Employers of record (EORs) - meaning, purpose and benefits

Author: Preston Wickersham, Remote

Companies are realising the advantages of hiring workers internationally, but it can be tricky to recruit, pay and manage workers in foreign countries. If you don't have legal entities in the countries where you want to hire, working with an employer of record (EOR) is the easiest way to leverage a global workforce. As Remote's Preston Wickersham explains, it's a cost-effective approach that minimises the many risks of global expansion, whether you're a startup, a small- or medium-sized business or a large enterprise.

What is an EOR?

An EOR - meaning employer of record  - is a service provided by a third-party company. It enables you to hire people in other countries by acting as the legal local employer on your behalf. The EOR takes on all the legal and compliance obligations, while you retain the day-to-day relationship with the team member as usual.

While they are primarily used for this purpose, EORs can also function domestically. In some countries (like the US, Canada and Australia), different states or provinces have different taxation and employment requirements. In situations like this, a local employer might choose to partner with an EOR just to simplify their HR processes.

EORs typically take on HR administrative duties, run payroll, provide compliant benefits and manage taxation obligations. They serve as the employing entity, so when you partner with an EOR, you don't need to establish a legal entity in your hire's country.

You also don't need to spend time, money and resources on building the required knowledge in-house. The best EOR providers guide you through every step, with in-built local expertise and strict guardrails to keep you compliant.

What are the responsibilities of an EOR?

EORs handle HR activities, payroll, taxation, legal issues, compliance and benefits for your global team members. However, these responsibilities can vary from company to company - as can the ways your EOR provider handles these duties on your behalf.

The most common responsibilities of an EOR include:

• onboarding employees;
• paying your employees in local currencies;
• administering employee benefits packages;
• withholding taxes;
• filing tax forms;
• making contributions to government programmes (like social security); and
• maintaining compliance with evolving local labour laws.

What are the benefits of using an EOR?

1. No need to set up multiple legal entities to employ global workers

If you're planning to hire in multiple countries or you don't want to set up your own entity in a specific country, an EOR allows you to hire quickly and easily. This makes it much easier to tap into global talent and explore new business opportunities.

2. Access to local experts on tax law and regulations

With the local expertise of an EOR, your company is free to focus on its core business functions without worrying about compliance and administration. It's the EOR's job to navigate all the complex and unfamiliar tax and labour landscapes - not yours.

3. Comprehensive understanding of local statutory benefits

With an EOR, your business doesn't have to worry about meeting its benefit obligations, such as paid leave, healthcare and retirement contributions. 

4. Fast onboarding of new workers

EORs facilitate the onboarding of new employees by handling administrative tasks such as employment contracts and payroll setup. This means your company can hire new talent quickly and efficiently, even in unfamiliar markets.

5. Intellectual property protections

EORs help protect your company's intellectual property (IP) from theft or misuse by ensuring contracts are watertight. This is essential in global operations where IP laws may vary.

6. Fewer classification risks

Using an EOR can help mitigate risks related to worker misclassification - the erroneous categorisation of employees as independent contractors or vice versa. Such misclassifications can lead to significant legal complications and penalties. EORs have the knowledge to classify workers correctly according to local laws, which greatly reduces the risk of unintentional misclassification.

7. Less paperwork

With an EOR handling the administrative responsibilities, your paperwork is significantly reduced. From payroll processing and tax filing to benefits administration and employment contracts, EORs streamline these processes so your company can concentrate on strategic tasks instead.

8. Acceleration of your global expansion plans

EORs can significantly speed up a company's global expansion efforts. They offer a quick way to employ staff in new markets without the need for a legal entity, accelerating go-to-market timelines and facilitating swift growth.

In short, for any startup or established business that's expanding internationally, using an EOR service can result in a significant reduction in time, spend and headaches.

What's the difference between an EOR and a PEO?

PEOs (professional employer organisations) are fundamentally different from EOR services, although some people use these terms interchangeably to refer to global payroll services. From the outside, they can look very similar. After all, both handle HR tasks, including global payroll, benefits, tax withholding and reporting.

However, there are a few key differences:

• You must own your own local legal entity in a country to use a PEO. For example, if you are a UK-based company with owned legal entities in Spain and France, you can use a PEO in those countries. However, if you want to hire someone in Germany, you would need to either set up a legal entity there, or use an EOR.
• Working with a PEO means entering into a co-employment arrangement; working with an EOR does not.
• With a PEO, the final responsibility for compliance with local labour laws falls to you. If you treat your contractors like employees, this can create significant misclassification risk. It's important to be aware of these risks and understand how to avoid them.

In terms of cost, it ultimately depends on your circumstances and goals. If you already have a local legal entity in your hire's country, then a PEO will likely be cheaper. If you don't, then it's usually more affordable to work with an EOR.

When should you use an EOR?

There are several situations when it may make sense to work with an EOR.

1. If you don't want to set up a new local legal entity

Establishing a local legal entity can be both expensive and time-consuming. In some countries, it can take months (or longer) and cost upwards of £100,000. Unless that makes financial sense for your business, an EOR is a simple, cost-effective solution to hiring international workers quickly and easily. You can have employees ready to work within days for a flat fee per worker.

2. You need to employ international workers for non-contract work

Although it's possible to use international contractors, not all jobs can be classified as contract work. Misclassifying employees as contractors opens you up to serious consequences such as fines and penalties.

3. When an existing employee relocates

As remote work becomes more commonplace, employees are less tied to one physical location. Workers today can move freely around the world without giving up their jobs. An EOR is a quick and easy way to retain employees who choose to relocate. With an EOR, you can even hire digital nomads moving from country to country.

4. You have concerns about worker classification

More and more countries are actively cracking down on employee misclassification, and employers must be careful and ethical about properly classifying employees. That said, definitions and enforcement vary from country to country. A reliable EOR partner will have local expertise to help you classify employees and contractors properly, thereby reducing your misclassification risk.

5. You need to protect your IP globally

Working with international employees and contractors can expose your intellectual property to novel risks if you aren't careful. Owned-entity EORs offer superior IP protection, which can give you peace of mind as you expand your global team.

6. You lack expertise in international tax and employment law

Hiring an employee in a new country means needing to learn how taxes work in that country, as well as complying with a whole new set of employment laws. Given how complicated these laws can be, it's unrealistic to expect to navigate all of them without outside help. An EOR understands these laws on your behalf and can help you navigate new employment markets with ease.

Five key steps to using an EOR to hire international employees

1. Research EOR providers

There are a lot of EOR providers, so choose the one that aligns best with your needs and budget. Practice due diligence and investigate a variety of EOR providers, their offerings and their price points.

2. Analyse customer reviews

No one tells the truth quite like a customer. Seek reviews and feedback from existing customers of the EOR you want to use. In particular, value feedback from reviewers with needs similar to those of your own business, as your experience with the EOR will likely be similar.

3. Consider the experience of your people

Since the EOR will handle your team members' payroll, benefits and other HR tasks, it's important to work with a partner that will treat your team with respect. These interactions include onboarding, getting paid and dealing with tax.

4. Pay your workers appropriately

To attract and retain the best talent, it's crucial to offer a salary that is competitive and aligned with local market rates. A good EOR can guide you in determining the right salary for your employees in regions where you may not have much experience.

5. Safeguard your IP

Your IP is the lifeblood of your business. Without protections in place, you could end up fighting costly legal battles in foreign courts under laws you may not know. Avoid the hassle by working with an EOR that provides the maximum protection for your IP and invention rights.

What are the alternatives to using an EOR?

If you don't want to use an EOR to hire international workers, you have two choices. You can either work with contractors or you can establish your own local legal entity.

Hiring global contractors

If you don't have a local legal entity and don't wish to use an EOR, you can still hire global contractors. This can be a great way to grow your business or handle time-sensitive tasks without onboarding new employees. However, if you treat your contractors like employees, this can create significant misclassification risk. It's important to be aware of these risks and understand how to avoid them.

Establishing a local legal entity

If you wish to hire employees in another country without an EOR, your only other option is to establish your own local legal entity. To do this, you must file the proper paperwork with local authorities and prove your case as a registered business. Note that each country has different requirements, which may include having a certain number of employees or even establishing a physical presence in the country.

In some countries, establishing an entity can be relatively painless. However, in others, it can take several months and cost tens of thousands of pounds. Ultimately, it depends on the location itself and your company's future hiring goals.

Establishing a local legal entity may not make sense for a handful of employees. But if you want to open an office and hire, say, hundreds of workers, opening a local legal entity may be the best option.

Using an EOR as an interim solution

If you do choose to establish an international entity, an EOR can help you accelerate your plans by allowing you to start employing local workers without waiting. You can employ your team members through the EOR until your local entity is ready, then transfer the employee agreements to your newly established company.