The benefits of using EOR companies to expand your business internationally are clear, but there are nevertheless some financial and operational hazards that you need to consider if you use these services.
Below, I’ll explain the main EOR pitfalls that you should be aware of and how to make sure that necessary precautions are taken to minimize risks.
EOR Risk #1: Provider or Aggregator?
A main reason why companies go the EOR route is to avoid having to become well-versed in the employment laws and regulations of another country just to bring in 1-3 people into the team.
In practice, you need to make sure that the EOR company you choose actually has an entity in the countries that interest you, and is not simply an “EOR aggregator.”
There are two types of EOR companies: providers and aggregators. Providers are those who do the legwork of setting up their own entities in each of the countries they claim to operate in. They hire local payroll professionals who are proven experts when it comes to their country's labor laws. Then, they are able to provide those services to you via some paperwork and a nice software interface - for a fee.
EOR aggregators, on the other hand, may own some entities but mostly partner with other smaller EOR companies in each country they list on their website. They then set up more intricate paperwork, where they act as an intermediary between you (the client) and the company that will be officially employing your team member in their country. This is then presented to you via another nice software interface, also for a fee.
There’s nothing shady about going with an EOR aggregator, but it’s putting another intermediary, one with whom you’ll most likely have absolutely no contact, between you and your employee. Hence, if we’re talking about risk, it’s setting up more possibilities for something to go wrong or communication to fail.
To mitigate this, you need to read the fine print and figure out who’s ultimately liable for any fines or legal disputes that could arise from the four-part arrangement. Naturally, ask your potential EOR company if they have their own entity in the target country before signing with them.
If they are functioning as an aggregator, make sure you understand who ultimately your employees' EOR is and what kind of expertise they bring to the table. There should also be a plan set in place in case the EOR company separates from the aggregator and your employee isn’t left in a limbo (see point no.5 below).
EOR Risk #2: A Sense of Detachment
EOR hiring is more common in high turnover industries. It’s also telling that most EOR software companies also offer a contractor management product, where the ‘employee’ acts completely as an autonomous business.
The reality is that, in both arrangements, there’s a possibility that the overseas employee feels more like a one-man business, a ‘solopreneur’ who works for a large client, than as an employee in a company. Hence, it’s possible for them to feel a sense of detachment and even low commitment.
Naturally, the risk here is that your employee retention rate may be negatively impacted, and high turnover rates usually imply myriad other costs in constant recruitment, hiring, and onboarding. The good news, however, is that you can grab the bull by the horns and mitigate this risk through a solid and engaging company culture.
Take the example of eLearning Industry Inc., a Nevada-based learning platform. Speaking to its founder, Christopher Pappas, we learned that its EOR employees tended to feel more like they were working for themselves or even for the EOR. Pappas and his team decided to implement regular team-building activities and open more communication channels between all employees, regardless of their employment status. This, says Pappas, “helped bridge the gap and foster a stronger sense of belonging and commitment to our company’s mission.”
We heard a similar example from Alex Ugarte, an operations manager at London Office Space. His company hired a developer through an EOR, yet felt that: “Despite his technical skills, the developer struggled to integrate with our team’s culture of open communication and collaboration.”
This gave Ugarte and his team the push that they needed to overhaul their onboarding process, which now includes a more nuanced culture training. They also implemented regular check-ins for employees, and a project management tool to help with asynchronous communication and collaboration.
EOR Risk #3: Data Protection
In a nutshell, setting up an EOR employee opens up another possible point of failure for a data breach. The EOR model requires sensitive data from both the client company and the employee, such as financial, personal, and even health insurance information. Companies with EOR employees must ensure that their provider uses stringent data protection measures.
Several green flags should be looked for when vetting an EOR for data security, such as regular audits, partnerships with compliance monitoring firms, and data protection certifications like SOC 2 Type 2, ISO27001, and ISO27018. You can also implement your own data protection agreements with them, conducting your own periodic reviews between your IT department and theirs.
Your EOR provider should also regularly monitor its compliance with regional data protection requirements, such as GDPR (Europe) and CCPA (California). Non-compliance with such measures can lead to large fines, which can incur millions or a percentage of your turnover rate.
EOR Risk #4: Financial Risks
Aside from potential fines for non-compliance or not meeting regulations, there are other financial pitfalls that you need to be aware of when working with an EOR. The first one is cost inefficiency. This can happen if your team in a certain country ever grows to the extent that services charged on a per-employee basis may surpass the cost of setting up an entity there. Even from the start, it’s not a bad idea to budget how much you would spend on circumventing the EOR route and make sure that what you are paying is still under that.
You also need to watch out for hidden costs, such as service fees, mandatory benefits, and currency fluctuations:
- Other Service Fees: An EOR will regularly quote you a platform service fee and a per-employee monthly payment. To this, you need to add any severance and exit payments that you’d pay in such events or extra fees for onboarding, HR advice, and payroll management.
- Benefits: Make sure your final quote includes the benefits you’d pay for your employee, those mandatory in the country of operation, and any that you wish to add along with the base compensation.
- Currency Fluctuations: Many EORs' selling points are that they can pay your overseas employee in their preferred currency. While that’s great, you also need to consider the possibility of sharp drops or rises in the exchange rate and how these fees may add up on your end.
EOR Risk #5: Business Continuity
Using an EOR provider could also present business continuity issues, in addition to potential fines for non-compliance or non-meeting regulations. Any disruption in the EOR's services can directly impact your operations. If the EOR faces financial instability or legal troubles, your employees might experience service interruptions, leading to operational halts and employee dissatisfaction.
As explained above, this is compounded if you’re dealing with an aggregator and not a direct provider. That said, the aggregator would certainly have some measures in place to swiftly switch providers on your behalf in the event of any disruptions, so it’s definitely something to ask before signing. Other ways to mitigate business continuity risks from an EOR are:
- Due Diligence: Vet your EOR provider's financial health, operational history, and legal standing. Opt for established providers with a solid track record.
- Contractual Safeguards: Include clauses in your contract that protect your business if the EOR fails to deliver services, such as indemnification clauses and service level agreements (SLAs). An example of a SLA would be establishing a payment timeline, and penalties for any delays, or providing compliance reports periodically.
- Backup Plans: Develop a contingency plan for switching EOR providers or bringing employment functions in-house to ensure minimal disruption to your operations.
- Frequent Communication: Maintain open and constant communication with the EOR to address issues promptly and stay informed about any potential risks.
EOR Risk #6: Regulations and Compliance
Navigating regulatory challenges is always a risk when employing an overseas individual. While the EOR is there to minimize those risks and provide local expertise on the matter, there are still some possible difficulties you need to consider.
Regulations are always evolving, so it’s up to the EOR, provider or aggregator, to stay in-the-know and make sure you don’t get hit with any fines just because they failed to adapt to a new ordinance. Governments tend to provide a grace period for businesses and individuals to make the necessary paperwork if there are changes to make. If the EOR company does have local experts in each jurisdiction, they should be able to keep you compliant at all times.
Key Takeaways
To sum up, here are the top Employer of Record risks you should look out for and what to do about them:
- Provider vs. Aggregator: Ensure your EOR has its own entities in target countries to minimize communication failures and legal risks. Understand the distinctions and liabilities between providers and aggregators.
- Employee Detachment: EOR employees may feel less connected. Mitigate this by fostering a strong company culture, regular team-building activities, and open communication channels.
- Data Protection: Protect sensitive information by choosing EORs with strong data protection measures, regular audits, and certifications (SOC 2 Type 2, ISO27001, ISO27018). Ensure compliance with GDPR, CCPA, and other regional data protection requirements.
- Financial Risks: Watch for hidden costs like service fees, mandatory benefits, and currency fluctuations. Assess if the cost of EOR services outweighs setting up your own entity as your team grows.
- Business Continuity: Vet EOR providers for financial stability and operational reliability. Include contractual safeguards (e.g., indemnification clauses, SLAs) and have contingency plans to switch providers if necessary.
- Regulatory Challenges: Ensure your EOR stays updated with local labor laws and regulations to avoid legal penalties. Regular compliance updates and legal support are essential for mitigating these risks.
By understanding and addressing these key EOR risks before you sign up with a vendor, you’ll increase your chances of safeguarding your business and ensure a smooth experience for everyone involved.
