- June 9, 2023
- Posted by: Mohammed Abiola
- Category: Uncategorized
An employer of record has its benefits and risks, but the benefits outweigh the risks. An employer of record creates a smooth path for you to recruit and manage employees in any part of the world. With businesses seeking to explore new markets or expand globally, this comes with responsibilities to comply with employment laws, payroll, taxation, and the cost of setting up an entity. These are complicated matters that require careful management and utmost compliance. Using an employer of record provides an efficient solution to keeping your company legally compliant.
This article addresses the employer of record risks and benefits. It also explains what an employer of record is, why you need one, and how to choose the best one for your business.
What does EOR stand for?
An EOR is a popular acronym that denotes “employer of record”.
What is an employer of record (EOR)?
An employer of record is a third-party organization that acts as the legal employer of the workforce for your organization but has no legal presence in a particular jurisdiction. The employer of record takes on full responsibilities on your behalf. These activities include hiring, payroll management, employee benefits, onboarding, and firing.
An employer of record ensures full legal compliance with state and federal laws for your business to operate successfully.
Is an employer of record legal?
Yes, an employer of record is legal. In most countries, employers of record have the backing of the law to operate. And this is done in complete compliance with the law. In some countries, like China, there are restrictions on collaborating with an employer of records. In this case, you have to establish a legal entity in the country before you can operate legally there.
Employer of record companies
There are several EOR companies, of which PoweredUp Consulting is one. Some of these companies include Safeguard Global, velocity Global, Atlas, Globalization Partners, Remote, Deel, Oyster, etc.
The operations of EOR companies vary from one organization to another. While some EORs have legal entities, some own no legal entity and operate through a third-party EOR with legal entities establishing themselves as intermediaries.
What is a local EOR?
A local employer of record owns a legal entity in a specific country. Local EORs operate only in one country. The local EOR prides itself on being totally compliant with the local legal provisions stated in the law.
A local EOR is well conversant and knowledgeable with all regulations and regulatory bodies, that are vital for the successful operations of businesses. Governments are liable to change or update employment and tax laws easily. A local EOR is always up-to-date with such changes. You can assess top talents with a local EOR and relieve yourself of employee-related paperwork.
What is a global EOR?
To become a global employer of record, you need legal entities in different countries globally. Global EORs, or international EORs, have their tentacles spread out globally. In reality, some of these global employers do not own a legal entity but act remotely to establish a presence in each country or engage the services of an indigenous employer of record. A global employer of record allows you to hire and manage your distributed workforce in any part of the world.
Employer of record services
An employer of record offers employee-related services and is not involved in day-to-day employee tasks. These services include:
• Employment contract
• Legal compliance
• Human resources management
• Hiring of employees
• Administering employees’ benefits and compensations
• Termination of employment
• Onboarding of hires
• Payroll processing and management
• Filing of tax
• Running Background checks of employees
Benefits of an Employer of Record
An employer of record offers potential benefits for businesses seeking to expand into the global marketplace. Below are some of these benefits
- Enhances Speed
- Prevents contractor miscalculation risk
- Improve the immigration process for foreign employees
- Cost-effective
- Streamlines human resources management
- Reduces compliance risk
- Perfect for a low permanent establishment risk
Saves time
With an employer of record, a company saves time hiring new employees and managing employee-related activities. An employer of record speeds up these processes for the client. Favorably, the client focuses on key fundamentals of business operations. Perhaps, you want to source talent in a particular country. Since, you have no entity in that country, and are unwilling to set one up, the legalities of the country can serve as a hurdle to acquiring such talent. But with an employer of record, you can easily employ that talent.
Prevents contractor misclassification risk
In most countries globally, an independent contractor is classified as an employee of the company that hires them because of the similarity in structure and roles to that of an employee. Hence, through the law, the client company has to pay taxes and adhere to other labor laws.
Therefore, it is a criminal offense to misclassify your employee as a contractor with intentions to shy away from employment responsibilities. However, an employer of record prevents such a risk. In this case, the employer of record employs the contractor, who still works for the client’s company. This avoids the hefty financial penalties attached to misclassification.
Improve the immigration process for foreign expatriates
If there is a position you want to fill with an international employee in another country but have no legal entity in that country, that alone can be discouraging. However, An employer of record will manage all processes related to the immigration of an expatriate.
Low cost
An employer of record not only saves time but also saves money. Imagine the amount you will have to spend to establish an entity in your desired location, hire an HR team, and hire other employees to handle your payroll and taxes. That is quite a lot of money if you don’t have plans for a permanent establishment in that location. Interestingly, an employer of record is a legal entity with the right to hire, carry out HR-related tasks, and handle payroll. These are all done at a low cost.
Perfect for a low permanent establishment risk
If you plan on engaging the services of employees to take on roles with low permanent establishment risks, such as remote work, entry-level roles, junior roles, and internships, an employer of record will perfectly suffice for that. An employer of record takes on the responsibility of the legal employer, issues the contract, and pays the worker. This ensures that your company’s permanent establishment risk is reduced to prevent severe financial penalties.
Streamlines human resources management
An employer of record assumes all human resources tasks, relieving your in-house HR of the stress of handling paperwork and generating reports for different locations. Besides, having an in-house HR to manage all these are inefficient and risky as they might not be familiar with the employment laws of the country you want to operate in. Which can lead to making mistakes and incurring penalties in that country. An EOR conversant with the law will ensure that all HR responsibilities comply with the law.
Reduces compliance risk
An attribute of an employer of record is legal compliance. A company that claims to be compliant but has little understanding of the legal wits of employment and tax laws fails as an employer of record. An employer of record will shield its client from tax and legal risks. An employer of record ensures you remain compliant and safe.
Employer of record risks/disadvantages
• Permanent establishment (PE) risk
• Potential Time constraint
• Potential scale limits
• Employee disconnection
• Joint employer risk
• Potential Limits on the company’s authority
• Unsuitable for robust employee package or benefit
• Possible infringement of Intellectual property
Permanent establishment (PE) risk
A permanent establishment occurs when an audit shows that a foreign organization has a stable and taxable presence in a country. Businesses with a permanent establishment are liable for tax payments both at home and abroad.
When a company reaches this stage, an employer of record won’t suffice. If you continue with an employer of record, it becomes a criminal offense, and you become liable to fines and other penalties.
For example, a company that does not have a long-term plan for hiring and maintaining employees through an EOR won’t be at risk of a permanent establishment as the roles of employees are short-term.
On the other hand, a company with an employee in a senior-level position is at risk of having a permanent establishment, and engaging the services of an employer of record will induce a penalty. In this case, the company will have to set up an entity in that location and adhere to the regulatory laws on employment and tax.
Potential time constraint
Some countries do not have laws for permanent employment through an EOR. For example, in Germany, the maximum duration of employment through an EOR is 18 months.
In such cases, you become limited by time. You can advertise this by setting up a legal entity in such countries if you plan on recruiting permanent workers and engaging the services of a professional employer of record (PEO).
Potential scale limits
There are limits on the number of staff you can employ through an EOR. Some EORs will not work with you if you want a large workforce; hence, establishing your legal subsidiary becomes necessary. Also, if your number of employees outgrows the capacity of an EOR, the EOR will stop rendering services to your company; hence, you have to set up a legal entity. Before you engage the services of an employer of record, you should fully understand the structure of the EOR firm.
Employee disconnection
Some employees might feel disconnected from the parent company. They may see themselves as different from the staff working directly with the company. However, this can be managed by delivering competitive employee benefits to them and publicly acknowledging and rewarding them for their excellent jobs.
Joint employer risk
Some countries set laws and determine who the legal employer is. In some countries, the client’s company and EOR become co-employers or joint employers. An informed contract between the client and the employer of record will minimize such risks.
Since an EOR acts as the legal employer by law, they can limit the clients’ authority over the employees. Though the client company assigns delicate tasks to the employees, there are some restrictions on the employees. For example, the client might issue disciplinary action against an employee, but this can only be done through an EOR. There might be delays in implementation or non-compliance with such actions by the EOR, thus limiting the authority of the client company. Such a situation can be prevented by duly spelling out the terms and conditions in the contract with the EOR. In this way, the EOR becomes compliant with directives from the client’s company.
Unsuitable for robust employee package or benefit
You may desire to offer robust packages for your employees; an EOR might not be suitable for that. This is because they have their own defined packages within the scope of the law and might become reluctant to implement your packages. You may need to set up your own legal entity.
Possible infringement of Intellectual property
Some EORs might not protect the intellectual property developed by staff in a foreign country. However, to mitigate this, you should include this in your contract with the EOR.
When do you use an employer of record?
Some employers are skeptical about engaging the services of an employer of record. However, the market demand for an EOR is ever-growing, and at some point in your business, you might require their services. Here are some key factors to consider when engaging an employer of record.
• When you want to a new market quickly
• When you want to hire and onboard talent in different locations
• When you have no legal entity
• When you want to be compliant with international laws
When you want to enter a new market
You should consider an employer of record if you want to explore a new market and enter it quickly without going through the stress of setting up a subsidiary, a branch, or a legal entity.
When you want to hire and onboard talent in different locations.
An employer of record allows you to hire effortlessly and onboard top talent globally that is unavailable in your locality. With an employer of record, you won’t be constrained by geographical locations, employment, and taxation laws as you hire talents to achieve your business goals.
When you have no legal entity
You might plan to establish a business in a different location without setting up a local entity due to financial limitations and a lack of knowledge of the local legislature. You will need an employer of record to scale.
When you want to be compliant with international laws
If you seek to remain compliant with international business laws and prevent tax risks, you will need the services of an employer of record.
How do you choose an employer of record?
If you decide on going forward with an employer of record, You have to consider some factors to enhance your choice. Here are some key factors to consider when looking out for an employer of record to reduce risks.
• Entity coverage
• Compliance
• Support
• Cost
• Security
• Reliability
Entity coverage
Some EORs do not have physical entities in the countries they claim to cover. As such, you have to investigate the coverage of the employer of record solution companies. The best option is to go with a local employer of record. Local employers of record have a physical presence in their countries.
They have an efficient system in place to seek out top talents in their countries and can easily carry out security checks on potential employees.
Compliance
A great EOR choice should be duly compliant with the laws that apply to employment and the payment of taxes. They should be fully aware of changes to the law and act accordingly.
Support
You should consider an EOR that offers a great support system. Always be responsive to your company’s needs and in tune with the goals and objectives of your business. Such an EOR should be able to offer solutions to challenges that arise during the course of your relationship with them.
Cost
Some EORs are expensive. If you are tight on budget, seek an EOR that is affordable. Also, go for EORs that provide services at a flat fee rate rather than a percentage rate.
Reliability
In the process of working with an EOR, you will have to share confidential information. To ensure the safety of your data, you should check if the EOR complies with the Data Protection Act. You should inquire about the security measures put in place by the EOR to protect and preserve all companies’ secrets and maintain the company’s integrity.
Achievement
You should confirm the success track of your prospective employer of record. It is vital to check if they are well-equipped, render the expertise you want, are responsive, and are secure. In addition, you can get them by reading testimonials online.
Frequently asked questions on an EOR
Difference between an employer of record and a PEO
A professional employment organization enters into a partnership with the parent company and acts as a co-employer only in locations where you have a legal entity. They share liabilities with the client company.
On the other hand, an EOR acts as a legal employer for your company in places where you have no legal entity.
Differences between an employer and employer of record
An employer is responsible for administering day-to-day activities and overseeing the operations of an employee, while an employer of record is responsible for employment-related tasks.
Employer of record vs. common law employer
While a common law employer delegates tasks to employees and controls how employees carry out such tasks, an EOR is concerned with hiring employees on behalf of your company.
Difference between an employer of record and a staffing agency
The main difference between an employer of record and a staffing agency is that the latter’s job is to find and recruit candidates that are a perfect fit for a job description. While EORs hire, pay taxes, and process payrolls.
Why is PoweredUp Consulting the best choice to mitigate risks for your company’s expansion?
PoweredUp Consulting is a legal entity in Nigeria. Operating through PoweredUp Consulting means your business will remain compliant with the labor laws in Nigeria. We have a strategic presence in Nigeria to give you access to the pool of top talents there. In addition, our team is always there to provide you with personalized solutions and advice for any challenge that may arise.
Discover how we can help you hire, onboard, and pay your employees request a demo