Employer of Record (EOR), explained
An employer of record (EOR) enables companies to legally hire and collaborate with employees overseas without opening their own local entity in that country, while fully complying with local employment and tax laws. An EOR takes on the responsibility of establishing its own legal entity in a country to hire employees on the client’s behalf. It handles all the legal requirements of employment, such as payroll, employment contracts, vacation, leave, and taxes, while allowing you to continue to manage employees’ day-to-day work.
The benefits of an EOR
Establishing a formal business entity in a foreign country is complex and, without deep knowledge of the regulatory systems in that country, can be fraught with risk. An EOR minimizes compliance risk and simplifies the hiring process.
From providing immigration assistance to handling onboarding, payroll, and terminations, an EOR handles the most sensitive regulated aspects of hiring and managing workers in another country.
An EOR can help you:
- Eliminate complexities and costs that come with opening your own entity
- Accelerate your hiring, so you don’t lose out on promising candidates
- Generate locally compliant employment contracts
- Streamline payroll by handling local taxes, pensions, and statutory benefits
- Offer your full-time global employees competitive benefits
How to choose an EOR
EORs are not one-size-fits all—this checklist will help you determine which EOR is right for you.
Is the EOR active in the countries in which you need to hire?
The first, and perhaps most obvious consideration when choosing an EOR for global expansion, is if they operate in the country in which you’d like to hire.
Does the EOR own its own entities in the countries it services?
Depending on the EOR you choose, it may or may not own entities in the countries in which it offers services. If the EOR does not own the entities, it means they are partnering with a local or third-party provider.
There are potential pitfalls when a third-party provider gets involved:
- Everyday processes like hiring, payroll processing times, and changes to employment will dramatically slow down
- Security, especially IP security, can be at risk
How does the EOR protect your sensitive and confidential information?
Your EOR will be working with sensitive corporate information, including employee and business data. It is vital that your EOR has the appropriate data protections in place, as well as secure technology that eliminates potential disclosures of private information. Some EORs may require you to onboard new employees via email—we recommend looking elsewhere, as email onboarding can expose you to significant risk.
Does the EOR offer automated solutions?
It is important to consider whether the EOR will require a significant investment in time and people-power on your end. You may want to look for an EOR that automates the busy work like onboarding and benefits enrollment and other common HR and IT tasks, which can save you time.
What is the EOR’s support model?
It’s essential that your EOR has support staff that is both easy to contact and experts in the regulations of the countries in which you are hiring. In many respects, they will be the face of your company to your global employees.
Does an EOR make financial sense for your business?
An EOR is not for every business. For example, those with a significant presence in the country may find it more valuable to establish a business entity in the country rather than use an EOR.
How much does an EOR cost?
Your total cost will depend on a variety of different factors, including how many employees you employ through the EOR, which services you’d like to take advantage of, and the EOR’s pricing structure.
EORs typically use one of two pricing structures:
- Fixed monthly fee per employee
- Percentage of payroll plus applicable taxes
Both methods can also come with various administrative fees, onboarding charges, and other costs if you want extra bells and whistles—so be careful of hidden fees. Make sure to fully understand your contract and the total cost of working with the EOR before signing.
The difference between a PEO and an EOR
A Professional Employer Organization (PEO) and an EOR may seem similar, but they are legally very different. Therefore, it is essential to understand the distinction between the two when hiring employees overseas.
Unlike an EOR, a PEO co-employs a company’s workforce for administrative purposes, like paying employees and filing payroll taxes. Co-employment means that both the company and the PEO employ its workers–each is responsible for certain obligations of employment. A PEO does not allow you to hire in other countries where you do not have a local entity. A PEO serves as a turnkey replacement for the whole HR function.
An EOR, on the other hand, is the sole employer of record and assumes the associated liabilities and responsibilities. An EOR allows companies to work with employees in other countries without setting up a business entity there. As a result, it can be used for a portion of the workforce, complementing operations in the business’s home country.