Employer of Record (EOR) Guide - Benefits & Risks
2. EOR meaning
A little over three years ago, the world went into global lockdowns due to a pandemic the likes of which we had never seen before. It was difficult to imagine the situation creating any positive opportunities. Yet, three years and a few vaccines later, that’s exactly what has happened.
One of these key opportunities is the way these last few years have opened our eyes to the various employment possibilities. Not only are employers engaging more freelancers, contractors and contingent workers, remote employment too, is at an all-time high.
And with good reason. Opening up your workforce to remote workers means you get to choose from a wider talent pool and enjoy the benefits of a globally diverse team. There are economic advantages too – you get to hire teams in more affordable cities, and can say goodbye to overheads like relocation costs. Moreover, it allows you to offer employees the flexibility of working from anywhere they please.
But it hasn’t traditionally been easy to hire people based in different locations because different jurisdictions are governed by unique regulations and labor laws. That’s where an EOR service comes in.
If you work with freelancers and contractors, you may be familiar with Agent of Record (AOR) services – third-party entities that ensure that your engagement remains compliant and legal, no matter where your workers are based. An EOR offers similar services for remote full-time employees.
There are many similarities between AOR and EOR services, but our blog ‘AOR vs EOR: Everything You Need to Know’ can help you to identify which one you need.
What is an employer of record (EOR)?
An Employer of Record (or an EOR) is a third-party entity that takes over your legal, payroll and HR responsibilities as an employer in various geographies. Simply put, they act on your behalf and function as an employer for your workers in new locations where you do not have a company presence.
EORs represent you only when it comes to the operational and legal side of things. Officially, you are still the employer. You will still be responsible for managing remote employees, guiding them on project-related matters and ensuring that they feel engaged and culturally included within your larger team.
Do note – when looking to hire remote workers in other geographies, you do have another option. You can opt for the services of Professional Employer Organizations (or PEOs). This too, is a third-party employer entity. The key difference between an EOR and a PEO is that while EORs take over your operational obligations completely as your representative, PEOs act as your co-employer, so you’d still need to bear shared liability of your responsibilities.
What is a Global Employer of Record?
Before we delve into the specific functions of an EOR, let us discuss another term you may come across as you seek to hire remote employees – Global Employer of Record.
As the name suggests, this is an EOR that functions at an international level. A Global EOR enables you to hire and manage workers in different countries, without first having to set up a local office there. Obviously, this brings immense logistical and financial advantages.
Importance of EOR
Now let’s look at the functions and responsibilities you can expect your EOR to take over for you. Here’s what they will help you with:
Hiring. Since you may not have recruitment capabilities in a new location, many EOR vendors offer hiring and personnel vetting services, either through strategic partnerships or via any in-house recruitment branches they may have. In these cases, you enjoy the kind of advantages you’d expect from staffing agencies.
Onboarding. Your EOR vendor will put together the right contracts and agreements in adherence to local labor laws. They will also gather tax forms and other necessary documents from your new hires, so you can rest assured that you are onboarding them legally and compliantly.
Payroll functions. Your EOR will store your employee data compliantly, pay their salaries on time each month, and ensure that the right insurance and tax deductions are carried out as required.
Perks and benefits. Mandatory benefits like vacation days and paid maternity leaves vary from country to country. For example, in the US, 12 weeks of maternity leaves are the norm, whereas in countries like France, mothers are entitled to 16 to 26 weeks of maternity leave. Your EOR will help you disburse the necessary benefits to your employees, while keeping in mind their statutory rights in that location.
Ongoing compliance. Your EOR will ensure you remain compliant with local labor laws throughout your engagement, even if those laws are changed or updated. For example, as of 2023, paternity leave policies have been updated as per EU law – fathers are now entitled to 10 working days off, where they must be paid at the same rate as the sick pay. Parents and carers are also entitled to have flexible work options. Your EOR will update you about these and other changes in a timely manner, and ensure you offer these benefits to your employees in that geography.
Termination protocols. Diverse laws and union rights dictate factors like severance pay, notice period and more. Should you need to terminate the services of a remote employee, your EOR will help you do this compliantly, with the right protocols.
How an employer of record benefits businesses
It gives you the ability to expand to new markets quickly
Typically, expanding to a new market requires you to apply for a host of licenses and registrations in that country. This takes time and money, and often involves jumping through various bureaucratic hoops.
Engaging Global EOR services lets you sidestep these obstacles, and start operating in a new country right away. The EOR in a particular country would already have the necessary licenses and registrations to operate as an employer on your behalf, so you can enjoy all the advantages while still remaining on the right side of the law.
It brings crucial cost benefits
Aside from bureaucracy, setting up offices in a new location can be expensive when it comes to paying registration fees, leasing premises, outfitting the office space and paying taxes. The other alternative is paying to have your remote employees relocate to your city – which can get expensive, especially if it involves an international move. With an EOR, all these cost challenges become opportunities for you to enjoy!
The other way an EOR brings you cost benefits is in terms of hiring your workforce. If you have an important project coming up but are based somewhere where the cost of labor is really high, hiring equally qualified employees in a different city or even country, may be the more affordable option for you. With the services of an EOR, this becomes possible.
It lets you work with the best talent, globally
Working with a Global EOR opens up the possibility of hiring the best talent from anywhere in the world, without having to worry about where they are based or whether they would be willing to relocate.
This is also a great way to attract and retain top talent as an employer. Workers today appreciate the flexibility of being able to work from anywhere – so if you are offering this benefit, they are more likely to choose to work for you rather than a competitor who requires them to uproot their lives to move to their location.
It lets you remain compliant
As we have discussed above, labor laws can vary greatly from country to country or even state to state – and these often get updated to accommodate new ways of working. It is not always possible to be conversant with the changing laws of every country – especially if you happen to be a small or medium business without the benefit of an extensive (and expensive) legal team.
An EOR takes over complete responsibility of compliance. If any laws are updated, it is their responsibility to notify you of the changes in your obligations as an employer. What’s more – if they fail to do so, or if there are any compliance issues down the line, it is the EOR, and not your company, who will be held liable. So you can truly be guaranteed your peace of mind as you venture into a new and unfamiliar geography.
It helps reduce risks
The most common risk that we have discussed so far is to fall foul of labor laws. But there’s also the risk of misclassifying your workers. Given their location and work flexibility, remote employees are sometimes wrongly classified as freelancers or contractors. But this can be seen as a serious misconduct by the tax authorities, even if not intentionally done.
There are lots of other seemingly small missteps that can mean grave risks in a new country. For example, you may be used to paying taxes in January in your home country – but in India, tax season for businesses is in October. Missing this date could open you and your remote employees to hefty fines. Likewise, the insurance protocols in a new geography may be completely different from what you are used to, and any errors can leave you liable. An EOR helps you reduce all of these risks and more.
Are there any risks associated with EORs?
Before you go ahead and opt for an EOR service, be aware of the risks you might come up against. Here are some common risks and how to avoid them:
Always ensure that the EOR you are about to engage has relevant experience in your target country. For example, a vendor may be well-known for their services in Europe but if they don’t have adequate knowledge of the labor market in Asia, they may not be the best option for your new remote team in Singapore.
Similarly, since an EOR also fulfills your HR obligations, it helps for them to have some idea about the way your industry functions. The more relevant their experience, the more efficiently they will be able to represent you as an employer.
Ensure that you sign airtight contracts with your EOR vendor, clearly outlining their responsibilities and liabilities. That way, you don’t bear the brunt of any potential negligence or missteps.
Time and growth limitations
You cannot operate indefinitely through an Employer of Record, and there are legal limitations to prevent you from doing so. In Germany, for instance, a worker can only be hired through an EOR (or an Arbeitnehmerüberlassung, which is the German equivalent), for a maximum duration of 18 months at a stretch. After that, you will need to wait for a 3-month cooling off period before you can engage the same worker through an EOR again. In other countries, you may be required to extend fixed-term, renewable contracts to employees, rather than being able to issue permanent contracts.
Similarly, the number of employees you hire through an EOR matters too. An EOR is meant to make it simple for you to set up operations in a new location quickly and easily, so that you can start exploring the opportunities within that market. If you are looking to expand beyond that, and continue operating there on a more permanent basis, a PEO would be more appropriate.
Normally, the EOR vendor you are considering will understand your goals, and advice you on these limitations and alternatives.
Limits on your powers as the employer
While you remain the employer, once under an EOR agreement, you may not always be able to override them to take certain actions. For example, when it comes to taking disciplinary actions or terminating an employee, you cannot proceed independently – you will necessarily need to implement them via the EOR.
This adds time and extra layers to your operational processes, but this is done to protect the rights of your employees and keep you compliant as an employer.
Limits on the functions of an EOR
By its very definition, an EOR only helps you with the operational aspects of hiring and managing remote employees. They cannot assist you with the other aspects of business like logistics, accounting, marketing or anything else.
Certain activities like seeking government grants or tax breaks may require you to have an incorporated entity in that country, so simply having an Employer of Record will not help in those instances.
Before signing on an EOR vendor, make sure you get a detailed breakup of their pricing so that you are not taken unaware by hidden costs later.
It is common for vendors to retain a certain amount as deposit for every employee they hire on your behalf. This helps to cover their salaries if there is a delay in payment from your end. In addition, the vendor may have setup costs, cancellation charges, extra taxes and more. All of these costs should be communicated to you, clearly and transparently.
How much does it cost?
This depends on the EOR vendor you opt for and the pricing model they offer. Some vendors charge a fixed monthly price per employee – and this usually ranges between $200-$500. Others charge you a certain percentage of each employee’s payroll amount.
If you wish to offer extra perks and benefits to your employees beyond what is legally mandated, your EOR vendor may disburse these on your behalf and add the cost to your bill. As stated above, it is important to establish these costs and pricing options beforehand, and ask about any extra or unexpected costs so you go into the agreement knowing exactly how much you’d end up paying.
How can TalentDesk help with EOR services?
With our extensive experience in helping our clients work with freelancers, contractors and external and remote workers, TalentDesk can work with you to find the best talent for your requirements and classify them correctly.
For more information on how to differentiate between 1099 and W-2 employees ➡️ read our blog.
If you realize that engaging global freelancers and contractors will sufficiently meet your project needs, we have in-house Agent of Record (AOR) services to help you manage those engagements compliantly. If on the other hand, you need to hire full-time remote employees after all, we can offer you EOR services through our partner.
Find out more about our EOR services and how it can protect your company.
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