Mastering Employer of Record: A Guide to EOR Services, Benefits, and Selection

For businesses eyeing international expansion, employing global talent is key. A global Employer of Record (EOR) facilitates this by handling the complexities of international employment.

Contributing Advisor

David Niu

Partner

Essentially, an EOR is a third-party organization that becomes the legal employer for your workforce, managing all related responsibilities on your behalf. This includes HR tasks, payroll, and employee management while your company focuses on daily operations.

EOR’s functions

Role and responsibilities

A global EOR helps businesses legally hire employees across different countries without establishing a local entity. This avoids potential legal pitfalls related to local employment laws.

The EOR undertakes various legal and regulatory obligations, including immigration, employment, payroll, and benefits for a geographically dispersed workforce. The EOR assumes responsibility for traditional employment tasks and liabilities, including payroll processing, tax filing, unemployment handling, workers’ compensation, and benefits administration.

Utilizing software platforms, EORs offer a streamlined approach to managing these tasks, providing insights and analytics on employee assignments and related costs.

Services variety

• Draft and maintain employment contracts that comply with local laws.
• Manage payroll and tax withholdings and ensure timely payment to employees.
• Offer comprehensive benefits and handle termination and offboarding processes.
• Provide ongoing support on local labor laws and regulations.

Hiring through an EOR

Hiring through an EOR involves a series of methodical steps, from establishing a legal agreement to managing and overseeing a global workforce. This approach allows companies to expand their international presence efficiently while adhering to varying local employment laws and regulations.

Initial agreement and legal framework

A contractual agreement is established between the EOR provider and the organization, detailing services, pricing, and terms. The EOR becomes the legal employer, taking responsibility for all HR-related tasks.

Setting up global and local operations

EORs may set up local entities or employ subcontractors in various countries to facilitate global employment.

Employee recruitment and compliance

EORs engage in creating locally compliant employment contracts for global and remote workers. They conduct background checks to ensure the suitability and legality of the workforce.

Managing employee benefits and payroll

Collaborating with companies, EORs arrange employee benefits such as health insurance, pensions, and learning and development budgets. EORs are responsible for processing international payroll, managing tax documentation, and adhering to local regulations.

Employee onboarding and ongoing management

The EOR oversees the onboarding process for new employees, integrating them into the client company’s workforce. Businesses can hire employees in countries where the EOR operates, with the EOR managing all aspects of contracts, payroll, and taxes.

Administrative and operational control

While the EOR handles comprehensive administrative tasks, the client company retains control over the day-to-day responsibilities and management of the workforce.

The EOR provides a range of employee benefits and intellectual property protection and manages the process of contract terminations.

Oversight of contingent workforce

The EOR takes charge of the contingent workforce, handling payroll, ongoing onboarding, and offboarding processes, and benefits administration, ensuring seamless operation and legal compliance.

Advantages of using an EOR

Utilizing an EOR presents a multitude of advantages for businesses looking to expand internationally. It offers the following benefits to enable companies to focus on their core business operations and growth strategies:

• Rapid onboarding and cost savings: EORs can simplify the onboarding process for international employees, accelerating the startup time for new staff and reducing direct and indirect costs associated with establishing overseas offices.
• Enhanced talent retention and benefits: EORs offer competitive benefits packages, helping businesses keep important staff and attract new talent. They allow companies to use flexible pay and benefits models in new markets without changing their usual pay structures. This makes it easier for businesses to meet local needs and stand out as great employers worldwide.
• Streamlining international employment: EORs address the complexity of complying with employment laws across different countries, providing a clear path for businesses to hire and manage global talent in a compliant manner.
• Facilitating global workforce management: EORs provide a unified platform for businesses to efficiently manage employees spread across multiple countries, without the challenges of geographical differences.
• Operational efficiency and compliance: With professional compliance support and advanced HR technology, EORs enhance the operational efficiency of businesses while ensuring global operations comply with local regulations.
• Expansion and HR technology benefits: Businesses can leverage the advanced HR technology and tools offered by EORs to expand into new markets while optimizing human resource management seamlessly.
• Reduced administrative burden with enhanced security: EORs take on many administrative and compliance tasks, allowing businesses to lighten their internal load while improving data and privacy protection levels.
• Equal employment opportunities: EORs support diverse and inclusive hiring, helping businesses achieve equal employment opportunities globally.
• Compliance and risk mitigation: EORs help businesses lower legal and compliance risks, especially in unfamiliar new markets, through their expertise.
• Market expansion and reduced risks: Businesses can quickly enter new markets through EORs while reducing the risks and complexities of traditional international expansion.
• Cost reduction and efficient business operations: The services provided by EORs help businesses achieve higher cost efficiency, making them more competitive in the global market.

EOR in practice

An Employer of Record can be pivotal in a company's international expansion and remote workforce management. By providing expertise in legal compliance, payroll management, and employee relations, EORs enable businesses to focus on their core operations while ensuring a seamless and compliant global employment process. Whether to test new markets, attract global talent, or navigate the complexities of international employment law, an EOR offers a strategic solution for businesses.

Assessing the need

Organizations should consider an EOR for building a distributed workforce and ensuring compliance in various jurisdictions. Key considerations include;

• Plans for market expansion;
• Talent acquisition and retention strategies;
• Contractor classification;
• In-house resources for international employment law; and,
• Willingness to delegate administrative processes.

Responsibility differences between businesses and an EOR

The responsibilities between businesses and an EOR are distinctly partitioned, with EORs handling international employment's legal, payroll, HR, and compliance aspects. In contrast, businesses maintain control over their core operations, strategic direction, and daily management of the workforce.

Employee-Employer dynamics with an EOR

• Legally, employees are hired by the EOR in their local region, but practically, they work for the client company.
• EORs provide comprehensive HR services, including legal, payroll, and benefits management, ensuring employees feel integral to the client company's team.

Mitigating risks

Using an EOR helps avoid the misclassification of contractors, a significant risk for companies relying heavily on international contractors. They ensure compliance and reduce the risk of legal repercussions associated with misclassification.

Utilizing EORs for independent contractors

Typically, EORs focus on hiring full-time or part-time employees rather than independent contractors. Since local labor laws do not mandate payroll taxes or benefits for contractors, there's often no need for an intermediary like an EOR for contractor engagements.

Independent contractors, by definition, operate under a different set of labor laws than traditional employees. They are usually self-employed individuals or entities engaged in a professional capacity for a specific task or project. The legal obligations for hiring independent contractors are generally less cumbersome. Unlike full-time employees, contractors are not subject to mandatory payroll taxes, employment benefits, or the same level of regulatory scrutiny in most jurisdictions.

EORs limited role with contractors

Given that the legal and administrative burdens are significantly lower when working with independent contractors, the role of an EOR becomes less critical. The primary services offered by EORs – such as handling employment taxes, providing statutory benefits, and ensuring compliance with employment laws – are not typically required for contractor engagements.

Businesses often engage contractors directly without the need for an intermediary. This direct engagement is usually more straightforward and cost-effective, bypassing the additional layer of administration and cost that an EOR would entail.

Specific scenarios

• Specific scenarios exist where an EOR plays a role in contractor engagements, especially in complex international settings. For instance, if a business needs more local expertise to draft compliant contractor agreements or navigate foreign legal requirements, an EOR with regional experience could provide valuable guidance.
• Additionally, in cases where the line between independent contractor and employee status is blurred due to local regulations, an EOR may offer consultancy services to ensure proper classification and avoid legal complexities.

Strictly speaking, employee management should be handled by the EOR supplier, with the client merely being the service recipient.

Businesses must also ensure that contracts with independent contractors are clear, comprehensive, and compliant with local laws. This involves defining the scope of work, payment terms, intellectual property rights, and other contractual terms.

When a foreign company contracts a local entity in China for a project, the duration and nature of the project can lead to the creation of a PE, particularly if the project extends beyond six months. This could occur in several scenarios, such as when the foreign company has a physical location in China (like an office or construction site) or exercises management and control over the project within China for an extended period.

The specific rules and definitions regarding what constitutes a PE are outlined in China’s tax laws and its relevant double taxation agreements (DTAs) with other countries. The creation of a PE carries several implications, including:

• Tax liability: The foreign company would be liable for corporate income tax in China on the profits generated from its activities within the country. The tax rate and the method of calculating the taxable base can vary depending on various factors, including the nature of the income and the stipulations of any applicable DTA.
• Compliance and reporting: Establishing a PE requires compliance with Chinese tax filing and reporting requirements. This includes registering for tax purposes, filing tax returns, and possibly dealing with VAT and other tax obligations.
• Operational impact: Recognizing a PE in China might necessitate setting up local accounting and HR processes to comply with tax withholding, social security contributions, and other local regulations.

Consulting with tax advisors or legal professionals specializing in Chinese tax law is crucial to navigate these regulations, minimize tax liabilities, and ensure compliance.

Choosing the right EOR

Choosing the right EOR involves a thorough understanding of their pricing models, experience in specific regions, and the comprehensive costs associated with their services. This insight allows for better financial planning and ensures that the chosen EOR aligns with the business's strategic goals and operational needs.

EOR pricing models and cost considerations

• EORs offer two main pricing structures: flat fee and percentage-based models. The flat fee model is generally preferred for its predictability in budgeting and financial planning.
• Percentage-based models tie fees to employee compensation, which may lead to increased costs during salary raises or promotions and can discourage fair compensation practices.

Geographical expertise

Selecting an EOR with experience in your target regions is crucial to avoid delays and additional costs. Experienced EORs provide essential knowledge and capabilities, leading to cost savings, compliance with local laws, and more efficient operations.

Breakdown of EOR costs

• A significant portion of EOR costs is attributed to employee salaries and benefits, including any additional perks offered.
• Compliance and legal fees are incorporated into EOR pricing, ensuring adherence to varying local labor laws.
• Administrative and operational costs are also factored in, covering payroll management and other employee-related processes.
• Technology and infrastructure expenses are incurred to streamline HR processes and enhance communication.

Understanding total EOR costs

• The overall cost of employing an EOR extends beyond just the invoice amount, encompassing time savings, operational flexibility, and service quality.
• It's important to evaluate the overall user experience, including any hidden fees and the balance between technological efficiency and human interaction provided by the EOR's services.
• Opting for a high-quality EOR service can lead to improved productivity, better employee engagement, and higher retention rates, which are essential factors impacting the long-term financial health of a business.

Finding the optimal EOR

• Conduct thorough comparisons of multiple EOR providers, examining both their pricing structures and service offerings.
• Assess each potential EOR’s reputation, track record, and the quality of customer support they provide.
• Consider the EOR’s ability to scale with your business’s growth and expansion plans.
• Remain vigilant about potential hidden costs, including setup fees, termination charges, or fees for additional services.

By carefully evaluating these factors, businesses can identify an EOR partner that meets their immediate needs and supports their long-term international growth and compliance objectives.

Comparative analysis

These tables provide a clear overview of the fundamental differences between EORs, PEOs, and staffing agencies, helping businesses to make informed decisions based on their specific employment and operational needs.

EOR vs PEO