Updated: Jun 28, 2022
The quest for expansion often calls for new strategies to overcome market frictions. Small and medium-sized businesses looking to scale to other states and countries can leverage an employer of record to meet their hiring needs. An employer of record model is a smart HR solution that allows companies to expand into new territories where they are not legal entities without going through the process or expense of registering their business.
Usually, companies hire employees and take on the full responsibility of compliance, payroll, employment taxes, letting employees go, onboarding, benefits, healthcare, and so on. Not many businesses want to run that model. Some prefer outsourcing those responsibilities and liabilities to third-party companies specialized in hiring and managing employees. In contrast, the client company focuses only on core business processes and provides a conducive work environment for the employees.
This is where an employer of record comes in.
What is an Employer of Record (EOR)?
An Employer of Record, also known as a co-employer, is a third-party organization that takes on the responsibility of hiring and paying an employee on behalf of another company. The EOR is in charge of day-to-day employee management and handles other duties, such as submitting taxes, ensuring compliance with local laws, and other formal employment tasks.
In essence, a business hires a third-party organization to act as an employer of record while the employee works for the business or client company. An Employer of Records makes it easy for companies to hire and engage overseas workers, either in a different country or state, without being a legal entity in that region. The employer of record bears all the liabilities and responsibilities that typically come with managing the employees.
What Does an Employer of Record Do?
An employer of record acts as an intermediary between the original employer and the employee. This hiring solution is ideal for situations where the client company needs to hire a professional in a region or jurisdiction where it is not registered as a legal entity. So, the EOR model solution eliminates the need to establish a legal presence wherever the company operates, an undertaking that can be costly.
While the client company defines the work to be done and decides who to hire, along with monitoring the activities of the employees, the EOR performs the following actions:
In line with the legal requirements applicable in that country or state, the EOR is responsible for processing the payroll of all employees engaged by the original employer. Note that the EOR charges the employer a fixed rate for each hour the employers work.
In the eyes of the tax authorities, the EOR is the registered employer of staff. The client company is not involved in tax submissions. The EOR withholds payroll taxes from the employee remuneration and remits them as and when due to the authorities.
Mediates between the employer and government authorities
Since the employer of record is the only recognized legal entity, all transactions and dealing with the government in the local country go through the employer of record.
The EOR is also in charge of employee benefits, registering employees for retirement/pension funds, health insurance, and other workers’ compensation. It must do all these within the bounds of the law in that country.
Compliance with employment laws
The employer of record is equally concerned with ensuring compliance with local employment laws and providing workers with a conducive work environment if they are working in-office.
The employment contract exists between the employer of record and the employer, while the client company retains a consultation relationship with the EOR.
Hiring and termination of contracts
The EOR hires employees and is also in charge of terminating contracts, typically based on advice from the original employer or client company, as permitted under the law.
Employer of Record and Professional Employer Organization (PEO): What’s the Difference?
The PEO model solution is a popular outsourcing solution in the U.S. It bears similarities with the EOR model, in that it engages employees as a third-party intermediary between employers and employees, but there are striking differences between the two models.
They are different in several ways. An Employer of Record may exist as a solution under the international PEO model, but unlike PEOs, EORs do not share liabilities or employee management responsibilities with the primary employer. This, of course, is in addition to carrying out recruitment, payroll outsourcing, tax submissions, and employee management functions on behalf of the client company. See our article on international PEO for more details.
Here are some other differences between the Professional Employer and Employer of Record solutions:
The employment contract in an international PEO solution is directly between the employer and employee. With an Employer of Record, the employment contract is between the employee and EOR.
A PEO enters a co-employer partnership with the employer or client organization and the employer of record. Although the company still carries major responsibilities, the PEO shares part of the liabilities and helps to minimize compliance risks. The PEO facilitates a contract agreement between the client company and EOR.
The PEO provides a degree of cover to the client company, in that it shields the employer from issues, such as taxation and compliance with local employment policies. An EOR’s insurance, on the other hand, covers the employee and client company fully.
With international PEO, client companies need to register their company in all the foreign countries where they wish to hire new employees. With an EOR, however, there’s no need to register in multiple locations since the EOR is already a registered legal entity in those countries.
Benefits of Using an Employer of Record Solutions?
Instead of worrying about satisfying the local laws and staying compliant as a legal entity in every country a business enters, the smart solution would be to engage an employer of record. Aside from easing international or local expansion, other benefits include:
Payroll and taxation compliance
Offering competitive benefits packages
Proper classification of employees to avoid penalties and liabilities
Reliable HR and employee management solutions
No need for local incorporation
Limitations of Employer of Record Solutions
The employer of record solution has its benefits, but it also has some disadvantages.
Not Suitable for many employees: The model is a solution best suited for small businesses looking to expand into other territories. If the company is planning a major expansion, they might need many employees, hence they will need to get registered as a legal entity.
The original employer has limited control over the management of employees: many HR processes require the cooperation of the EOR. Unfortunately, if the EOR delays or refuses to cooperate, it can be frustrating, especially when urgent actions need to be taken. This delay in implementation may affect the business of the client company.
Limitations in employment conditions: some countries do not allow individuals to stay employed under an EOR arrangement for long. An example is Germany, which prohibits an EOR engagement over 18 months. In this instance, employers may need to consult an international PEO to sort out incorporation if they wish to maintain a long-term relationship with employees in such countries.
Using an employer of record is a highly effective way to scale your business across state and international borders. However, because of some limitations, it is better to go through an international PEO or a global PEO. This option offers more coverage, and you also get advice and help on how to incorporate your business in foreign countries. In case you have more questions about how to leverage an employer of record locally or internationally, we’d be glad to hear from you.
At Mission, we do not only offer businesses the services and solutions they need to scale internationally. We also bring our years of experience and rich insight to the table, providing businesses with answers to all their bugging HR and outsourcing needs. Contact us today if you have more questions regarding an employer of record solution and international PEO.