Understanding the Key Differences Between Agent of Record and Employer of Record

Growing a business comes with risks and hurdles, mostly related to the employment of workers. As a business owner, you have to be aware of these risks and seek measures to minimize them. This risk attribute includes an inappropriate classification for independent contractors. This arises when a business owner engages the expertise of an independent contractor, rather than employing a full-term employee, who executes duties identical to those of an employee. This action can spark suspicions and endanger your business by exposing it to charges and fines.  An agent of record or an employer of record can help prevent your business from encountering such a risk.

In this article, we will dissect what an independent contractor misclassification entails and identify the distinct features between an agent of record vs. an employer of record.

Independent contractor misclassification  

An independent contractor is an individual or entity that is unconnected to the company or business they render services to. This means a contractor works independently of another company for a short-term or long-term project based on the contract specifications. The contractor is responsible for filing their taxes and managing their insurance.

There’s confusion about a freelancer, remote worker, gig worker, etc. being an independent contractor. In cases where an individual renders services such as electrical installations, plumbing, carpentry, housekeeping, etc. to a company that has no employee that can provide the same service, the individual becomes an independent contractor for the company.

An independent contractor is out of the control of the client. The client can’t delegate duties or regulate the timestamp for the work of the contractor, as would be done to a normal employee. A client treating an independent contractor as an employee can be charged with independent contractor misclassification, leading to further complications. In such a situation, the company either converts the contractor to an employee and becomes responsible for the insurance, tax, benefits, and compensation, or faces severe financial fines.

To prevent risk, the company has to ensure accurate classification of independent contractors by delineating the roles of a contractor from those of an employee or by entering into a partnership with an agent of record or an employer of record.

Agent of record (AOR)

An agent of record (AOR) is a third party responsible for managing insurance policies on behalf of its client. An AOR is also referred to as an individual or company that manages an independent contractor on behalf of another company.

The AOR correctly classifies the independent contractor, ensures the contractor has an active insurance policy, and remits tax as and when due. An AOR goes further to prepare an independent contractor’s invoice and disburse payments on behalf of the client compliantly. In essence, the AOR performs all back-office obligations to maintain smooth operations of the contractual agreement in compliance with the law and reduce misclassification risks.

Key Services of an agent of record

·         Classification of independent contractors

·         Administration of contracts

·         Mitigation of risks

·         Administering contractor invoices and payments

·         Insurance maintenance

Employer of Record (EOR)?

An employer of record (EOR) is a third-party organization that performs the role of a legal employer for a company’s employees. EORs take over employment duties as a legal employer from their client in the process and assume liability risks applicable to the client. With an employer of record, a company can hire employees globally without setting up an entity. And this is done compliantly.  

An EOR prevents independent contractor misclassification by converting the contractor you hire into an employee. The contractor registers under the EOR as an employee but works for you. This means the independent contractor is now an employee, managed by the EOR, but you oversee the employee’s day-to-day activities.

Key Services of an Employer of Record

Onboarding of new employees

·         Hiring and termination of employment contracts;

·         Screening of employees through background and security checks

·         Keeping employee records

·         Distributing benefits and compensation to employees

·         Payroll processing, payroll tax deductions, and filing taxes

·         Offer expertise in employment law to maintain compliance

The major difference between an Agent of Record vs. an Employer of Record  

The main distinction between an agent of record and an employer of record is the scope of responsibilities. An agent of record is responsible for managing the contractual agreement with independent contractors on behalf of a company in a compliant manner. In the process, an AOR enforces the terms of contracts to ensure the independent contractor adheres to them.

Whereas an employer of record converts an independent contractor to a normal employee. Manages employment-related responsibilities, compliance, and other HR-related tasks.

Key factors when choosing employer of record vs. agent of record  

Legal compliance

Though both service providers ensure compliance with the law, they do so in different ways. An AOR compliance scope is limited to insurance provisions for your independent contractors, while an EOR compliance scope is broader and more encompassing. An EOR ensures compliance with local laws that border on employment and taxes.

Human resources administration

Outsourcing human resources tasks can be a means to relieve the burden of learning and keeping up with different HR laws in different geographical locations. An EOR is the best option for outsourcing your human resources responsibilities in regions where you have no legal establishment.

Insurance administration and management

If you require a service provider for the sole purpose of mitigating insurance risks, go for an AOR. An AOR takes care of all insurance policies regarding your independent contractors and does it in compliance with the law. On the other hand, an EOR takes care of insurance provisions for employees based on the employment contract.

Independent contractor management

If you are only interested in hiring contractors due to the nature of your business and don’t have plans to hire permanent workers, then an AOR is the best option. An AOR will effectively manage your independent contractors compliantly, while an EOR manages both short-term and long-term employees.

EOR services at PoweredUp consulting

At PoweredUp Consulting, we provide robust employer of record services to oversee your employee needs. We will manage your payroll, benefits and compensations, onboarding and offboarding, security checks, and tax payments. Need more information? Book a consultation with us today.