What is an Employer of Record?

If you are considering going global, chances are you are slightly at a loss on the topic of employment. Should you rely on freelancers overseas or should you establish a hub? How to pay new remote teams? Is there a safe way to cut through the red tape and just get things done risk-free? Read on to find out how to proceed when venture out into the foreign markets.

EORs save time and effort for companies that decide to expand overseas. The risks are high if the plan is to enter a new market and stay there for good. Naturally, when landing in a new location, an employer of record is a viable alternative to money-wise demanding office establishment. Legal, budgetary and social burdens that a foreign business is subject to are a lot. So, relying on an EOR is a way out for companies that are testing the waters of an unexplored geo.

Does EOR always have to do with market entrance? Well, with today’s increasingly mobile and out-of-office nature of work, retaining top talent is increasingly achieved through the ability to hire them and pay them anywhere. If you are a European IT startup looking to grow, you are likely to go to India, the new IT capital of the world, where IT talent is abundant. To attract professionals, you need to be able to pay them safely and regularly. And this is where EOR services step in.

Last but not least, EOR provides safety for companies that are experimenting with new markers. When a company hires anyone, it needs to properly define their status. It is understandable that companies tend to hire freelancers and formulate their relationship with a hire as that of a business and a freelancer. Yet it is not always true. In fact, misclassification of contractors is a serious legal violation that is highly likely to cause at least fees, if not prosecution or banning altogether.

Since an EOR is a body that holds legal responsibility for employment on behalf of an employer, its functions are made up of HR and payroll management tasks. Put in simplest words, EOR is a layer between an employer and a worker that performs as a representative of the employer in a foreign setting.

An EOR’s tasks include, but are not limited to:

• Payroll, including tax withholding and employee benefits
• Managing insurance, such as workers' compensation and unemployment insurance
• Compliance, from drafting correct employment contracts to termination and offboarding conditions

However, it is still the company that manages staff. The actual employer is the company, so it is up to the company to fire or to hire individuals abroad.

To work with an EOR and use it as a representative, companies need to sign a three-side agreement with an employee and the EOR. The conditionals are generally along the lines of:

1. Company and Employee are in a direct work relationship, where the former is responsible for workload, tasks and performance management — everything and anything that is connected to the working process.
2. EOR is Employee’s legal employer. This means that on paper it is EOR that hires Employee and manages their payroll and tax. The amount of money paid is decided by Employer.
3. Employee follows and fulfills the obligations assigned in a work contract.

Choosing an EOR is an important decision that will be reflected in how a company grows, what people come to join it overseas and how safe it is abroad. It is reasonable to look out for the following characteristics in a prospective EOR partner.

• Is pricing transparent? Disturbed workforce is already expensive enough. If you are not entirely sure how much EOR services are going to cost, you may want to openly pose the question to the partner. In turn, if they offer no clarity, then it is probably an unreliable partner that may introduce hidden charges later.
• Do they provide accurate employee burden calculations? Normally, it is the EOR’s job to provide its clients with a careful calculation of how much money will be paid on top of the actual salary. Importantly, there must be a distinction between countries, if you are expanding to more than one geography. While there is some ‘average' percentage employers pay for their personnel abroad, your EOR must give you an accurate calculation (supplemented with sources!) so that you are fully aware of how much you will end up paying in salaries.
• Is there anyone to back up a given EOR provider? A third-party validation is a strong influence when making a choice. Consider relying on such software review sites like G2, Gartner and Clutch.co where users publish their opinions on providers. Another action to do to make a better informed choice is checking reports on industry leaders in EOR. Some providers from top positions may be too expensive, but cheaper options are listed too.

A Professional Employer Organization (PEO) is an alternative to an EOR due to some of its key differences. The primary difference lies in the fact that a PEO partially enters a co-employment arrangement between an employer and an employee. PEOs share responsibilities with a business by providing comprehensive HR services. Basically, it serves as an outsource HR team that hires and manages your team for you. Yet the company is responsible for legal and daily operations in a location.

Simply put, the difference is geography. A PEO cannot serve as a legal employer for a business’s distributed workforce because its primary role is an outsource HR department for local staff. On the contrary, it is an EOR partner that can position itself as an employer of remote workforce thus removing responsibility from the company.

Like any other business instrument, EORs have unique drawbacks and benefits. The most obvious benefit of working with an EOR is time and effort saved for businesses that need to employ abroad but do not have enough expertise in local employment regulations. Besides time economy, EORs make a company’s operations overseas compliant with local law. This is a crucial benefit in establishing a permanent presence in a foreign country for good. An Employer of Record provider helps navigate the risks and requirements of employment outside of a company’s home country. Although the context is primarily business expansion, sometimes companies may want to hire individuals in a different state without entering the state’s marker. In this case, EORs become key partners that make employment possible.

As for weaknesses of EORs, the major challenge is maintaining an honest relationship with employees. A situation where a person is hired by A but is managed by B may not seem sound and secure to workers. Employers that mediate hiring through an outside party need to communicate to their employees that they are still part of the big corporate family. It may not be obvious, but employee engagement is linked to this reassurance.

It cannot be stressed enough how important a proper choice of an EOR is. An EOR is going to be your representative for the foreign workforce. Ultimately, how your EOR treats your remote team has a direct impact on your HR brand. Therefore, the choice should be based on conversations with a prospective agent. Here is a list of questions to ask to form a deeper understanding of contractors.

Question 1: Will your overseas employees be legally hired? – The point of this question is to understand whether an EOR is registered as an employer with local tax authorities thus ensuring tax compliance. The purpose of an EOR is to take responsibility away from the company. If a provider doesn’t have proper requisites to operate as an HR and tax manager for your overseas staff, then it is probably best not to proceed with this partner.

Question 2: Are they going to employ directly? – Basically, what you need to find out is whether the organization hires staff directly or through a network of partner agencies. While it is not necessarily alarming that an EOR has a system of subordinates, it nonetheless signals that in case of an emergency or a mistake, reaction will take longer to come. The less parties are between you and your employee, the safer you are. Additionally, a probability of a mistake is in direct proportion to how many constituent parts there are in your HR system.

Question 3: What employment models do they use in different countries or in a country of interest? – Normally, EORs don’t openly share how exactly they manage their workforce. Although most EORs claim they can help with any geography, you may want to investigate on your end whether a country you are looking at allows EOR. For example, in Germany employment under EOR has a time limit of 18 months, and in France the limit is 36 months. So asking bluntly about how employees are managed law-wise after the limit expires is a necessary step to protect the business from breaking the law, albeit inadvertently.

Question 4: How do they keep data safe? – EORs manage huge bodies of highly sensitive data of people that work for you. Part of your responsibility for them is properly evaluating how safe data is with your EOR. It is crucial to review the security and privacy protocols of an Employer of Record to evaluate their adherence to both local and global data protection laws, such as GDPR and Schrems II.Furthermore, it is essential to determine the specific safeguards implemented to ensure the security of your data. Don’t be shy and ask about the physical location of the data storage servers, the disaster recovery and management strategies, threat detection systems, and whether they hold ISO27001 certification or are actively working towards obtaining it.

Question 5: What are contract termination conditions? – In other words, before you start, learn how to finish. Things may turn sour, so it is necessary to be aware of what your partner may demand in case you decide to cut the relationship. Find out more about the termination period and termination notice, as well as any fees that the company may be subject to.

An important thing to keep in mind is that EORs primarily support full-time employment. Although working with an EOR is easier than setting up your own HQs abroad solely for the purpose of hiring, often what your company may need is not staff but contractors that will build an MVP or set up a minimal working environment to introduce your product to a new country.

If you are looking for a simpler solution to help you transfer payment to your individual contractors overseas, then EasyStaff has you covered. EasyStaff is a freelance management platform that works globally. EasyStaff allows companies to pay their employees and contractors anywhere in the world in just a couple of clicks.

EasyStaff acts as an intermediary between a company and its worker, either part-time or full-time. For business, EasyStaff is a B2B partner. For workers, it is an employer. EasyStaff provides closing documents to both parties, so companies and employees are able to legally declare their income and spending.

EasyStaff is one of the fastest ways to cross borders and grow internationally. Finding more affordable workforce, establishing presence overseas, or relocating part of staff is easy with EasyStaff.