What is an Employer of Record?

The ‘Employer of Record’ (EOR), sometimes known as the local Employer of Record, is a third party contracted to take responsibility for all formal employment tasks.  An Employer of Record can be useful for companies that choose not to directly employ a worker on assignment, either in a different state or foreign country.

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

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.

Employer of Record Definition

The simplest definition is a third party local entity, placed as 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

History

The use of EORs 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.

Differences 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.

Employer of Record vs. Available Alternatives

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.

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.

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.