets you quickly onboard new employees while automatically enrolling them in required compliance training. It also comes with time and attendance features that track overtime compliance. On the IT side, Rippling can manage an employee’s apps and work devices.
What is the EOR’s support model?
You want to make sure the support staff behind your EOR provides legal and tax knowhow for all its country’s compliance considerations. If you have questions about anything from vacation and sick leave policies to health insurance and pension contributions, you want a readily available expert to help problem-solve.
Does an EOR make financial sense for your business?
EORs are usually priced as a fixed monthly fee per employee or as a percentage of your total payroll, plus any taxes (if applicable). In either pricing structure, you should look out for administrative fees, onboarding charges, and other costs for supplemental features.
When considering costs, keep in mind that you don’t need to use an EOR for all of your international employment. If you want to limit its use to only some of the countries where you hire, you’ll only be charged for the employees you employ through the EOR.
Since EORs are generally pricier as your headcount grows, companies with a larger staff in a foreign country may find it more cost-effective to set up a legal entity and hire legal compliance experts.
But remember, Rippling’s EOR is built on top of native payroll rails, which means that when the time comes, you can seamlessly transition from an EOR to Global Payroll through your own entities in minutes, instead of starting from scratch.
Run your global workforce with Rippling EOR
Rippling can help you address every stage of your international growth, while allowing you to transition easily between them:
- Global contractor payments
- Global payroll via Rippling entities
- Global payroll via your own entities
Rippling and its affiliates do not provide tax, accounting, or legal advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any related activities or transactions.