If you’re a global business or a business on the verge of global expansion, you might have heard the term employer of record (EOR) batted about. It seems like a great do-it-all solution to make employing your new global employees a breeze, but there’s a lot you need to know about an EOR before you decide it’s the right solution for your organization. Here’s everything you need to know.
What is an EOR?
First things first, what actually is an employer of record? They’re a business which will become the legal employer of a worker in a certain county. The EOR will legally employ the talent on your behalf, so you can hire, pay, and insure employees in a place where you don’t have a legal entity set up.
They’ll handle all the payroll, tax, benefits and HR administration. The only thing you have to worry about is the day-to-day management of the employees.
How does an EOR work?
Hiring an EOR sounds easy enough – they do the work for you – but it’s important to understand how an EOR works if you’re planning to use them.
1. Hiring
This is the step you as the employer needs to start with. It’s up to you to find the local talent in your chosen country.
2. Employment compliance
Once you’ve selected your chosen talent, the EOR will then take over the hiring process. They’ll onboard the employee and figure out all the paperwork such as contracts, payroll, HR, and benefits in an efficient and locally compliant manner.
3. Payroll & HR
Each month your EOR will be in charge of running the payroll for your employees, including calculating any taxes, deductions, or changes which need to be made. They’ll also handle any HR admin you might have with your employee such as address changes, holiday entitlement calculations, or sick leave payments.
4. Risk management
Most EOR’s will assume the responsibility of risk management when hiring. This includes workers compensation, employment liability and other employment-related insurance coverage. Beware that this might not always be the case—check the fine print of your agreements to understand exactly what you’re liable for, keeping a close eye for indemnity clauses that transfer liability back onto your organization.
5. Termination
If an employee’s contract needs to be terminated, then this is a process which your EOR will manage for you. Ensuring that all paperwork and processes are done legally and compliantly.
6. Billing
The way that the billing works for an EOR is that your company will be billed for each employee’s salary, benefits, and any additional services, plus a fee on top for the EOR services.
EOR Benefits and Risks
Once you’ve got a clearer understanding on what and EOR is and how it works it’s time to weigh up the benefits and risks of an EOR to understand if it’s the best suited solution for your organsation.
Lets, start by looking at some EOR benefits:
Cost savings:
Typically, hiring someone using an EOR can be more cost-effective than setting up a legal entity and employing them directly. However, it’s important to note that this is usually only the case when hiring five or less employees in a specific location. hiring a large number of employees then makes an EOR much more costly.
Streamlined compliance management:
Understanding and keeping up with local labor laws in all the countries where you’re hiring someone can be complicated. But making sure you play by the rules is important because slip-ups can lead to costly fines, penalties and poor reputation. Luckily with an EOR they will make sure that your company is following the rules in different countries.
Flexibility and scaleabity:
An EOR offers a level of workforce flexibity that traditional employment cannot match. EOR services provide employers with the flexibility to adapt to changing market conditions, project demands, or seasonal variations without the administrative burden associated with traditional hiring and layoffs.
They’re a good solution for ‘trialing’ expansion into a new location, as you can very quickly start employing in another territory with an EOR—and just as quickly withdraw from that location if things don’t go as planned.
Easy onboarding and offboarding:
To put it simply, they take the wheel on this process. A huge part of their job is the compliance and admin associated with hiring and firing employees making the whole process so much simpler.
International payroll expertise:
You might be a payroll expert in your local country, but it’s hard to be an expert in every country where you have employees. But luckily for you, your EOR will be an expert in the county you’re using them in, meaning when you don’t know the answer – they do!
Mitigating risks:
It’s an employer of records job to handle employment-related risks such as worker misclassification, wage and hour disputes and employee claims. This not only protects your business, but also ensures a fair and reliable payroll process, fostering trust and satisfaction among your employees.
Speaking of risks, let’s now take a look at the top EOR risks you need to be aware of:
- Your new hire is not actually employed by your company, this means it can be more complicated to enforce certain employment conditions.
- Data protection can be a risk since you and the EOR will need to transfer any personal data between the businesses.
- You don’t know how an EOR will treat your employee, meaning that the EOR’s processes might not be to your company’s standards.
- The EOR is in charge of keeping everything compliant, and if something goes wrong your employee could end up with issues because of this.
- EOR agreements often include an indemnity clause which transfers liability back to the hiring organization. This can increase the risk of an EOR, as one of the big selling points is that liabilities and responsibilities relating to compliance in your new territory is covered by the EOR company.
- EOR’s are usually helpful in managing social security compliance, but they might not be at advising you on corporate tax liabilities which are associated with hiring globally. This could leave you open to legal challenges and fines if not dealt with properly.
EOR costs
The next big factor when looking at an EOR is, what does it actually cost? Unfortunately, there isn’t a simple answer to this as it’ll all depend on the company that you use, the services that you require and the number of employees you have. But these are some of the common EOR costs which you might need to consider before selecting this as an option for your business.
- Set up fees
- Monthly service fees
- Additional service costs such as HR support, benefits admin or tax advisory
You’ll need to compare how these costs are vs some of the alternative payroll solutions, in-house payroll or payroll software might seem cheaper in the short term but consider what the cost is to your employees.
How to choose an EOR solution
If you’ve gotten this far into the decision-making process and you’ve decided on using an EOR service for your global hiring needs that’s great! But there’s still some decisions to make – like how to choose the best EOR solution for your business. The market is absolutely flooded with different providers with a range of offerings and prices, so before you have a quick google and select the top option let’s look at some of the considerations and questions you should be asking a potential provider.
Considerations:
- Global expertise: You need to make sure they know what they’re doing when it comes to international employment laws, customs and communication.
- Risk mitigation: Assess what the EOR’s approach to this is, and their ability to handle any unexpected challenges.
- Transparent costs: EOR’s have a range of things they bill for, find out what’s included in your package and what the costs will be when you need anything additional from them.
- Technology: Find out what system they use and how it works with what you do.
- References and reviews: Find out from real life clients of the organization what they’re like to work with.
- Flexibility and scalability: Find out how you can customise your EOR experience to suit your business’s needs, can you choose specific services and not take others.
- Security: You need to know that your data and employee’s data are safe.
- Employee benefits: Make sure that the EOR you’re selecting can provide any employee benefits you’d like to offer an employee.
- Onboarding process: How easy is it for your employees to actually be onboarded to the EOR service?
- Customer service: How are they going to handle any questions or concerns you might have?
- Exit strategy: Can you leave? You need to ensure that you understand the terms and conditions for ending the agreement with the EOR if the solution is no longer working for you. Look at any costs, obligations or risks that might be included.
We have a full list of questions to ask a potential provider if you need help with how to find out this information.
EOR vs. alternative employment methods
If you’re still not 100% sure that an EOR is for you, then there are a few alternative hiring methods (other than direct hiring) which could be an option for your organization.
Staffing agency
What is a staffing agency? Sometimes also called international staff agency or staffing firm, a staffing agency essentially does the bit that an EOR doesn’t offer—they help you find your international talent. They specialize in finding the right personnel for your company, whether it’s for temporary positions, short-term projects, or permanent roles. The services which they offer are:
- Temporary staffing solutions
- Recruitment expertise
Find out how a staffing agency compares to an EOR.
Professional employer organization
A Professional Employer Organization will “co-employ” a worker with you. This arrangement could be invaluable. It’ll save you time and allow you to focus on your business and your customers. HR related responsibilities such as payroll processing and administering benefits are time consuming and complicated. The differences between a PEO and an EOR are:
- The employment relationship, this is how you hire someone!
- Legal liability
- Control over HR admin and functions
- Scale – what size business they can handle!
Contractor
A contractor, or ‘freelancer’, is an individual hired to perform specific tasks or provide services for a defined period. Contractors are not typically considered employees and are responsible for managing their own taxes, benefits, and other employment-related matters.
How do you choose between an EOR and a contractor?
- How long will the length of employment be? If you only need someone short term, then a contractor might work better.
- Are you trialling a new location? An EOR can work – but it can be costly when using for a short period.
- Costs! With an EOR you’ll pay fees, as well as all the traditional hiring costs and benefits. With a contractor you just pay them a flat fee.
- Nature of work, do you need to work closely with them? Then an EOR might be a better fit!
- Is your business likely to scale up or down rapidly? Look at hiring a contractor as you can let them go much faster than a traditional employee.
Get started with an EOR today!
We think that’s probably everything you need to know when it comes to making the big decision if an EOR is the right fit for your business, but if you still have questions (like the ones we’ve covered above) then get in touch with us today to get started on your EOR journey.
Or if you’re not sure that an EOR is the right fit for your business, then we do offer international payroll services which might be a better fit for your business needs.