What is an EOR? Meaning, purpose, and benefits

Organizations are increasingly recognizing the benefits of recruiting employees on a global scale. However, the challenges of hiring, compensating, and overseeing workers in countries where a local legal presence is lacking can pose difficulties.

Engaging with an Employer of Record (EOR) emerges as the most straightforward method for companies to tap into a global workforce while mitigating the risks associated with expansion. This approach also presents a cost-effective alternative to establishing independent legal entities internationally, catering to businesses of various scales, including startups, small and medium-sized enterprises, as well as large corporations.

So, how do you partner with an EOR?

This article elucidates the concept of an Employer of Record (EOR) and delineates the intricacies of establishing a partnership with an EOR. It delves into the advantages of leveraging an EOR for expeditious and cost-efficient global recruitment, elucidating the array of services one can anticipate in the process.

 

Jump straight to a key chapter

• • • Provide a definition of an EOR (Employer of Record).
    • Outline the responsibilities typically associated with an EOR.
    • Enumerate the benefits of engaging with an EOR for employment services.
    • Identify various types of EOR service providers.
    • Distinguish between an EOR and a PEO (Professional Employer Organization).
    • Explore scenarios indicating when it is advisable to use an EOR.
    • Detail the components typically included in an EOR agreement.
    • Outline five key steps to follow when utilizing an EOR to hire international employees.
    • Introduce a checklist for hiring international employees through an EOR.
    • Discuss the factors influencing the cost of EOR services.
    • Present alternatives to using an EOR for employment solutions.
    • Promote Remote’s EOR services as a specific option for consideration.

 

The guide provides actionable steps for selecting an Employer of Record (EOR) and navigating the process of entering into an EOR agreement. It further explores the typical costs associated with EOR services and elucidates how engaging with an EOR can yield significant time and cost savings compared to the alternative of establishing your own international entity.

 

Provide a definition of an EOR (Employer of Record)?

 

An Employer of Record (EOR), signifying employer of record, is a third-party entity that facilitates the employment of workers in various locations by assuming the role of the legal local employer on your behalf. The EOR shoulders the legal and compliance responsibilities, allowing you to maintain the everyday employee relationship as usual.

EOR services extend to both domestic and international contexts. In countries like the United States, Canada, and Australia, where different states or provinces entail distinct taxation and employment obligations, an employer of record adeptly manages these intricacies. Local employers may opt to collaborate with an EOR primarily to streamline their HR processes.

For example, Remote can serve as the legal employer on behalf of a Texas-based company across different U.S. states and internationally.

Typically, an EOR takes charge of HR administrative tasks, payroll processing, provision of compliant benefits, and oversight of taxation obligations. As the employing entity, partnering with an EOR eliminates the need for establishing a new legal business entity when hiring in another country. Instead, you can leverage the EOR’s established entity in the respective region.

Engaging with an EOR presents an ideal solution for companies aiming to expedite and simplify global hiring without incurring the costs of establishing a new entity or grappling with the complexities of managing compliance internally. The top EOR platforms guide you through the global hiring process, offering built-in localized expertise and compliance safeguards.

With a dependable EOR partner, you can efficiently and securely recruit and compensate workers on a global scale, bypassing the costly and intricate process of establishing your legal entities in multiple countries.

Outline the responsibilities typically associated with an EOR?

 

EORs take charge of a spectrum of responsibilities encompassing human resources activities, payroll management, tax and legal matters, compliance, and benefits administration for your overseas employees. The specific nature and execution of these duties can differ across companies and are contingent on the approach your EOR adopts in managing these functions on your behalf.

Typically, the key responsibilities of an EOR include the following:

 

Onboarding employees

EORs streamline the onboarding of local employees in foreign countries by overseeing administrative tasks such as drafting employment contracts, conducting background checks, and establishing payroll systems.

A seamless onboarding process plays a crucial role in shaping a positive initial perception of the company, contributing to heightened employee engagement and productivity right from the outset.

 

Compensating your employees in the currencies native to their respective locations

An EOR streamlines the payment process by facilitating the disbursement of salaries to employees in their local currency. This approach reduces exposure to exchange rate fluctuations and minimizes administrative complexities.

This service proves especially advantageous for multinational businesses with a dispersed workforce across various countries. It enhances the efficiency of payroll procedures, guaranteeing that employees receive their compensation promptly and in their preferred currency.

 

Managing and overseeing the provision of employee benefits packages

EORs take charge of the administration of employee benefits. They have the capability to design benefits packages that align with local regulations and cater to the expectations of employees. These packages often encompass healthcare, retirement plans, and a diverse array of additional perks.

By entrusting an EOR with benefits management, you can alleviate internal burdens related to compliance and administration. Top-tier EOR partners also bring invaluable localized expertise to the table, aiding in the development of competitive benefits packages that are tailored to attract and retain talent in each country where your hiring initiatives extend.

 

Deducting taxes from income

EORs take care of tax withholding for employees, ensuring the precise calculation and deduction of the correct amount of taxes from each paycheck. This meticulous process not only upholds legal compliance but also mitigates the company’s risk of potential liabilities.

 

Submitting tax forms

EORs also handle the submission of essential tax forms related to employment, including those for income tax, social security, and unemployment taxes. Undertaking this responsibility aids in averting penalties and fortifying regulatory compliance in every location where your workers are situated.

 

Contributing to government programs such as social security

 

EORs oversee contributions to government programs, including social security, unemployment insurance, and workers’ compensation. They meticulously document contributions made on behalf of both the employer and the employee.

These services play a crucial role in ensuring compliance with laws and regulations, safeguarding the interests of both parties in case of a claim.

 

Ensuring adherence to evolving local labor laws and regulations

 

Local labor laws undergo frequent changes and exhibit variations from one location to another, making it a daunting task to stay abreast of diverse country-specific requirements.

In the absence of an EOR or a similar service provider, your HR department would be tasked with navigating minimum wage laws, overtime regulations, leave policies, and other labor-related mandates in every region where your workforce is present.

EORs play a pivotal role in keeping companies informed and compliant with these dynamic regulations, thereby reducing the likelihood of legal issues.

For more in-depth information on the functions of an EOR, refer to our comprehensive guide.

 

Enumerate the benefits of engaging with an EOR for employment services?

 

Given the extensive range of services provided by an EOR, the advantages of opting for this solution to expedite and simplify international employment become evident.

These benefits result in cost savings, risk mitigation, and streamlined HR processes, making an EOR a potent ally for businesses with dispersed teams.

Here’s an in-depth exploration of the benefits of utilizing an EOR:

 

1. No Need for Local Legal Entity Setup:

EORs eliminate the requirement for businesses to establish a local legal entity to employ global workers, removing a significant barrier to global expansion. This simplifies access to global talent and business opportunities.

 

2. Access to Local Tax Law Experts:

Leveraging the local expertise of an EOR allows your company to focus on core business functions while the EOR manages complex tax and labor landscapes, relieving the burden on your HR team.

 

3. Comprehensive Understanding of Local Statutory Benefits:

EORs ensure businesses meet their obligations regarding statutory benefits, including paid leave, healthcare, and retirement contributions, relieving companies of the complexities associated with varying benefit structures.

 

4. Fast Onboarding of New Workers:

EORs facilitate swift onboarding by handling administrative tasks such as employment contracts and payroll setup. This enables companies to efficiently hire new talent, even in unfamiliar markets.

 

5. Intellectual Property Protections:

EORs contribute to safeguarding intellectual property by ensuring employment contracts include necessary confidentiality and non-disclosure agreements, crucial in global operations with diverse IP laws.

 

6. Mitigation of Classification Risks:

EORs help mitigate risks related to worker misclassification by correctly classifying workers according to local laws. This reduces the chances of unintentional misclassification and associated legal complications.

 

7. Reduced Paperwork:

EORs streamline administrative responsibilities, from payroll processing and tax filing to benefits administration and employment contracts, resulting in a significant reduction in paperwork for businesses.

8. Acceleration of Global Expansion Plans:

EORs expedite global expansion by offering a swift means to employ staff in new markets without the need for a legal entity. This accelerates go-to-market timelines and facilitates rapid growth.

In short, for any startup or established business that’s expanding internationally, using EOR services can bring a significant reduction in time, spend, and headaches.

Identify various types of EOR service providers?

 

There are two primary categories of EOR service providers: partner-dependent and owned-entity.

 

EOR service providers that rely on partnerships

As the name implies, EOR service providers that are partner-dependent do not directly deliver their services to clients. Instead, they resell the services of local third parties in the countries where they operate—either across all nations or only in specific ones.

This structure allows partner-dependent EORs to potentially generate higher margins, but it comes with the trade-off of less control. These EORs do not have ultimate authority over their own fees, leading to potential unpredictability in monthly bills. Moreover, they lack control over the experience provided to your employees, which can result in delays in problem resolution. This model also heightens security risks as data is exchanged between the EOR and various third-party providers.

In short, avoid partner-dependent EORs to keep a decent experience for your employees, minimize fees, and protect your employment data.

 

EOR service providers with owned entities

Owned-entity EOR service providers, such as Remote, do not depend on third parties. Instead, they establish and fully own their local legal entities, granting them complete control over their billing processes and the overall experience of your employees.

Remote, for example, exclusively operates in countries where it has complete ownership and operational control over its local legal entities. This strategic approach aims to offer cost savings, ensure a positive experience for your employees, and provide utmost protection for your intellectual property.

Regardless of the EOR you select, it is crucial to ensure that the EOR owns its own entity in the countries where your employees will be stationed.

Distinguish between an EOR and a PEO (Professional Employer Organization)?

 

You might be acquainted with professional employer organizations (PEOs) and might question whether these entities offer services comparable to EORs. Let’s briefly explore the distinctions.

Although some individuals may use the terms interchangeably, a PEO is fundamentally different from an EOR, particularly when referring to global payroll providers. At a superficial level, they may seem quite similar, as both are involved in managing HR responsibilities, including global payroll, benefits, withholding, and reporting.

Nevertheless, there exist several crucial distinctions:

• Having a local legal entity in a country is a prerequisite for utilizing the services of a PEO.
• Engaging with a PEO involves participating in a co-employment arrangement, a feature absent when collaborating with an EOR.
• In the case of a PEO, the ultimate responsibility for compliance with local labor laws rests with you.
• If you already possess a local legal entity, opting for a PEO might be more cost-effective compared to an EOR.
• In the absence of a local legal entity, partnering with an EOR is generally more cost-effective.

 

Explore scenarios indicating when it is advisable to use an EOR?

 

1. 1. 1. There are numerous scenarios in which partnering with an EOR might be a sensible choice: When you prefer not to create a legal local entity in a country where you intend to hire employees. Creating a legal local entity is a costly and time-consuming process, often extending over months and incurring expenses exceeding $100,000. Unless this aligns with your business’s financial strategy, an EOR presents a straightforward and cost-effective solution for the swift and easy hiring of international workers. With an EOR, you can have employees prepared to start working within days, all for a simple flat fee per worker.

1. 1. 2. In situations where you need to hire international workers, and the nature of their work doesn’t fit within the classification of contract work. While utilizing international contractors is a viable option, it’s important to note that not all roles can be appropriately classified as contract work.

Engaging in misclassification can expose you to severe consequences, including fines and penalties. In such instances, opting for an EOR is a prudent and advantageous choice.

1. 1. 3. When an employee who is already part of your workforce relocates. As remote work gains prevalence, employees are no longer bound to a single physical location. Modern workers have the flexibility to relocate globally while retaining their jobs. An EOR provides a swift and uncomplicated solution to retain employees who choose to relocate, eliminating the need to establish entirely new legal entities in multiple countries. With an EOR, you can seamlessly employ digital nomads moving from one country to another.

1. 1. 4. When there are apprehensions or uncertainties regarding the classification of workers. An increasing number of countries are intensifying their efforts to combat employee misclassification, which involves wrongly categorizing individuals as independent contractors instead of recognizing them as salaried workers with entitlement to associated benefits under local laws. Proper and ethical classification of employees is crucial, but definitions and enforcement practices vary widely from one country to another. A dependable EOR partner, equipped with local expertise, can assist you in accurately classifying employees and contractors, thus mitigating the risk of misclassification.

1. 1. 5. When safeguarding your intellectual property (IP) on a global scale is necessary. Collaborating with international employees and contractors brings potential risks to your intellectual property, necessitating careful consideration. Owned-entity EORs provide enhanced IP protection, offering reassurance as you extend your global team.

1. 1. 6. When you lack expertise in tax and employment law in a specific market. Employing someone in a new country entails acquiring knowledge of the local tax system and adhering to an entirely new set of employment laws. Given the complexity of these regulations, expecting to navigate them without external assistance is unrealistic. An EOR comprehends these laws on your behalf, offering assistance in seamlessly navigating new employment markets.

Detail the components typically included in an EOR agreement?

 

An EOR agreement encompasses various components:

• • • Assignment of the worker’s legal employment to the EOR.
    • Transfer of intellectual property created by the worker from the EOR to your business.
    • Specification of the employee’s salary.
    • Outline of the employee’s benefits.
    • Stipulation of any mandated social contributions to the country’s government, such as social security.
    • Terms related to payment.
    • Duration of the agreement.

Certain employers of record might request you to sign an exclusivity clause, binding you to a contract with a single provider for an extended period. Such exclusivity clauses pose a substantial risk to your business if the chosen provider fails to meet expectations, as they restrict your ability to switch to a different provider.

In contrast, Remote avoids including exclusivity clauses or long-term commitments in its EOR agreements. This approach grants you the flexibility to make informed choices for your business without being tied to a single provider.

 

Does an EOR manage payroll?

Certainly, an Employer of Record (EOR) assumes the responsibility of managing payroll for your international employees. The comprehensive payroll services provided by an EOR include tasks such as deducting taxes and mandatory social contributions. Additionally, EORs handle contributions for benefits like private health insurance. Beyond payroll management, EORs also oversee benefits administration, local tax filing, and overall compliance with relevant regulations.

Outline five key steps to follow when utilizing an EOR to hire international employees

 

1. Conduct research on Employer of Record (EOR) providers

Given the abundance of EOR providers, opt for the one that best aligns with your requirements and budget. Exercise due diligence by thoroughly researching multiple EOR providers, evaluating their services, and understanding their pricing structures.

 

2. Evaluate customer reviews

Customers often provide the most candid insights. Look for reviews and feedback from current clients of the EOR you are considering. Pay special attention to feedback from reviewers whose needs align with your own business, as their experiences are likely to be more relevant to your situation.

 

3. Take into account the experience of your employees

Given that the EOR will manage your employees’ payroll, benefits, and various HR responsibilities, it’s crucial to collaborate with a partner whom you trust to execute these tasks accurately and who will also treat your team with respect. This extends to interactions such as onboarding, receiving payment, and navigating tax-related matters.

 

4. Ensure proper compensation for your workers

Ensure that you are compensating your workers appropriately, considering the local market conditions and their roles within your company. A reliable EOR can assist you in determining the suitable salary for your employees in regions where you may lack extensive experience.

 

5. Protect your intellectual property

Your intellectual property serves as the lifeblood of your business. Without adequate protections for your IP, you could find yourself entangled in expensive legal disputes in foreign courts operating under unfamiliar laws.

To sidestep such challenges, ensure that you collaborate with an EOR that offers robust protection for your intellectual property and safeguards your rights to inventions.

 

Introduce a checklist for hiring international employees through an EOR

Utilize this checklist to assist you in maintaining compliance when employing across borders.

How much does an EOR cost?

EORs commonly adopt either a flat fee or a variable pricing model. Let’s explore the advantages and disadvantages of each approach:

 

Flat fee EOR pricing

In a flat fee model, a single charge is levied per employee, usually on a monthly or annual basis. Opting for an annual payment is generally more cost-effective, while monthly payments provide increased flexibility.

Flat fee pricing for EORs comes with several advantages. For instance, you can hire any number of employees at any salary, and your expenses remain consistent regardless of your employees’ compensation or the benefits you choose to provide. This is the favored choice for many companies.

Remote adheres to a transparent and straightforward flat-rate pricing structure in all the countries where we operate. We are dedicated to transparency, ensuring that there are no concealed fees or percentages in our charges.

 

Variable EOR pricing

In a variable pricing model, charges are based on a percentage of your employee’s salary. The amount you pay is directly tied to your worker’s earnings, potentially making it a more economical choice for businesses with lower-paid employees. However, as your employees’ salaries increase, your EOR expenses also rise.

This model may discourage wage increases, potentially impacting your company’s competitiveness in attracting top talent in the region.

It’s important to note that variable pricing introduces the possibility of fluctuating fees based on decisions made by your EOR provider. Generally, this model is characterized by less predictability and is often considered less favorable compared to a flat pricing model.

 

Discuss the factors influencing the cost of EOR services?

 

If opting not to utilize an EOR for hiring international workers, you have two alternatives. You can either engage contractors rather than employees, or you can choose to establish your own local legal entity.

 

Engaging global contractors

In the absence of a local legal entity and a decision against using an EOR, there’s still the option to hire global contractors. However, it’s essential to avoid arbitrarily designating employees as “contractors,” as this could lead to misclassification issues and legal complications.

When properly recognizing and respecting the independence of contractors, collaborating with global contractors can serve as an effective means to expand your business or manage time-sensitive tasks without the need for traditional employee onboarding.

 

Creating a local legal entity

If you intend to hire employees in another country without utilizing an EOR, the alternative is to establish your own local legal entity. This involves filing the necessary paperwork with local authorities and demonstrating your status as a registered business. Requirements may include establishing a physical presence in the country or meeting specific employee number criteria.

The process of establishing international entities is time-consuming, often taking several months or more, and can incur substantial costs, often reaching tens of thousands of dollars. However, this route may be justifiable, especially if you plan to establish a new office in the country.

While creating a local legal entity might not be practical for a small number of employees, it becomes a more viable option when planning to open an office and hire a larger workforce, typically around a hundred employees or more.

 

Present alternatives to using an EOR for employment solutions

 

If you opt to establish an international entity, an EOR can expedite your plans by enabling you to commence employing local workers without delays. Through the EOR, you can engage your team members until your local entity is fully established, at which point you can transfer the employee agreements to your newly formed company. This approach allows for a smoother transition and continuity in employment arrangements.

Promote Panda Work Global  EOR services as a specific option for consideration

 

If you’re prepared to expand your business internationally, consider trying Panda Work Global EOR services.

Panda Work Global provides extensive EOR services across numerous countries globally, with new additions each month.

Our EOR services encompass the entire process, from onboarding workers and managing payroll to handling tax withholding and reporting, along with the creation and administration of locally compliant benefits packages. Our user-friendly software grants convenient access and reporting for all your global employees and contractors.

Furthermore, Panda Work Global Guarantees ensures industry-leading intellectual property protections. Should you ever have inquiries, our team of local tax and legal experts is always ready to assist.

Ready to initiate the employment of workers in other countries through Panda Work Global EOR services? Sign up now to commence the onboarding process for employees and contractors within minutes!

If you’re uncertain whether Panda Work Global is the suitable choice for your business, reach out to us to connect with one of our global employment experts. We’ll assist you in making an informed decision.