EOR Guide: What Is an Employer of Record + Benefits and Risks
An Employer of Record can be essential to global expansion. Discover what it is, why you may need it, and how to choose the best EOR.
Published on November 25, 2022
Employer of Record (EOR) 📄When your company hires an employee, you are bound by law to assume responsibility for them and must comply with all mandated employment tasks, costs, and taxation. If you're based in one country, then such matters – while complicated – will likely be manageable. If you're looking to expand globally, however, the intersecting issues of international labor, payroll, and taxation laws will require careful handling and expertise to achieve maximum compliance.Sometimes, this means you have to open a foreign subsidiary. Other times, working with an employer of record (EOR) will suffice.Where an Employer of Record is essential to global expansion, you'll need to work with an EOR that provides the service you need in the country of your choice. Pilot, for example, provides employer of record services in 175+ countries all over the world.In the following sections, you'll discover what an EOR is, why you may need it, how to choose the best EOR, and why Pilot may be the best fit for your business.
What does EOR mean? 🤔EOR is an acronym for employer of record.
What is an employer of record (EOR)? 🔍An employer of record (EOR) is a third-party organization that acts as the full legal employer for your workers, assuming all responsibilities on your behalf. These could include onboarding, payroll, and management.It is important to note that EORs vary in the way they operate. For example, some EORs own their legal entities. Others, on the other hand, do not own entities and act as intermediaries instead. Finally, some EORs use a hybrid model where they own their entities while also serving as intermediaries.
What is a global employer of record? 🌏A global employer of record (or international employer of record) is an EOR with local entities set up in different countries worldwide. They allow you to hire international employees without going through the lengthy and expensive process of local entity establishment or risking violation of local labor laws. Partnering with a global EOR will allow you to hire, onboard, pay, and provide benefits to talent based anywhere in the world – quickly and affordably.
What are employer of record (EOR) services? 📋Employer of record services refer to those employee-related services that traditional employers are legally required to provide, such as:
- Global expansion strategy
- Human Resources management
- Risk assessment and mitigation
- Legal compliance
- Employment contracts
- Verification and security checks
- Benefits and compensation
- Stock options
- Termination, unemployment, and rehire
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What does an employer of record (EOR) do? 🕵️♀️On top of the services mentioned in the previous section, an employer of record can also assist a company in hiring workers based in other states. For example, a Califonia-based business could hire a worker in Illinois via an EOR.A reputable global employer of record (EOR), on the other hand, can also do the following:
- Help you hire a team member in another country without the risk of misclassification and non-compliance with local labor laws
- Pay employees in multiple countries
- Administers benefits for global employees per local labor laws
- Manage employees - regardless of their location
- Distribute employee stock options, where applicable
Employer of record benefits 👍Using an employer of record when hiring a worker based in another state or country can offer significant benefits. It can help you:
- Save time and money
- Comply with payroll and social contributions
- Deliver a competitive benefits package
- Avoid worker misclassification
- Improve compliance in specific industries
Save time and moneyOne of the many benefits of working with EORs is that they can save you time and money, especially in global expansion situations where you would have had to incorporate your own local entity.Working with a global EOR means you can hire your worker quickly without going through the legal rigmarole that often accompanies the creation of international subsidiaries. They're a lot cheaper, too!
Comply with payroll, local taxation, and social contributionsEORs are compliance experts and know their way around payroll, taxation, and social requirements, where applicable. In the US, these vary by state. Around the world, these naturally vary by country. Working with an experienced EOR means that you minimize your risks of non-compliance.
Deliver a competitive benefits packageSome companies award their workers a competitive benefits package that must comply with local labor laws. An international EOR can help you create a package that suits your needs and deliver that package to your workers in the specified timeframe.
Avoid worker misclassificationShould your new hire be an employee or a contractor? Different states in the US – and different countries – have guidelines that dictate the classification of your workers. Misclassification can incur severe financial penalties, depending on a number of factors (e.g., duration of the infraction).
Improve compliance in specific industriesSome US-based companies operate in industries with an increased risk of worker misclassification. In the construction industry, for example, workers are often illegally classed as contractors when they should have been employees.
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Employer of record risks and disadvantages 👎As you can see, EORs (international or otherwise) can offer your company a lot of benefits. However, this doesn't mean it's always the best fit for your business goals. In the sections below, we'll go over some of the risks and disadvantages of an employer of record:
- Potential time limits
- Possible limitations on the company's enforcement authority
- Potential limits on the activities of international businesses
- Possible co-employment or 'joint employment' risk
Potential time limitsIn some countries, workers cannot be permanently employed by EORs. German labor laws, for example, mandate that workers cannot be hired for more than 18 consecutive months.If you need a more permanent staffing solution, you may have to go beyond an EOR and work with a global professional employer organization (global PEO).
Possible limitations on the company's enforcement authorityBecause EORs act as the full legal employer, they can potentially limit the client companies' ability to manage their workers. For example, before they can enforce formal disciplinary action, client companies will need to secure the cooperation of the EOR – resulting in implementation delays, if not outright non-compliance.To mitigate this disadvantage, you'll need to specify in your contract that your EOR partner must comply with your company directives.
Potential limits on business activitiesIt may also be the case that you want to do more than hire staff. You may be a US-based company that wants to hire employees in the Philippines as well as tap into the Filipino supply chain. In this case, working with an EOR won't be enough. You may need to set up a local entity as well.
Possible co-employment or 'joint employment' riskEORs come with an increased co-employment or joint employment risk, where the client company and the EOR are both treated as a worker's legal employers. You must work with your EOR to minimize this risk.
Is an employer of record (EOR) legal? 🕵🏻♂️Yes, an employer of record (EOR) is legal. Although, as mentioned above, some countries impose restrictions on them for various reasons.
When to use an employer of recordHow do you know if you need the services of an employer of record? This section talks about three primary reasons why:
- When you want to explore new global markets
- When you want to attract and retain top talent
- When you want to avoid misclassification
When you want to explore new marketsAre you in the exploratory phase of your global expansion plan? If so, you may want to check if your target market is worth the time, cost, and effort by partnering with an EOR before setting up a local entity.
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When you want to attract and retain top talentIf you want to work with top talent, regardless of where they are, then working with an EOR may be your best way forward. No longer will you be constrained by geographical boundaries. Instead, you could hire the best in the business – wherever they may be, a decisive edge in today's era of remote work, where the ability to work from anywhere is beneficial for both employee and employer.
When you want to avoid misclassificationIf you're working in an industry where misclassification occurs as a norm (e.g., construction, as mentioned above) or you wish to work with someone based in another country, you'll find EORs beneficial.They will have the expertise you may not necessarily have that will allow you to navigate complicated labor, social contribution, and tax laws that could result in legal ramifications.
How to choose an employer of record partner 💭If you've decided that an employer of record is the way forward, how do you select the best fit for your business?You can take a look at the following:
Pricing: How much does an EOR cost?The first thing you need to check is an EOR's pricing structure; you'll want transparency and clarity so you can stay within your budget. The total cost could be impacted by a number of different factors, including how many workers will fall under the EOR umbrella, which EOR services you'd like to use, and the prospective EOR's pricing structure. EORs may have a fixed monthly fee per employee or take out a percentage of payroll plus applicable taxes. Pilot, for example, charges a flat rate of $29 per contractor per month and a starting fee of $299 per employee per month. Regardless of the structure, EORs also often have administrative fees, setup fees, onboarding charges, taxes, or termination fees on top of their initial quotes. Ask your prospective EOR for the total cost of working with them before signing a contract.
Security: How does the EOR secure confidential information?Because you'll have to share confidential information with your EOR and data protection is sometimes enshrined in law (e.g., General Data Protection Regulation (GDPR) in the European Union (EU)), you have to check what security measures are currently in place. How would your prospective global EOR secure client information?
Accuracy: How accurate are the EOR's calculations of your labor burden?Anytime you employ someone, you incur a cost. Often called payroll or labor burden, this cost goes beyond the salary you give your employee and often includes legally required employee benefits (e.g., paid time off and retirement), health insurance, employee taxes, and other social contributions.These labor burdens vary from state to state and country to country. An EOR like Pilot will understand these variations and will be able to provide you with an accurate calculation of your labor burden. You need to see this to keep to your distributed workforce budget.
The information contained in this site is provided for informational purposes only, and should not be construed as legal advice on any subject matter.
Coverage: Does the EOR cover the markets you need?Make sure your partner EOR covers the markets you're interested in and, more importantly, has the expertise and knowledge to maximize local opportunities and minimize risks. An inexperienced EOR can cost you time and money and could increase your risk of non-compliance with local labor regulations.
Support: How good is the EOR's customer service?You'll want to work with a responsive EOR that knows its way around potential issues that may arise during your relationship with them. If you're partnering with them as part of your global expansion process, they should cover multiple time zones and, where needed, offer assistance in different languages.
Success: What is the EOR's track record?Confirm that your prospective employer of record truly has the required expertise, transparency, and responsiveness by verifying their social proof. What do other people say about them? Are they happy with the EOR's services? Read through testimonials from both current and former clients. Why are people working with them, and why did they stop?You can read testimonials on unbiased sites (Pilot is on G2, for example) or ask to be connected to their references to see if they are happy with the EOR's services. You'll want to pay particular attention to clients with similar needs to your own.
Currency: Does the EOR work with multiple currencies?Finally, you'll likely want to work with an EOR that can manage multiple currencies at a minimum cost, despite the volatility of foreign exchange markets. To mitigate the impact of currency fluctuations, you have to work with an international EOR that offers a clear, transparent, and fixed-rate pricing structure for foreign exchange transactions.
Other FAQs about EORs ❓❓❓Want to know more about EORs? Take a look at the frequently asked questions below.
What is an EOR in payroll processing?Partnering with an EOR in payroll processing often occurs when international employees are involved. You essentially outsource payroll, providing the EOR with the necessary funds, so they can distribute the salary, deduct tax, and withhold social security, insurance, and retirement contributions.
What is the difference between an EOR and PEO?While they are often used interchangeably, an employer of record (EOR) and a professional employer organization (PEO) are different. An EOR is only one of the many services commonly offered by PEOs, which also often help companies with recruitment, payroll outsourcing, global mobility, HR strategy, and company incorporation services.
What is the difference between EORs and staffing agencies?A staffing agency is also different from an EOR in that it's a third-party company that employs a workforce for rent, so to speak. In other words, it hires people who work for (or are leased out to) multiple clients. An EOR, on the other hand, employs workers for specific clients.
What is the difference between an Employer of Record and an Agent of Record?An agent of record (AOR) offers independent contractors (IC) or 1099 workers the same services that an employer of record (EOR) does for employees.
Can you hire international workers without an EOR?Yes, you can hire international workers without an EOR, but you'll have to either open your own legal entity in-country or hire workers as contractors. For some, these options may work. However, opening your own legal entity may be too expensive if you only plan to hire a few people. In this case, partnering with an EOR like Pilot will be more cost-effective.On the other hand, hiring workers as contractors requires local knowledge of specific employment laws because misclassification can lead to legal and financial penalties. An expert EOR could minimize potential compliance risks.
How much does an employer of record (EOR) cost?The cost of an employer of record (EOR) varies. See Pricing: How much does an EOR cost? for more information. Alternatively, you can take a look at our pricing.
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