What Are the Advantages and Drawbacks of Employer of Record Solutions?
Employer of Record (EOR) solutions, whether implemented locally or internationally, offer a variety of potential benefits:
Facilitating Global Expansion
When looking to hire professionals across multiple countries or regions, it's often necessary to establish local entities to formally employ staff.
International Employer of Record solutions enable the employment of professionals in multiple countries without the need for local incorporation. This saves on the costs associated with setting up multiple international subsidiaries and allows for rapid onboarding of new employees.
An International EOR solution ensures that all staff members are hired in full compliance with visa and immigration regulations.
Ensuring Payroll and Social Contributions Compliance
Payroll obligations, health insurance, and pension contribution requirements can be complex and subject to frequent legal changes.
Some tax issues, such as the treatment of options granted to foreign employees, can be particularly intricate.
EORs, as compliance experts, possess a deep understanding of all relevant legal requirements and bear responsibility for ensuring compliance.
Access to Competitive Benefits Packages
Small and medium-sized enterprises (SMEs) may struggle to access competitive insurance packages for their employees.
EOR services can enhance access to benefits like pension plans, which is one of the key reasons for the introduction of EOR services historically (particularly in labor leasing contexts).
Mitigating Employee Misclassification Risks
Some businesses may attempt to classify workers as independent contractors rather than employees, which carries inherent risks.
Employee misclassification can lead to substantial penalties and liabilities if regulators or courts determine that the worker should be treated as an employee.
EOR employees are considered bona fide employees, reducing the risk of misclassification.
Providing Equitable HR and Compliance Access
EOR solutions have gained popularity, particularly in the United States, in industries where individuals cannot feasibly provide their own payroll and HR solutions. For instance, EOR solutions are prevalent in the U.S. in in-home support services, where individuals prefer care provided by family members or trusted individuals. EOR solutions ensure that caregivers are compensated compliantly under Medicaid and tax laws.
These solutions also offer affordable compliance options in industries where workers might otherwise be incorrectly classified as contractors rather than employees, addressing compliance challenges in sectors like construction in the U.S.
What Are the Drawbacks of Employer of Record Solutions?
Just like any HR or employment approach, Employer of Record (EOR) solutions, if not executed properly, can pose certain disadvantages for client companies. These potential drawbacks include:
Possible Time Limits
In certain countries, there may be limitations on the duration for which employees can be continuously employed through an EOR solution. For example, in Germany, the local equivalent of an EOR solution (Arbeitnehmerüberlassung – AÜG) restricts individuals from being hired for more than 18 consecutive months.
In such cases, client companies aiming to hire permanent team members may need to explore options like partnering with a global Professional Employer Organization (PEO) to establish a local entity or subsidiary for direct hiring of local employees.
Limitations on Client Company's Authority:
While employees typically work under the day-to-day supervision of the client company, formal disciplinary actions often need to be carried out by the EOR.
This means that many HR processes may require cooperation with the EOR, potentially leading to implementation delays or concerns about the EOR's compliance with client company directives.
Contractual agreements between the EOR and client company often address this issue by specifying that the EOR must act according to the client company's instructions.
In some jurisdictions, a tripartite agreement among the EOR, client company, and employee can further outline the rights and responsibilities of each party.
Local Incorporation Requirements
When expanding globally, some organizations may seek to do more than just hire local staff, such as entering into supply contracts under local law or applying for government subsidies that require local business incorporation.
In such cases, the enterprise will need to establish a local presence rather than solely relying on an EOR solution.
Co-Employment or 'Joint Employment' Risk
The criteria for determining who qualifies as an employer can vary by country and is often defined by law.
It's important to note that, regardless of the terms specified in the contract between the client company and EOR, the legal test for employer status is set by applicable laws.
In the United States, it has been recognized that, in certain situations, two companies may be considered joint employers under laws like the National Labor Relations Act.
A responsible EOR takes measures to manage its relationship with client companies and employees to minimize the risks associated with co-employment or joint employment.
