Employer of Record

Employer of Record (EOR): Definition, Types, Functions, Benefits, Drawbacks, and Costs

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what is an employer of record?

An Employer of Record (EOR) is a third-party organization that legally employs workers on behalf of another company. An EOR fully manages all employment aspects, including payroll, compliance, tax withholding, and benefits. 

The main types of employer-of-record (EOR) service providers are partner-dependent and owned-entity EOR service providers. The main functions of an employer of record (EOR) are payroll processing, tax compliance, employee onboarding, unemployment insurance, and termination processes. The main benefits of the employer of record (EOR) are simplified global hiring, compliance management, and streamlined payroll processing. The main drawbacks of the employer of record (EOR) are limited control over HR processes and potential misalignment of company culture.

An Employer of Record (EOR) costs a monthly fee per employee, ranging from $300 to $800. An EOR also charges an additional fee based on a percentage of payroll, ranging from 5% to 10% of each employee’s salary.

What is an employer of record?

An Employer of Record (EOR) is a service provider that acts as the official employer for a company, managing legal, administrative, and compliance responsibilities. An EOR allows companies to recruit staff locally or globally without the necessity of requiring local legal setups. Employer of record simplifies the hiring process and minimizes the administrative complexities of managing a global workforce, according to the 2021 research paper titled Employers of Record: The Solution for a Compliant “Work-from-Anywhere” Future? By Julia Hauck.

Employer of record (EOR) simplifies compliance, speeds up market entry, minimizes costs, offers access to global talent, and enables companies to focus on their main business operations. An EOR includes benefits administration, HR support, payroll management, tax and legal compliance, and employee onboarding. Companies need to opt for an EOR to concentrate on their core operations and reduce administrative workload. 

What are the types of EOR service providers?

The types of EOR service providers are partner-dependent and owned-entity EOR service providers. 

These employer of record (EOR) types are listed below:

  • Partner-dependent EOR service providers: Partner-Dependent EOR collaborates with third-party organizations in the regions where it operates, bypassing the need to establish its own legal entities. Partner-dependent EOR works with local organizations to handle employment tasks, while companies expand their reach without the need to establish their own operations in each country.
  • Owned-entity EOR service providers: Owned-Entity EOR establishes its own legal entity in a region where it offers services. Owned-Entity EOR has direct control over payroll management, compliance, and HR tasks and duties. This type of EOR service provider offers better stability and secure data protection.

How does an employer of record (EOR) work?

An employer of record (EOR) works by serving as the official legal employer for a company’s employees in a particular region or country. The process for involving an EOR involves key steps such as initial consultation, contract agreement, candidate sourcing, hiring process, payroll and tax management, benefits administration, ongoing compliance, legal obligations, employee management, and termination process and offboarding. The company provides its hiring needs to the EOR provider, signs a service agreement, and identifies candidates with the EOR assisting in sourcing or posting jobs. The EOR completes the hiring process, including background checks, contracts, and onboarding. It manages payroll, timely salary payments, and tax compliance. EOR handles administrative tasks too, and if necessary, oversees employee performance and the termination process. The service also helps with final payments and compliance with termination laws.

Which services do employer of record (EOR) provide?

The services an employer of record (EOR) provides include onboarding international employees, managing global payroll, handling tax filings, delivering benefits packages, compliance with local laws, and overseeing terminations and offboarding.

These EOR services are explained below.

  • Onboarding international employees: Onboarding international employees involves an efficient workflow where EOR handles the hiring process, prepares required paperwork, simplifies the onboarding process, sets up payroll and benefits, and offers continuous HR assistance. This allows companies to hire new employees without worrying about complex international labor laws. This service lets HR teams focus on strategic goals instead of administrative tasks, helps start-ups expand into new markets quickly, and opens global opportunities for freelancers. Remote is a global Employer of Record (EOR) company that allows businesses to hire talent internationally. Atlas HXM is another leading international EOR platform that simplifies the hiring of employees globally.
  • Managing global payroll: Managing global payroll helps with the challenges of paying employees in other countries. Payroll is managed according to local laws and regulations, such as social security contributions and tax deductions. This reduces the risk of legal penalties and fines for non-compliance. Handling global payroll facilitates HR processes and helps business owners grow at a faster rate. ADP, also known as Automatic Data Processing, Inc. is a well-recognized company known for outsourcing payroll and is currently operational in over 140 countries. 
  • Handle tax filings: Managing tax filing in a business workflow includes tasks like preparing taxes, filing returns, and reviewing them for accuracy. It helps HR teams ensure compliance with employee tax laws and start-up owners to focus on growing their businesses without worrying about taxes. Freelancers benefit from accurate filings that build confidence and legal advisors offer better advice with clear tax records. Companies like ADP and Papaya Global use these tax solutions to streamline operations and demonstrate the importance of effective tax management. 
  • Deliver benefits packages: Delivering benefits packages involves a structured approach to meeting employee needs, explaining options, creating appealing incentives, and managing enrollment according to compliance with regulations. This process helps HR teams simplify administrative work, allows start-up owners to attract top talent, ensures legal experts maintain compliance, and allows recruiters to offer competitive compensation packages. Platforms like ADP and Zenefits provide effective solutions for businesses of all sizes to handle benefits efficiently.
  • Compliance with local laws: Compliance with local laws involves identifying relevant regulations, conducting audits, and implementing policies to minimize legal risks and avoid penalties. Legal compliance helps HR teams adhere to employee laws, supports start-up owners in overcoming legal hurdles, assists freelancers with tax requirements, and allows legal consultants to provide accurate advice. Companies like Globalization Partners specialize in managing compliance services for businesses operating across multiple regions.
  • Overseeing terminations and offboarding: Overseeing terminations and offboarding involves managing exit processes, conducting interviews, and following legal processes to minimize disruptions. This service helps HR teams to maintain a positive company culture. Platforms like GoCo and ActiveCollab offer reliable solutions for managing offboarding processes seamlessly. 

What are the functions of an employer of record (EOR)?

The employer of record functions are legal employment, recruitment and hiring, employment contracts, onboarding, payroll management, benefits administration, tax compliance, legal compliance, termination and offboarding, and ongoing support and consultation.

What are the responsibilities of an employer of record (EOR) service provider?

The responsibilities of an employer of record (EOR) service provider are payroll management, legal compliance, benefits administration, and onboarding and employment contracts. 

These responsibilities of an EOR are explained below.

  • Payroll management: Payroll management means calculating salaries, ensuring employees are paid accurately on time, issuing checks or direct deposits, and managing federal, state, and local tax obligations.
  • Legal compliance: Legal compliance covers all employment policies such as drafting legally compliant contracts, and making sure regulations are followed on minimum wage, overtime, and workplace benefits. EOR helps businesses reduce legal risks and prevent expensive fines and penalties by keeping them up-to-date with legal changes
  • Benefits administration: Benefits administration makes sure employee benefits align with local legal standards, and designs an attractive benefits package that meets all employee needs, such as health insurance, retirement plans, and paid time off.
  • Onboarding and employment contracts: Onboarding and employment contracts guarantee that new hires are introduced into the company smoothly. Comprehensive employment contracts that completely adhere to local legal requirements are prepared. Every part of employment is taken care of from the beginning.

What are the benefits of using an employer of record (EOR)?

The benefits for an employer of record (EOR) are simplified global hiring, compliance management, streamlined payroll processing, and cost efficiency.

The benefits of using an employer of record are detailed below.

  • Simplified global hiring: Simplified global hiring allows companies to hire employees in new countries without the necessity of establishing a local setup. Simplified global hiring speeds up market entry and reduces paperwork, making it easier to find and hire international talent while overcoming common challenges.
  • Compliance management: Compliance management ensures that businesses follow local labor laws, reducing risks related to taxes, employee benefits, and other employment practices. Compliance management through an EOR plays a role in helping companies navigate the complexities of local labor laws and regulations in the countries where they operate.
  • Streamlined payroll processing: Streamlined payroll processing ensures timely payments and accurate tax withholdings across different regions. It simplifies handling multiple currencies and reduces the challenges of managing complex financial systems.
  • Cost efficiency: Cost efficiency is achieved by assigning HR tasks to an EOR, allowing companies to avoid the high costs of setting up local offices in different countries and hiring specialized legal or HR staff. This approach helps manage budgets better and allocate resources more effectively. 

What are the drawbacks of using an employer of record (EOR)?

The drawbacks for an employer of record (EOR) are limited control over HR processes, potential misalignment of company culture, compliance risks, and dependency on the EOR

The drawbacks of using an employer of record (EOR) are discussed in detail below.

  • Limited control over HR processes: Limited control over HR processes potentially leads to delays in decision-making and policy enforcement, which impacts project management and employee interaction. This reduced monitoring disturbs a company’s ability to promptly address workforce challenges.
  • Potential misalignment of company culture: Potential misalignment of company culture occurs as there are differences in values, goals, and operational standards, especially with remote and regionally distributed teams. This gap creates challenges in areas such as employee engagement and workplace dynamics.
  • Compliance risks: Compliance risks arise when local labor laws are not fully addressed, and lead to legal penalties and reputational damage for the client company. Each country has its own regulations, and companies face challenges if these are overlooked.
  • Dependency on the EOR: Dependency on the EOR creates risks for companies if the EOR fails to meet obligations or faces operational issues. This reliance limits flexibility because any problems faced by the EOR can directly impact business operations.
eor benefits and drawbacks

How much does an employer of record (EOR) cost?

An employer of record (EOR) costs a flat fee per employee, ranging from $500 to $2,500 per month, based on the service complexity and local market conditions. The cost of using an employer of record (EOR) varies depending on multiple factors such as the provider, the employee headcount, and their geographic location. Some EORs have a fee based on a percentage of the employee’s salary, ranging from 10% to 20%. An EOR incurs extra costs for specialized benefits packages, compliance consulting, or legal support. They charge an additional fee for onboarding new employees. An employer of record charges for additional services such as background checks or foreign transaction (FX) fees for currency exchange. This typically costs from $50 to $500 per employee. The total annual cost of using an EOR can be around $7,188 per employee.

What are the alternatives to an employer of record (EOR)?

The alternatives to an employee of record (EOR) are a global employment organization (GEO), a professional employer organization (PEO), establishing a local legal entity, hiring independent contractors, remote work arrangements, and staffing agencies. Global employment organization (GEO) allows businesses to hire remote workers without creating a local entity but does not take full legal responsibility for employees. Professional employer organization (PEO) operates under a co-employment model, where legal responsibilities are shared between the PEO and the client company. Establishing a local entity involves registering with authorities and complying with local laws but offers full control. Hiring independent contractors is a cost-effective option for short-term projects without needing full-time staff. Companies also hire remote workers directly to avoid an EOR and simplify the process. Staffing agencies help find workers but don’t handle legal responsibilities.

How to choose an employer of record (EOR) service for your business?

To choose an Employer of Record (EOR), the process begins with identifying specific hiring needs and the countries intended for operation. Research potential EORs with expertise in those particular markets and evaluate their credibility by reviewing client feedback and industry recognition. Analyze the scope of services they provide, and confirm they deliver the required assistance, including payroll processing, recruitment, and legal compliance. Assess their effectiveness in operations and their ability to run financial matters smoothly. Finally, check their technological capabilities and make the process easier.

What are the best EOR companies?

The best EOR companies are Deel, Omnipresent, Multiplier, Remote, Oyster, Globalization Partners, and Papaya Global. They are recognized for their tech-driven and user-friendly approach. These companies provide comprehensive services in over 150 countries. Each of these companies provides unique strengths that cater to various business needs and this makes them suitable choices for businesses who are looking to expand their workforce globally.

How to implement an employer of record (EOR) in your business?

To implement an employer of record (EOR) in your business, start by selecting a reliable EOR provider that matches your needs. As part of the EOR implementation, work closely with the provider to ensure compliance with local labor laws, tax regulations, and employee contracts. The EOR will take care of payroll, benefits, and compliance, while you manage the day-to-day operations. Clear communication is key to defining roles and responsibilities. Ensure proper training and a smooth transition to integrate the EOR into your existing systems. Regular monitoring of the EOR’s performance is essential to help optimize the partnership and ensure its effectiveness.

What is the difference between an employer of record (EOR) and a staffing agency?

The difference between an employer of record (EOR) and a staffing agency is that an EOR takes on legal responsibilities for employees, such as managing payroll, benefits, compliance with labor laws, and taxes, while a staffing agency focuses on recruiting and placing workers with companies. An EOR helps with legal and administrative tasks and the company retains control over day-to-day management. Staffing agencies do not handle the employment relationship directly and do not take responsibility for things like payroll and compliance. In short, the EOR serves as the legal employer, while the staffing agency acts as a facilitator for recruitment.

What is the difference between an employer of record and a professional employer organization (PEO)? 

The difference between an employer of record (EOR) and a professional employer organization (PEO) is based on how the responsibilities are shared. An EOR acts as the legal employer for the employees, handling things like payroll, taxes, benefits, and compliance with laws, while the company maintains control over daily operations. A PEO shares the legal responsibility for employees through a co-employment agreement, where both the PEO and the company are jointly responsible for employment-related matters. Essentially, an EOR is the sole legal employer, while a PEO shares that role with the company. 

When to use an employer of record (EOR) service?

An employer of record (EOR) service is used when businesses need to expand into new markets where they do not have a legal presence. An EOR helps in quick market entry. EOR service is used to manage remote or virtual teams, speed up global expansion, avoid legal and compliance challenges, reduce administrative burden, explore new markets, simplify client’s HR processes, handle employee misclassification risks, and for short-term or project-based assignments.

Is engaging an EOR easier than opening an entity outside the country?

Yes, engaging an EOR is easier than opening an entity outside the country. EOR simplifies global hiring as it handles employment contracts, payroll, compliance, legal matters, and tax obligations on behalf of the client company. With global EOR hiring, businesses can quickly expand into new markets without worrying about local setups.

What is included in an employer of record (EOR) agreement?

An employment of record (EOR) agreement includes a defined scope of services they provide, important clauses like assignment of employment, employee compensation, pricing and fees, confidentiality and data protection, dispute resolution mechanisms, and contract termination and liability. An EOR agreement is a complete framework that allows both parties to run their partnership conveniently.

Is an employer of record (EOR) better than a contractor?

Yes, an employer of record (EOR) is better than a contractor because it ensures legal compliance, minimizes legal risks and delivers benefits like retirement plans and health insurance. A contractor lacks job security and is only suitable for short-term projects with less stability and support.

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