What Does an Employer of Record Do?
An Employer of Record (EOR) serves as the official employer of a worker in a specific country, assuming responsibility for all compliance aspects related to employment. This encompasses tasks such as managing payroll, taxes, statutory benefits, employment contracts, and more.
The EOR model isn't a recent development; it originated in the United States during the 1960s, primarily as a response to the complexities of employing individuals across state borders. In the U.S., an individual's tax residency is tied to the state in which they reside. Consequently, their employer must be registered for taxes in that same state and must file tax returns on their behalf annually. If a small business has employees scattered across multiple states, it can quickly become entangled in a web of reporting and compliance challenges. An Employer of Record steps in to provide a solution.
When a company engages with an Employer of Record, they enter into a three-party co-employment contract involving the company, the employee, and the EOR:
- The company maintains a direct relationship with the employee, assigning them tasks and overseeing their performance.
- As the entity responsible for the legal employment relationship, the EOR handles the operational aspects, including payroll, taxes, benefits, and other relevant obligations, ensuring that both the employee and the client remain compliant with all legal requirements pertaining to employment.
- The third party in this arrangement, the employee, fulfills their responsibilities as a worker for the company.
Companies are increasingly hiring individuals in countries worldwide, often in regions where adhering to all of a country's tax regulations and employment laws requires more than simply obtaining a tax identification number and filing annual returns. In such cases, an Employer of Record offers an effective solution for addressing compliance challenges and mitigating the complexities and uncertainties associated with employing individuals in more intricate or high-risk jurisdictions.
