How Does an Employer of Record Work?
An employer of record (EOR) is an entity that assumes legal responsibility for employment-related matters on behalf of an employer. While employees carry out their work for their designated employer, the EOR takes charge of the administrative and legal obligations linked to their employment.
These responsibilities encompass:
- Payroll processing and tax deductions
- Management of unemployment insurance
- Administration of employee benefits
- Provision of workers' compensation insurance
- Ensuring compliance with relevant laws and regulations
The Employer of Record (EOR) model was originally established in the United States during the 1960s to address the complexities of employing individuals across different states. In today's global landscape, where many teams are international, EORs assist companies in hiring individuals from various countries.
When a company engages an EOR, a three-party contract is established, involving the company, the employee, and the EOR:
- The company and the employee maintain a direct working relationship. The company is responsible for assigning tasks, managing performance, and overseeing all job-related aspects.
- The EOR serves as the legal employer of the employee. Their responsibilities encompass administrative and legal tasks, such as payroll, taxes, benefits, compliance, and more. In the case of global EORs, they may also handle matters like employee visas and tax-related issues in the host country.
- The employee is accountable for fulfilling the duties outlined in their job description.
Advantages of EOR
Employing an EOR can bring numerous benefits. To begin with, it can offer valuable assistance to businesses that lack the time or resources to handle the intricate paperwork and regulatory requirements associated with hiring employees. This is particularly pertinent for companies expanding into different employment regions, such as different countries or across state boundaries in the US.
In the current business landscape, it's increasingly common for companies to establish operations abroad or hire remote workers who don't need to be physically present in the office. However, doing so often involves more than just obtaining a tax identification number or filing annual tax returns to ensure compliance. Utilizing an EOR presents an efficient way to swiftly expand a business with local staff while adhering to local laws, all while providing essential protections and benefits to employees.
An Employer of Record can serve as an effective solution for navigating compliance challenges, mitigating the complexities of employment in diverse jurisdictions, and streamlining operational expansion.
Disadvantages of EOR
While an Employer of Record (EOR) can be a viable option, it does come with certain drawbacks, and it may not suit every business.
Firstly, collaborating with an EOR might make individuals within the business feel like they have less control. Regardless of the extent of the EOR's involvement, transferring ownership of essential administrative processes can be perceived as challenging.
Moreover, delegating these responsibilities to an EOR can significantly reduce the workload for other teams within the company, particularly the HR department. While this isn't inherently negative, it may result in many job functions being outsourced, potentially reducing HR's day-to-day involvement in company operations. Businesses utilizing an EOR may need to reconsider the structure of their in-house HR department to ensure it remains effective.
Lastly, engaging an EOR may lead to shifts in company culture. Entrusting core processes to an external entity and introducing another player into the employee-employer relationship could influence how employees perceive the employer. This potential impact can be mitigated if the company is aware of this challenge and actively works to build and maintain a culture that aligns with its vision and values.
