What is an Employer of Record?

What is an Employer of Record?

An Employer of Record (EOR) is a third-party organization that hires and pays an employee on behalf of another company and takes responsibility for all formal employment tasks. Using an Employer of Records allows companies to legally and efficiently engage with overseas workers either in a new country or state, without having to set up a local entity or risk violating local employment laws.

There are a few terms used to signify a third-party Employer of Record has been engaged, such as a local employer, local partner, local EOR, back office staffing, and in China, a FESCO (Foreign Enterprise Service Company).

What does an Employer of Record do?

The simplest explanation of an Employer of Record is a third party local entity, placed as an intermediary in an existing employee-employer relationship.  The EOR is charged with carrying out the legal and regulatory requirements of immigration, employment and payroll, but does not participate in day to day work activity.

In essence, the EOR is the registered employer for the worker, but does not have any supervisory or management role vis a vis the employee’s position.  The original employer maintains the substantive work relationship, making all decisions on compensation, position duties, projects and termination.

Specifically, the employer of record is the legal entity that:

• Arranges all visas and work permits for the employee, avoiding delays or refusals
• Provides a registered entity for running a local, compliant payroll inside the country
• Meets all host country labor laws pertaining to local contracts and worker protections
• Advises the client of required notice periods, termination rules and severance pay
• Is the host country interface between the employee and government authorities

Why Use an Employer of Record?

The reasons for using an Employer of Record are primarily to overcome the regulatory and cost hurdles when employing workers in a remote location.  Every country (and some states or regions) have their own employment, payroll and work permit requirements for non-resident companies doing business.  The challenge of meeting those rules can be a major obstacle to business expansion across international borders.

If a company has a commitment to a country, the DIY approach of incorporation, registration and running a local payroll may be worthwhile.  But for many companies just entering a new market, or smaller firms with limited HR resources, an EOR can be an ideal alternative.

The Employer of Record is typically used as the core of a comprehensive GEO (Global Employment Organization) solution, that makes foreign employment simple for any size company.  It is equally effective for both local residents and expats since it is in full compliance with the host country laws.  There is no reason to risk violating labor, tax and employment regulations when there is an EOR solution available in almost any country.

Benefits of Using an Employer of Record

There are many distinct benefits for a company to use an Employer of Record along with the related GEO services.  In many cases, the EOR has the greatest benefit when doing business in foreign countries, where the cost, complexity and compliance risk of local employment may be prohibitive.

No Need for Local Incorporation

If a company elects a DIY approach, the first step is setting up a local entity via incorporation and registration.  This of course can be time consuming and expensive, requiring skilled legal and accounting support to ensure compliance.

While some companies can justify the time and expense of setting up a foreign subsidiary, there are many instances where utilizing a GEO local Employer of Record is a better alternative.  The GEO already has a legal entity in place that can handle all aspects of payroll, employment and immigration requirements in the host country.  The EOR is an intermediary between the client-company and assignee, and has the network and expertise to ensure full compliance with all laws and regulations.

Immigration Compliance

Immigration policies and rules are constantly shifting, and there is increased scrutiny by foreign governments of work permits, visas and types of business activity.  This makes compliance the number one challenge for multinationals, and immigration violations can have lasting consequences for a company and its employees.

Instead of risking non-compliance with immigration laws, many companies choose to use a GEO solution and local EOR.  With this method, the staff on assignment are legally permitted to work in the host country, eliminating the issues with remote payroll, overuse of business visas and multiple entries into the country.   The GEO’s local partner handles all work permit and visa requirements, avoiding any complications or scrutiny from immigration authorities.

Running a Local Payroll in the Host Country

Most countries will require a company with employees on assignment to run payroll according to local standards with a registered entity.  The practice of ‘remote payroll’ (remitting by the home country payroll) is rarely permitted, especially for long term assignments.

A key aspect of running a host country payroll is the calculation and withholding of statutory deductions from pay, including pensions, health insurance and taxes.  The EOR takes care of all of these critical details, to ensure the payroll is accurate and compliant for each employee on assignment.

The EOR is the perfect employment solution, providing the required entity to run payroll with expertise in host country withholding and tax rules.  This ensure that there are no issues with local authorities and is the most cost effective means to quickly deploy employees abroad.

Limitations to Using an Employer of Record

Despite the benefits, there can be a few limitations to using an EOR, depending on the employment needs and business strategy of the company.

May Not Be Suitable for More Than 10 Employees in One Country

If a company plans a major entry/expansion into a country, they would probably opt to incorporate an entity, hire local experts and manage the payroll process on their own.  In that case, the EOR may only be an interim solution to get employees hired quickly.

The Employer Gives Up Control of Host Country Payroll Process

Some employers are reluctant to have a local EOR be the legal ‘employer’, although it is only for administrative purposes.  For some companies, this may be an entirely new concept and may run counter to traditional business ideas of direct employment.

Arms-length Employment Relationship for Company

Because the employment contract is between the EOR and employee, the company does not have independent standing to assert its rights locally and relies on the EOR to handle any claims.  However, the company’s contract with the GEO does give the company rights to have the EOR act in their interest and remain in compliance.

How to Choose an EOR Service

Choosing the right EOR service is essential given the pitfalls of hiring internationally.

A few core questions about core characteristics are important:

• Is the GEO that is managing the EOR a global company, with regional account managers?
• Does the employment contract they use align with your company’s interests?
• Has the EOR worked with companies similar to yours so they are capable of understanding your needs?
• What is the EOR’s service history and performance record?
• Is the EOR service the core business of the GEO company, or is it a sideline service?
• Do you need other services, or the EOR only?
• What is the contract minimum length for your company and the notice period for termination?
• How are their fees and rates set, and what is the timing cycle for invoicing and payments?

History of Employer of Records

The use of Employer of Records has evolved as global mobility programs have expanded and become more fluid.  The traditional multi-year foreign assignment has given way to shorter, flexible postings that can include one or more countries in a single year.

This trend made the DIY approach of incorporating in every market untenable, and the demand grew for local employment alternatives.  Companies began to explore options such as outsourcing payroll, hiring immigration attorneys and seeking local business partners to alleviate some of the regulatory burden.  But a more complete remedy was needed, allowing for the development of a single-source service that could manage the full range of local employment criteria.

The GEO EOR model meets a modern business need, to allow companies to quickly enter a new market and deploy workers legally and efficiently.

What is the Difference Between an EOR and GEO?

If you are unsure how an EOR differs from a GEO, there is a simple explanation.  The GEO (Global Employment Organization) is an international structure that utilizes EORs in each country of employment.  The GEO initiates the client relationship with the client/company, and then hands off the employee to the EOR for onboarding and payroll.

The GEO remains in an oversight role of the EOR/employee/client relationship, to make sure that all deadlines are met and that there are no issues with compliance.  While there is a single GEO structure, there are many EORs employing locally in multiple host countries.

What is the Difference Between an EOR and PEO?

A PEO (Professional Employment Organization) is another type of third party service that fulfills a similar, although less comprehensive, role compared to a GEO.  A PEO is most commonly used in countries like the US where there are different employment and reporting requirements between states and regions.

This can be too great a task for smaller companies to meet all of these rules on their own, so they will use a PEO for assistance.  The PEO does not take over the full legal employment role as a GEO EOR does, but can provide help with local payroll, registration and compliance steps.

What are the Alternative Options to Using an Employer of Record?

In addition to the PEO option, there are only a few real alternatives to the EOR solution.  Of course, a company can opt for a DIY approach, but that may be out of reach for some businesses, or is simply impractical.

For shorter projects or sales activity, a multinational has the option of hiring independent contractors to fill those roles.  However, this option has limits due to the low commitment of contractors, variable skill level and host country rules that constrain or prohibit contractor use.  There is also the risk that the IC is reclassified as an employee, bringing unexpected expense and compliance problems.

The Future of International Employment Using a EOR

The benefits of using a GEO local Employer of Record for international assignments become apparent when a company considers the cost and time involved for a DIY approach.  The EOR provides a layer of legal insulation for companies, as well as taking responsibility for the numerous elements required to employ workers abroad.

Clearly, the future of the EOR solution is assured, as more and more countries are changing local regulations on immigration and employment to prevent abuses and loss of tax revenue.  Companies must have a way to overcome this challenge of doing business abroad, the EOR is becoming a core strategy for employing both local citizens and expats.

The information in this article is subject to changes in local legislation.