Understanding the Differences Between an Employer of Record vs Common Law Employer

Understanding the difference between an employer of record (EOR) vs. a common law employer can help simplify the hiring and management of employees. An employer has to be familiar with the legal responsibilities of employment. However, partnering with an employer of record or using a common-law employer relieves you of shouldering such responsibilities.

In this article, we will explore the thin lines that distinguish an employer of record from a common-law employer. To enable you to make the right choice when considering your business needs.

What is an Employer of Record?

Simply put, an employer of record is a legal employer of labor. An employer of record bridges the gap between an employer (client) and employees in jurisdictions where a client has no legal office present. Partnering with an EOR is a safe way of ensuring your business and operations remain compliant with local laws.

An EOR makes this possible by assuming and managing all legal responsibilities on your behalf. With an EOR, a business can hire any employee they so desire in any part of the world. Through an EOR, you can hire, pay, retain, and terminate employees, all in compliance with the employment laws.

When you choose an EOR as a third party to manage employment-related tasks, you have transferred the right of employment to the EOR. You might wonder how this is done. Legally, as an employer, you have no right to hire an employee in a country where your business has no legal structure (that is, the business is not registered with the local authorities and has no legal office in the said country). To circumvent this and save on the costs associated with establishing an entity, businesses go through EOR companies to hire employees. You pay the EOR, who in turn pays your employees. In addition, An EOR simplifies HR-related tasks—such as filing payroll taxes, administering payroll, drafting contracts, keeping employee records, and handling workers’ compensation—to reduce the burden on the in-house HR department. 

What are the Employers of Record Services?

An employer of record offers a wide range of services to cater to the growing needs of a business. These services are primarily centered on the employees of a company. Let’s check out the services that record companies provide.

HR Administration

One major benefit of collaborating with an employer of record is taking on HR responsibilities. This saves your HR the time and cost of having to deal with paperwork from different locations that must be compliant with financial and employment laws. An EOR will single-handedly manage such tasks through its team of HR experts that know the laws. 

Payroll management

An EOR ensures a business’s payroll system remains compliant with local laws. An EOR creates an efficient approach to tracking employees’ work hours, calculating wages and salaries based on the number of hours employees have worked, deducting payroll taxes from employees’ payroll, and filing employee taxes. 

Recruitment and termination

An employer of record handles all recruitment and termination processes in a way that is compliant with labor law. An EOR ensures the best candidates to fill important positions in your company are recruited in line with best practices. Also, terminating workers your company doesn’t need can be done in a compliant manner through an EOR. They develop and distribute termination notices and termination letters to your employees on your behalf.

Drafting compliant employment contracts

Employment contracts prevent disagreements from ensuing between an employer and an employee. To ensure compliant contracts, an EOR drafts employment contracts that conform to local laws. 

Administering employee compensation and benefits 

An EOR administers compensation and benefits to employees on your behalf. These compensations and benefits are tailored to the provisions of the law. Also, an EOR ensures statutory benefits are provided to your employees. 

Maintaining employee records

Record-keeping is one of the many frontiers of an EOR. This means all records involving employment: employee information, employment type, employment date, hours of work done daily, pay records, statutory and annual leaves, and terminations. 

Processing immigration

Companies that need the service of an expatriate in another country can rely on EORs to process the immigration requirements for such employees. 

Security background checks on employees

Background checks on employees are vital during recruitment to avoid employing someone with criminal intent or records. An EOR conducts thorough security checks on the individual to ascertain their address, affiliates, family, and records.

Employer of Record Contract?

An EOR develops an employer-of-record contract in a manner compliant with the local law of the country. The contract revolves around the employer, employee, and employer of record, who are bound by the terms of the agreement. The three parties involved in the agreement sign the agreement. The EOR contract provides information on the responsibilities of the employee, the employer, and the employer of record. The contract entails every aspect of employment.

What is a Common Law Employer?

A common law employer is an individual or a company that exercises full control over an employee’s activities. This activity includes directions on what to do, how to execute it, and what not to do. A common law employer has the right to set and pay wages and salaries, terminate any employee’s employment, and oversee operations. Companies make use of a common law employer when they have legal establishments in a country and seek to oversee all employment-related responsibilities. In this case, employers are solely responsible for creating a compliant contract, managing payrolls, filing and paying taxes, administering benefits and compensations, paying wages and salaries, and hiring and firing employees.

Common Law Employment Contract?

A common-law employment contract emphasizes the terms and conditions of employment in line with the local law that stipulates employment in a country. The details found in a common law employment contract include:

Notice of termination period

Remunerations and entitlements

Confidentiality requirement

Job title and description

Sick leaves and annual leaves

Working hours, holidays

Withhold taxes from the salaries

Insurance such as health insurance and accident insurance

Employer of record vs Common Law Employer: Factors to Consider When Making a Decision

Now that you have a grasp of what the two service providers do, the question that begs to be answered is which to choose for your business. They are unique and provide distinct services; in some cases, you might be required to provide both along the way, depending on your long-term and short-term goals. 

I have curated some factors to consider when choosing between an employer of record vs common law employer.

Employer liability 

An essential factor to consider is employer liability coverage. Employer liability involves the legal responsibilities of an employer towards the work-related safety of employees. Employer liability entails an employer taking action against damages inflicted on employees while working for them. An EOR is weak in assuming employer liability in such a case; the client remains solely responsible for this liability.

Furthermore, the company, not the EOR, is liable for charges and court cases in the event of a shortfall. Hence, a company should bear this in mind when partnering with an EOR.

However, a common law employer takes care of all responsibilities related to employees. A common-law employer can be charged with lawsuits if they fail to be responsible for employee-related work hazards. Hence, having a proper employer liability insurance structure in place can avert litigation from springing up.  

Compliance with state and federal laws

Another factor in your decision-making outline is compliance with local laws. A common law employer can only exist in jurisdictions where a company has a legal functional office. This requires them to be compliant with local laws.

A company seeking to expand into markets without establishing a legal entity cannot operate in that country except through an employer of record. An EOR will handle all compliance-related duties to ensure the client operates smoothly in the country. 

Employment and legal liabilities

As a rule of thumb, considering legal liabilities that may arise in the course of running a business in another country is of the utmost importance for every business. Generally, EOR takes care of a business’s legal requirements.

An EOR assumes liabilities for issues such as failing to file a tax return or pay taxes, wrongfully terminating an employee without notice, breaching an employment agreement, and inappropriate management of an employee’s compensation and benefits.

In this case, the EOR, not the client, will be liable for charges related to the failure to implement a compliant system. Thus, the client is safe from events that might negatively impact the business.

On the other hand, having a common law employer puts the business at risk of facing fines and penalties if lawsuits arising from failure to comply with employment laws ensue.  

Scope

The next important factor to put into consideration is the scope of the business. A business owner that does not include expansion in its master plan should consider itself a common law employer, not an EOR. However, business owners with plans to expand and hire internationally need the services of an EOR. Using an EOR for global expansion offers a cost-effective and simplified system. This means your business is relieved of legal requirements, compliance, and the need to set up legal footprints internationally.  

Control

Finally, an important point to consider is control. A business owner who wishes to have 100% control over employees needs a common-law employer. This provides full authority over employees as fast and well-thought-out decisions are made and implemented without going through a third party. An EOR may slow down employee decision-making by their employers and also lead to a disconnect between the employer and employee. A common law employer dispels such disparity and puts the employer in total charge. 

Get Better Compliance with PoweredUp Consulting. 

The bottom line is that choosing between an EOR and a common law employer arrangement depends on the goals of your business. 

At PoweredUp Consulting, we have a team of experts that understand the tenets of the laws in regard to employment and payroll to ensure a compliant environment for your business to thrive. If you have further questions regarding our services, book a free consultation with us to gain more information.