Legally hiring an employee in a new jurisdiction often requires formal registration with local authorities, making it a significant barrier to entry into new markets. An Employer of Record (EOR) solves this problem by locally representing the company as a legal entity and an employer, handling complex HR and compliance responsibilities on their behalf.
This article explores the value EORs offer, their drawbacks, and alternative approaches to HR outsourcing.
Key Features of Employers of Record
Employers of Record offer several valuable features that allow businesses to quickly expand internationally and hire talent from new markets. The fact that the EOR market grew by 120% in 2022 and is projected to grow by 40% to 50% CAGR through 2025 underscores the demand and value of EOR services for businesses.
Here are the features you can expect to find in a typical EOR service.
Compliance With Local Employment Laws
EOR services have a comprehensive understanding of local employment laws in each country or state where they have a legal presence. This allows them to:
- Ensure that employees are hired in line with local regulations.
- Draft employment contracts according to the requirements of each territory they operate in.
- Take the burden of red tape off a company’s shoulders, allowing it to focus on the tasks and projects that drive growth.
New Team Member Onboarding
EORs help employees seamlessly integrate with their companies by ensuring a smooth employee onboarding process. This may include the following:
- Preparing or verifying the required documentation, including contracts, identification and education credentials, and other job-specific formalities.
- Offering resources and support to ensure a positive environment in line with local labor laws.
- Enrolling the new employee in any benefits the client wants them to have as part of their employment.
Running Payroll
One of the primary functions of an EOR is to manage payroll in each of its client companies’ territories. The best EORs offer the following services in the domain of payroll management:
- Ensuring compliance with local payroll regulations.
- Taking care of taxation formalities.
- Making timely salary payments.
- Managing deductions and contributions.
- Ensure accurate record-keeping.
- Conduct audits.
As a result, EORs can save time, money, and effort for their client companies, depending on the size and complexity of the business. They can be a cost-effective alternative to standalone global payroll software solutions.
Processing Contract Terminations
Employee contract termination can be a complex process for businesses that have team members in multiple countries. As EOR services are experts in local compliance, they can help enterprises to offboard employees smoothly.
The formalities a robust EOR service can manage may include:
- Calculation and payment of severance pay.
- Conducting exit interviews.
- Processing final settlements.
- Taking point in any legal implications for the employee regarding the termination.
- Maintaining employee offboarding-related communication.
- Managing offboarding documentation.
Managing Benefits
In addition to payroll, EORs can also help their clients manage employee benefits. This includes but isn’t limited to the following:
- Help employers offer benefits tailored to the needs of employees in each country of operation.
- Aid in the strategic development of a benefits program and total rewards strategy. This is an avenue for smaller companies to offer benefits on par with larger employers — an essential component of attracting top talent.
- Streamline the process of employee enrollment into benefits programs by coordinating with the relevant stakeholders, such as health insurance providers and employee assistance programs.
- Align any perks and employee reward programs the client wants to offer employees with local regulations.
- Ensure continuous communication about the structure of the benefits program and any updates to it.
- Collect employee feedback about the benefits program and work with the employer to improve it.
Benefits of EOR Companies
EORs offer numerous benefits for organizations looking for seamless multinational expansion and recruitment from a global talent pool.
Global Workforce Expansion
One of the main benefits of working with EOR services is the ease of tapping into international talent pools. Companies wanting to expand internationally can hire employees seamlessly and compliantly in any of the EOR’s supported territories.
EORs have the advantage of local presence, legal expertise, and knowledge of employment regulations. This allows them to help their client companies navigate international labor markets efficiently and systematically.
Risk Management
EORs mitigate risk for their client companies in multiple ways. By becoming the legal employer in employees’ territories, they take on the burden of regulatory compliance. They, therefore, provide legal protection to the client in situations where compliance or other legal issues arise.
If, for example, there is a requirement for the employee to hold a particular registration or certification to perform their job legally, the EOR would ensure they comply.
Since EORs understand the local regulatory environment, their knowledge and expertise minimize the chances of any missteps in setting up and operating an international business. Naturally, this protects the client company from incurring fines and other legal fees due to a misstep.
Cost Efficiency
Depending on the size and complexity of the client company’s business, EORs offer significant cost savings. These savings come from circumventing the requirements of establishing legal entities in various countries of operation and outsourcing various legal, administration, and HR functions.
Because of their local awareness and networks, EORs can help businesses save time on administrative compliance tasks and avoid penalties and liabilities to which a new business may otherwise be vulnerable.
HR Support
EORs offer a full suite of HR services. This negates the need for a growing company to add a significant HR headcount to manage intricate compliance issues.
Although the typical scenario where an EOR features is with international employment, this is only part of the case. For example, a company with remote employees in various U.S. states may use an EOR service to ensure they adhere to different state laws.
Typical HR functions an Employer of Record can perform include:
- Global hiring
- Running pre-employment background checks (this can consist of checking for a criminal record or relevant registrations in the employee’s territory)
- Payroll processing and tax deductions
- Benefits administration
- Offboarding
- Ongoing employment compliance
Companies no longer need separate HR teams for their expansion plans when an EOR can be their one-stop shop for HR support in foreign countries or out-of-state branches.
Local Expertise
EORs offer valuable expertise in navigating local labor laws, contracts, payroll processing, taxation, workers’ compensation and benefits, and other essential operations.
Moreover, when working with an experienced EOR, companies tap into more than just a package of outsourced human resources services. They gain access to and benefit from years of local experience, networks, and proven methods of getting things done in different countries.
Focus on Core Business Functions
A powerful yet subtle benefit of hiring a global EOR is the time companies can save and redirect into focusing on their core business functions. Letting EORs manage HR, administration, and legal responsibilities buys companies more time to work on strategy, growth, and innovation.
Drawbacks of using EOR Services
An Employer of Record service is not a silver bullet for companies looking for global expansion.
Depending on your business requirements, there may be potential drawbacks to using EORs. Here are a few to watch out for.
Outweighed Costs
Before hiring an EOR service, companies should conduct a thorough cost-benefit analysis to see whether the EOR fees exceed the cost of operating as a legal entity abroad. For example, some countries have strict policies on foreign bodies registering a tax-paying business entity within their borders, while others offer a relatively simple solution.
Organizations need to take a long-term view of their operations in foreign countries before deciding whether they should opt for the services of an EOR. In particular, they must consider labor requirements and project timelines before signing up with an EOR.
Typically, when a company hires an employee via an EOR, it is for a full-time role. If the project only requires a short-term contract, filling the position via a local staffing agency may be sufficient.
Employee Experience
Another potential drawback of hiring an EOR is the risk of a poor or inconsistent candidate or employee experience. After all, EORs are third parties managing employees on a company’s behalf. They might not always be able to live up to the standards internally set by an organization.
A poor employee or candidate experience may result in reputational damage to the company’s employer brand. Therefore, organizations need to conduct research and vet the EORs they want to work with before signing up with one.
Data Security
According to the State of Cybersecurity 2023, the number of organizations reporting a cyber attack jumped by 48% compared to last year.
Working with an EOR means relying on a third party to manage sensitive employee data, such as social security and payroll information. This opens the company up to the risk of data privacy breaches and customer or employee data misuse.
Therefore, it’s essential to ascertain that an EOR meets industry standards for data backup, cybersecurity, and IT infrastructure to safeguard your data.
What Types of Businesses Should Consider EOR Services?
Working with an EOR may suit some organizations more than others. Some types of businesses can benefit significantly from the EOR model.
Startups and Small Businesses
Startups and small businesses are usually cash-strapped and operate under a tight budget. In addition, a small business may need more HR headcount to support constant policing for non-compliance under various laws.
EORs offer a viable solution for such companies to facilitate their expansion abroad, penetrate new markets, and support international employees.
Companies Considering Expansion
The EOR model is worth looking into for any organizations considering international expansion. EORs enable new market entrants to test the waters, validate products and services, and, should the need arise, exit the country without hassle.
This is a perfect way to limit the risk of establishing an international branch.
Short-term Projects
Companies looking to work on short-term projects abroad can significantly benefit from EOR services. The right EOR would help them compliantly set up operations, hire local talent, manage payroll taxes, and more.
The EOR model works well for short-term projects and offers a viable alternative to setting up a local entity. However, depending on the length of the contract and the expertise the client company requires, dealing with a staffing agency or directly with a contractor may be sufficient.
Tech Companies
Unlike industries that require employees to be physically present, for example, construction or manufacturing, the tech industry often benefits from the digital nature of their work.
Tech employees can efficiently work remotely and contribute to projects electronically, opening up possibilities for remote work and global hiring.
These factors position tech companies to leverage the EOR model to expand quickly and build a global team of experts from around the world.
EOR Alternatives
Even though EORs provide a comprehensive solution for global workforce management, they may not be the best option for certain companies, depending on their circumstances.
Here are some alternatives available to such organizations.
Professional Employer Organizations (PEOs)
PEOs are the primary alternative to EORs. They offer similar HR outsourcing services, including managing payroll and benefits packages and ensuring compliance with local tax laws.
“EOR” and “PEO” are often used interchangeably due to their similarities. However, this is a misclassification.
Unlike EORs, PEOs sign co-employment contracts with their client companies. This means the client company has to give up a certain amount of control over its operations for the partnership to work.
Another consideration when working with PEOs is that they are limited to their domestic markets. Therefore, companies with global expansion ambitions may be better off working with EORs.
Staffing Agencies
While EORs act as legal employers, the client company is still responsible for sourcing and recruiting candidates to employ.
Companies requiring assistance recruiting temporary workers may consider working with staffing agencies. These service providers help companies connect with top talent for short-term projects or full-time employment.
However, there are key differences between EORs and staffing agencies. Staffing services are limited in scope and well-suited to clients only looking to connect with local talent. They are not designed to help companies expand to multiple international territories.
Legal Entity
Companies that want to retain 100% control and ownership of their business may want to establish their own legal entity in each country of operation. This model comes with maximum compliance risk, where the company is responsible for fulfilling all regulatory requirements, including tax compliance.
For certain large businesses that require many employees in each of their international regions, establishing a legal entity may be the right way to go.
Final Thoughts on EOR
Employers of Record are strategic allies that can seamlessly help businesses expand internationally. They possess a deep understanding of the domestic regulatory climate, know the local employment laws, and have expansive business networks.
EORs can leverage these assets to help ambitious companies reach new markets without worrying about administrative and legal responsibilities.
However, whether EORs suit a business depends on its requirements, budget, organizational structure, and long-term objectives. Establishing a legal entity, working with PEOs, and using staffing agencies are other potential solutions for specific business needs.
For optimal results, organizations must conduct thorough internal and external research before charting out a way forward and committing to any solutions we’ve discussed.
