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9 min read

What is an Employer of Record (EOR)?

What is an Employer of Record (EOR)

An Employer of Record (EOR) is a third-party HR provider that assumes the responsibilities of managing payroll, employee benefits, and risk management on behalf of a company. This saves companies time and money and is often used to hire international teams without setting up costly overseas subsidiaries.

Key Takeaways

  • An Employer of Record (EOR) is a service that enables companies to legally and compliantly hire employees in different countries without establishing a local entity.
  • The EOR becomes the legal employer for tax and employment law purposes, handling payroll, taxes, benefits, and compliance with local labor laws.
  • This allows the company to focus on managing the employees’ work activities.
  • This arrangement is particularly beneficial for companies looking to expand into new markets quickly and with reduced risk.

What is an Employer of Record (EOR)?

An Employer of Record (EOR) is an organization that manages payroll, benefits, and risk management for a company’s employees on its behalf, relieving the company of these responsibilities. The EOR serves as the legal employer of your staff, handling various administrative, legal, and compliance-related tasks linked with employment. While you control your staff’s strategic management, day-to-day roles, and functions, the EOR undertakes the backend HR work.

What can EOR Services do for you?

Now that you have asked, ‘What is an Employer of Record?’ you need to know what one can do for you. An EOR is an organization that takes on various administrative tasks and legal responsibilities and liabilities for a client company’s workforce. The following subsections outline the main functions of an EOR.

1. Payroll

One of the critical services offered by an Employer of Record is payroll processing. The EOR manages salary calculations, withholding taxes, and other deductions while disbursing timely employee payments. They also handle year-end tax forms, such as W-2s or 1099s, ensuring accurate reporting to the respective tax authorities.

2. Health Insurance

EORs are also responsible for providing appropriate insurance coverage to the employees. This includes workers’ compensation, health and dental insurance, life insurance, and other employee benefits. By outsourcing these services to an EOR, client companies can save time and resources and minimize potential risks associated with insurance management.

3. HR Compliance

An EOR manages legal employer obligations such as local payroll, taxes, and statutory benefits for workers in a country, making it easier for businesses to focus on hiring international employees without worrying about legal compliance. They provide guidance and assistance to companies in hiring employees according to local laws in every country or jurisdiction, ensuring compliant employment agreements and smooth entry into the international market.

4. Hiring Employees

An EOR will hire employees through local employment contracts; EORs play a pivotal role in maintaining adherence to local regulations and catering to employee needs. They can assist companies with their expertise in local laws regarding employment, helping them conclude contracts appropriately and efficiently.

In addition, EORs oversee employment agreements and establish the required processes for onboarding new team members. They also provide invaluable guidance when terminating an employee’s employment, reducing potential risks such as legal action, damage to the company’s reputation, and financial repercussions.

5. Onboarding

An Employer of Record (EOR) plays a crucial role in the onboarding process of a company’s employees. Taking over payroll, benefits, and risk management responsibilities ensures that all legal and administrative matters are handled efficiently and in compliance with local regulations. The employee onboarding starts with thorough background checks of potential candidates to mitigate any associated risks. As a third-party organization, the EOR ensures a smooth onboarding process, keeping the client company and its employees confident and satisfied with the transition.s

Employer of Record
The function of an Employer of Record

Employer of Record Services

Still wondering, ‘what is an Employer of Record?’ If so, understanding the services offered by an EOR might help.

1. Global Expansion

Employer of Record (EOR) plays a significant role in a business’s global expansion. As companies venture into new global markets, they often need help managing their global workforce and navigating the complexities of different labor laws in each foreign country. A Global Employer of Record, also known as an International EOR, uses their local knowledge in each location to help companies ease the global expansion process. This enables businesses to focus on their core operations and growth strategies without setting up local legal entities or hiring contractors.

2. Managing International Employees

An EOR can assist with various aspects of managing international employees. By partnering with a local EOR, companies can ensure that their international employees are onboarded, paid, and managed following the host country’s regulations. This reduces the company’s compliance risk and ensures a smooth onboarding process and a better employee experience.

Moreover, while adhering to local labor laws, EOR services can help with additional support, such as handling payroll, benefits, health insurance, and taxes. By leveraging an EOR, companies can access talent worldwide, efficiently manage diverse teams, and maintain high employee satisfaction.

In some countries, there may be specific regulations regarding the use of EORs. For instance, an EOR is only allowed for 18 months in Germany. After this period, the company needs to make alternative employment arrangements.

Utilizing an Employer of Record in the international context can significantly facilitate the global expansion and management of employees. Companies can save time and resources and minimize potential compliance risks, allowing them to focus on their market growth objectives.

Employer of Record Benefits

Critical to understanding what is an Employer of Record is understanding what an EOR can bring to the table for your business. A partnership with an EOR brings numerous benefits like compliance assurance, simplified payroll and tax management, and access to a global talent pool. This enables businesses to easily navigate the complexities of international employment and focus on their core operations, ultimately fostering growth and innovation.

1. The EOR Takes on Legal Employer Responsibilities

EORs ensure compliance with local employment laws, reducing the risk of legal exposure for companies. They provide the following services to maintain compliance:

  • Monitoring and adapting to changes in local employment laws
  • Proper documentation
  • Ongoing HR support
  • Background checks
  • Employment contracts
  • Benefits administration

EORs take on the legal and administrative duties associated with workforce management, eliminating potential legal risks for the company and ensuring adherence to local employment laws. These laws include:

  • Minimum wage requirements
  • Overtime regulations
  • Workplace safety
  • Anti-discrimination laws
  • Employee benefits mandates
  • Tax requirements

2. Streamlined Payroll and Tax Management

EORs simplify payroll and tax management by automating and streamlining HR, compliance, and tax-related tasks, allowing companies to focus on their core business activities. They manage:

  • Payroll processing
  • Tax filing
  • Benefits administration
  • Employment contracts

This provides significant savings in terms of time and resources.

The services offered by an EOR can alleviate the workload and ensure compliance with tax regulations. They leverage their expertise and local office infrastructure to:

  • Handle payroll processing
  • Ensure compliance with local tax laws and regulations
  • Manage payroll and tax withholdings for employees in different countries

3. Access to a Global Talent Pool

EORs enable companies to:

  • Access a diverse and skilled global talent pool
  • Foster innovation and growth
  • Assume the legal employer role
  • Manage visa applications, insurance, legal compliance, payroll, benefits, taxes, employment contracts, and onboarding.
  • You can hire talent globally without setting up your legal entity in each country.

Collaborating with an EOR allows companies to:

  • Step beyond geographical boundaries
  • Leverage a global talent pool
  • Result in a more diverse workforce with broader skills, experiences, and perspectives.
  • Empower businesses to be more competitive and adapt to the ever-changing demands of the global market.

4. Compliance

Hiring an Employer of Record (EOR) allows companies to maintain control over their global workforce while ensuring high quality. By partnering with a reliable EOR, organizations can easily manage their remote employees without establishing local legal entities. This ensures that companies can focus on their core business while leaving the complexities of global employment to the EOR.

5. Risk Mitigation

Companies face various risks when expanding internationally, such as compliance with local labor and tax laws. An EOR helps mitigate these risks by acting as the legal entity responsible for ensuring adherence to local regulations. EORs stay up-to-date with changing laws and provide expert guidance, reducing the chances of non-compliance and potential fines.

6. Cost Efficiency

Working with an EOR can be a cost-effective solution for businesses looking to expand globally. The EOR handles payroll, benefits, and other administrative tasks, allowing companies to avoid the costs and time involved in setting up entities in each country. This also lowers the overall EOR cost, as organizations can leverage the EOR’s existing infrastructure and expertise without additional investments.

In summary, hiring an EOR allows companies to control their global workforce, maintain quality, mitigate risks, and operate cost-efficiently. This partnership will enable organizations to expand into new markets without the burden of handling complex international employment processes and compliance requirements.

What is an Employer of Record vs a PEO?

The Professional Employer Organization (PEO) is a different HR model from EOR’s. The PEO acts as a co-employer rather than the sole legal employer of staff.

The PEO and Staffing Company Solutions are usually considered inappropriate when a company hires overseas without an existing entity.

Downsides of an Employer of Record

Despite the many advantages of using an Employer of Record (EOR), there are potential downsides that businesses should consider before opting for this model. This section will highlight two key drawbacks: Workers’ Compensation and Termination Processes.

1. Workers’ Compensation

One challenge that companies may face when using an EOR is navigating the complexities of workers’ compensation policies and regulations. Depending on the country or jurisdiction, the EOR and client organization may share liabilities for workplace injuries, illnesses, or accidents. This can lead to potential legal issues or disputes between the EOR and the client organization regarding the responsibilities and financial burdens associated with such incidents.

Moreover, EORs typically have workers’ compensation insurance, which may only sometimes align with the client organization’s policies or expectations. This can create discrepancies in coverage, premiums, and overall risk management strategies. Businesses looking to work with an EOR should thoroughly understand the EOR’s workers’ compensation policies to avoid surprises or misunderstandings down the line.

2. Termination Processes

Another downside of using an EOR is the increased complexity and potential confusion surrounding the termination of employees. As the legal employer, the EOR handles all aspects of the termination process, including adhering to local labor laws, issuing final paychecks, and providing required documentation. However, the client organization still controls the decision to terminate an employee.

This dual practical and legal responsibility can create confusion and potential legal issues if the EOR and client organization need to be fully aligned on the terms and conditions of employee termination. To mitigate this risk, the EOR and client organization must establish clear communication channels and agreement on each party’s roles and responsibilities regarding terminations.

In conclusion, while using an EOR can bring numerous benefits to an organization, businesses must be aware of the potential downsides and take necessary precautions to ensure a smooth partnership with an EOR.

3. Cost Considerations

The cost of using an EOR depends on factors such as location, services offered, and the number of employees, with fees often charged on a per-employee basis.

While an EOR solution usually means significant savings for providers, in some cases, it will be more cost-efficient to hire independent contractors. In doing so, the company needs to be extremely careful to avoid the risk of employee misclassification.

Global Employer of Record Services: The Future of EOR

1. Hire in Emerging Markets

In the coming years, the role of Employer of Record (EOR) is anticipated to expand significantly as businesses continue to target emerging employment markets. Companies will increasingly rely on EOR services to simplify hiring processes in multiple countries, navigating complex labor laws and regulations. By partnering with a third-party EOR, organizations can streamline their global expansion efforts and remain compliant with local regulations, fostering sustainable growth.

EORs will help businesses attract and retain the best talent in these fast-evolving economic landscapes. Companies are more willing to invest in high-potential markets as the EOR model takes the burden of complex legal and administrative tasks off their plates. Additionally, EORs contribute to a stronger employer brand by ensuring a cohesive onboarding experience and benefits administration for new hires.

2. EOR and Remote Employees

The remote work trend is here to stay, with many businesses embracing distributed teams and remote employees. EORs facilitate smooth employment relationships between companies and their remote workforce. EORs help companies legally employ international workers in different target countries while managing payroll, taxes, and human resource tasks.

As the demand for remote work grows, EOR services will likely gain even more prominence. Companies with distributed teams can significantly benefit from the expertise and solutions offered by EORs, avoiding potential legal pitfalls and ensuring a positive work experience for remote employees. With the help of EORs, businesses can continue to expand their global reach and access top talent without the burden of managing complex international employment tasks.

Frequently Asked Questions

Using an Employer of Record (EOR) offers several advantages, such as managing payroll, benefits, and risk management on behalf of a company, thus relieving the company of these responsibilities. It also simplifies international expansion, as an EOR can employ and pay full-time employees globally without the need for a foreign subsidiary.

Security deposits are financial instruments that serve as insurance against potential risks and uncertainties. They safeguard both parties involved in a business arrangement, providing a financial cushion that can be accessed under specific circumstances. In the context of EOR services, security deposits are intended to mitigate risks that could arise during the partnership between the EOR and the client company.

EOR Security Deposit

An EOR is responsible for ensuring compliance with local labor laws, including tax withholding, reporting, and payment of payroll taxes. They handle employee contracts, hiring, and onboarding, and ensure that contracts comply with applicable laws and regulations.

The cost of using an EOR service depends on the provider and the scope of services required. Some EORs charge a percentage of the employee's salary, while others may have a flat fee or a combination of both. It's essential to discuss pricing structures with potential EOR providers before making a decision.

An Employer of Record is similar to a Professional Employer Organization (PEO) in that both handle employment administration. However, an EOR becomes the legal employer of a company's workforce, while a PEO typically enters into a co-employment relationship with the client company, sharing employment responsibilities.

Yes, an Employer of Record can be used for global employment. A Global EOR enables companies to employ workers in different countries without establishing a foreign subsidiary or navigating complex international employment laws.

When selecting an EOR, consider factors such as the provider's experience, reputation, and expertise in the target country or industry. Additionally, evaluate the breadth of services offered, responsiveness to client needs, and pricing structure. It's important to choose a partner that aligns with your business goals and requirements.

Article By
Managing Editor
Milly is an international lawyer and tech entrepreneur who has advised companies on expanding globally for over 5 years. She is an advocate of remote hiring and regularly consults on future of work matters. Milly founded RemotePad to help employers learn more about building and growing international teams.