If you find it difficult to source talent in your industry, you may benefit from assistance from a staffing agency. However, you may also need to look beyond your local talent pool.
As hiring remote employees based in different countries becomes more common, the need for employers to manage complicated matters of international compliance also grows. HR functions, like taxation, payroll, and employee benefits administration are notoriously complex when you have employees in different nations — or even just different states. Employer of record (EOR) services are your ticket to managing all this with relative ease.
Understanding the differences between a staffing agency and an EOR is critical to contracting the right services for your organization. In some cases, you might even benefit from using both. This article unpacks the problems staffing agencies and EOR providers can solve, as well as guidance on choosing the best fit for your organization’s needs.
Key Differences Between EOR Services and Staffing Agencies
EOR services and staffing agencies share many of the same purposes. However, they have different operational goals.
An employer of record handles the logistics and nuances of ongoing employment. In most cases, their job doesn’t start until an employee has already been sourced, given an offer, and accepted the job. Nonetheless, they are considered the employee’s legal employer.
A company benefits from using an employer of record when there are compliance implications to talent acquisition that they cannot easily overcome. For example, if the talent they want is based in a country, state, or province where the company has no legal entity that can employ them.
An EOR is Responsible For:
Payroll Management
This includes payroll processing, calculation, withholdings, and tax deductions which are particular to the geography of the employee in question. The EOR pays the employee’s salary, bonuses, etc. It bills these funds to the client who works with the employee.
This service ensures the client can easily work with the international talent they want whilst remaining fully compliant with the applicable law when having an overseas or out-of-state employee. They can, in fact, have many employees in various countries while taking on practically no administrative burden to manage individual currencies, taxes, and other similar issues.
Benefits Administration
Because an EOR takes care of remuneration compliance, they must also manage the employee’s benefits enrollment and co-payments. This includes any applicable benefits insurance policies, such as health, dental, vision, and life insurance. Benefits administration also covers benefits outside of regular pay and insurance, such as social security, unemployment taxes, workers’ compensation, and more.
Small businesses and startups can also make use of an EOR service for the sole purpose of benefits administration. An employer of record would likely have access to better benefits packages than they could offer using standalone benefits administration software or otherwise. Benefits are a keystone in recruitment. It is also an area where smaller employers often struggle to compete with large companies in the race for top talent.
Regulatory Compliance
From the perspective of the employee’s local government, the EOR is their only employer. An EOR therefore carries the onus of adhering to local employment laws and regulations.
For example, if the employee is legally entitled to paid time off (PTO) according to local laws, the EOR is in charge of the related administration. The EOR’s client, with whom the employee works, may not be in a country that has the same legal obligations regarding PTO.
Legal Services
EORs are typically responsible for legal issues that arise from specific employees. For example, if the employee requires particular certifications to do their job, the EOR must monitor that it is up to date.
What an EOR Cannot Do
While an employer of record takes care of all the legal aspects of employment, they are not responsible for providing direction to the employee.
The EOR’s client takes care of onboarding the employee, assigning daily tasks, goal setting, and performance management. If, for argument’s sake, they want to pay the employee a performance bonus, the payment would still be made via the EOR.
For all practical purposes, the employee is a part of the client’s workforce. This would typically be a long-term arrangement where the client wants their talent to enjoy the benefits of full-time employment (or part-time employment). If the client needs talent on a project basis, they could hire a contractor, a freelancer, or a temporary worker.
That being said, EOR services are a lot more comprehensive. Many EOR service providers facilitate the hiring of contractors or freelancers. You can even start off working with talent on a contract basis through an EOR and switch to a full-time arrangement without having to switch companies.
How an EOR Differs from A Staffing Agency
Conversely, a staffing agency is primarily accountable for sourcing employees on behalf of other companies. A company would typically engage a staffing agency when they don’t have an in-house recruitment team, or their hiring needs exceed capacity.
The staffing agency’s responsibilities typically include advertising the position, screening candidates, and holding preliminary interviews. Once the agency has shortlisted candidates, a hiring manager from the client company gets involved to make the final call.
Depending on the agency, they might also provide some extra services, including:
- Background verification: Most staffing agencies can verify an employee’s career, academic, and criminal history.
- Drug testing: Certain agencies provide pre-employment drug screening services that test for marijuana, cocaine, opioids, and other illicit drugs.
- Skills training: Staffing agencies that are focused on one specific niche will sometimes train employees as needed.
If they provide these recruitment services, the staffing agency will not legally employ the successful candidate. Their client is the employer unless they also need the services of an EOR. From the staffing agency’s perspective, the job is done once the client has extended an offer to their top candidate and the candidate has accepted it.
The pricing plans of EOR and staffing services differ, too. Since most EOR services operate under a recurring, subscription-based model, they’re generally more expensive than the alternative. Staffing agencies, on the other hand, typically charge a placement fee – which often comes in the form of a percentage of the employee’s pay.
Similarities Between Staffing Agencies and EOR Service Providers
The purpose of an EOR service is very different from that of a staffing service. However, a small technical similarity arises in the context of temporary worker placements.
Although a staffing agency is not technically the same as a temp agency, many staffing agencies offer temping services. In this case, the temp is an employee of the staffing agency, not the client. The agency handles the temp’s remuneration, benefits, and other requirements of employment (just like an EOR would) while they are stationed at the client’s premises.
Staffing agencies that offer temporary employees are often industry-specific and employ talent with relevant qualifications, such as an agency for substitute teachers. A client may need a temp in instances where a permanent employee is absent, or they need some extra hands on deck for a limited time. In this sense, a staffing service and an EOR are worlds apart. Let’s look at instances where using an EOR makes the most sense.
Employer of Record Use Cases
While EORs and staffing agencies can be used together, there are specific scenarios that call for one or the other. Consider the following common use cases for modern EORs.
Transitioning to an International Business Model
If your organization is planning an international expansion or hiring workers in a remote capacity, EOR services can simplify the process.
Besides acting as a legal entity of employment abroad, a lot of EORs will also help you source international talent. Without their help, you’ll be responsible for initial and ongoing talent acquisition all on your own – including education and employment verification, drug screening, orientation, regulatory compliance, and all of the other nuances that are involved in doing so.
You’ll also be responsible for maintaining compliance with all applicable employment laws, tax laws, and other regulations. Depending on local laws, that may require establishing a legal (taxable) entity in every country where a team member resides.
Embracing an EOR for your international business means you’ll enjoy payroll consolidation across all regions. This includes:
- Ensuring fair compensation across multiple countries with different forms of currency.
- Managing all payroll processes.
- Overseeing and ensuring tax calculations and deductions according to regional regulations.
- Maintaining regulatory compliance with all applicable labor laws, rules, and standards.
If your in-house HR team is well-versed in international labor laws and has the capacity to deal with all these regulations, you could manage all these pieces yourself. Most small companies can’t claim that to be true and, therefore, need the services of an EOR to source talent from a global pool.
A Fully Remote Team
Modern companies, especially web-based businesses, have access to a global talent pool. Increased accessibility has led to many employers building fully remote teams consisting of talent from all over the world.
While a global remote team has many advantages, the payroll and employment compliance of a scattered workforce is a hefty consideration. Generally speaking, an employer must set up and manage a legal entity in each employee’s country to legally employ them. Most small businesses don’t have the capacity to manage this in-house.
With an EOR, there is no need to take on the administrative burden. The services they provide make it possible for remote teams to hire and grow based on the skills they need, not the location of talent.
Consolidating Your Organizational Tech Stack to a Single Platform
In most cases, organizations that already operate internationally use several different software platforms to manage domestic and international workers.
With an EOR, much of this technology can be consolidated and condensed into a single platform that ensures consistency, scalability, and data security.
Employer of Record Pros and Cons
While employer of record services can be beneficial to many different business models, they’re not without their faults. Before making a long-term commitment to a specific EOR, take some time to understand the most common pros and cons.
Pro: Access to a Global Talent Pool
Top professional talent isn’t limited to just one country or one region of the world.
In fact, foreign-born workers comprised more than 18% of the total U.S. workforce in 2022. But with international regulations, governmental approvals, and the task of finding new employees to fill their open positions, building a global team is easier said than done. Employers who want to expand their presence and consider employees from other countries can easily do so with an EOR.
Pro: Saving Time
Utilizing the services of an EOR is a great way to save time. Since they handle recordkeeping, payroll, and benefits administration, your internal human resources team will have more time to work on driving productivity and producing quantifiable results elsewhere.
Pro: Maintaining Compliance with Regional and International Employment Laws
A scattered workforce can easily become a compliance nightmare. An EOR helps you maintain compliance with regional and international regulations – including the latest data privacy laws.
These regulations tend to vary greatly from country to country, and they’re often cited as major obstacles to international business expansion.
Pro: Managing and Mitigating Risks
Working with an EOR is a great way to minimize risks on behalf of your organization – including potential business, legal, and financial risks. Essentially, if there is ever an employment dispute, the EOR’s client has no contract directly with the employee.
Not only will your EOR cover payroll, insurance, and any potential workers comp or unemployment claims, but they’ll assume responsibility in other areas, too.
Con: Vulnerability to Sub-par Data Security
Global cybercrime is expected to cost businesses a total of $10.5 trillion by 2025. With so much at stake, it’s important to find an EOR that understands the importance of data security and goes the extra mile to safeguard the data on their servers.
Check for data security certifications and compliance with security laws in the employee’s country.
A more secure, but potentially more costly and admin-intensive option for accessing internal talent pools is a full-service professional employment organization.
Con: Higher Cost of Employment
Organizations that utilize EORs pay a service fee over and above the remuneration of the employee.
While EOR service providers charge a range of fees, retaining an employee via an EOR will always be more costly than paying the person outright. That being said, setting up an entity in a foreign country so that you can employ and pay the person legally may incur legal fees and taxes.
The benefit you gain from working with an EOR (and the added expense) is relief of administrative burden related to compliance. You also get the peace of mind that, since your EOR has expertise in this field, they’re probably doing a better job of foreign compliance than you would.
Staffing Agency Use Cases
Traditional staffing agencies offer vetted expertise as an instant solution to companies who need it. In addition, they can tap into a vast talent pool to source candidates for permanent employment.
Beating the Competition
Organizations that are operating in highly competitive applicant markets might choose a staffing agency to tap into new markets and gain an edge over their top competitors.
This is especially true for organizations that maintain a remote workforce, as they’re not necessarily limited to finding talent within the immediate area.
Targeting Specialized or Skilled Workers
Certain staffing agencies specialize in sourcing top talent within niche or specialty fields. These agencies vet workers, so employers know they’re receiving qualified employees. In some cases, the staffing agency might even provide some basic skills training.
Managing and Supervising the Workforce
Staffing agencies are often used by organizations that want to outsource their staffing functionality while still retaining control over day-to-day workforce management and supervision. This is popular in numerous professions and industries, including:
- Manufacturing
- Logistics
- Transportation
- Retail
- Healthcare
Staffing Agency Pros and Cons
Like EORs, staffing agencies also have their benefits and disadvantages. To ensure you’re making the right choice, take some time to review the most common pros and cons of traditional staffing agencies.
Pro: Sourcing Employees on Demand
On-demand staffing is the whole point of most staffing agencies. Some agencies can fill open roles within a day or two, while others might take a few weeks.
Most agencies only charge when an open role is filled, and many offer satisfaction guarantees. If you’re not happy with a specific employee, most agencies will replace them without any additional cost.
Pro: Reducing Business Liabilities
Because staffing agency software typically covers payroll, insurance, and employee taxation, employers who use these solutions to source temporary workers can reduce their overall business liability. It can also offer a segway into recruitment — agencies are a great way to test out a worker on a temporary basis before committing to a more permanent arrangement.
Pro: Improving the Average Time-to-Hire
It takes an average of 44 days to complete the hiring process for a new employee. However, much of this time is spent sifting through resumes and conducting interviews. If your team can’t wait six weeks for their new teammate, a staffing agency is a great way to get the help they need as soon as possible.
Con: Dealing with Turnover and Absenteeism
Some staffing agencies are plagued by bad workers and underqualified applicants. Unless they have an extensive screening process in place, it’s relatively easy for some of these workers to slip through the cracks and end up with a spot on your roster.
Con: Lack of Cohesion
Working together consistently can do a lot for your staff. Daily contact builds team collaboration.
Constantly outsourcing new workers whenever you need extra help means your workforce is in constant flux. In this sense, temporary hires make it difficult to build a cohesive and collaborative team.
Con: Losing Control Over Key Hiring Processes
Organizations that work with a staffing agency lose control over certain hiring processes. While this can be advantageous for some companies, others prefer to have input at every step for fear that a third party may overlook the ideal candidate.
Final Thoughts on Employers of Record & Staffing Agencies
Although there is some overlap in their benefits, employers of record and staffing agencies serve two very distinct purposes and are two very different concepts. Whether you choose to work with one, the other, or both, your choice ultimately depends on your business model and your specific needs.
Taking the time to properly assess your situation will help you make the best decision for your entire organization.
