Employer of Record: What a Small Business Should Know

An employer of record (EOR) is an organization that takes financial and legal responsibility for your small business’s international employees by employing them directly, enabling you to work with overseas employees without opening a legal entity in that country. It handles onboarding, payroll, benefits administration, unemployment and workers’ compensation claims, and taxes and does not intervene in your ability to direct your staff’s day-to-day activities.

Small businesses may find an EOR valuable when looking to hire employees in a different country. If you’re looking to expand abroad, consider Papaya Global. It provides hiring, payroll, benefits administration, and workforce management support in over 160 countries.

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Let’s take a closer look at what an employer of record is, when you might need one, and how to find one.

How an Employer of Record Works

With entities established in various countries around the world, an EOR hires local workers on your behalf. It assumes legal responsibility for the workers, ensuring compliance with all local employment laws. It also handles payroll and taxes on your behalf for the foreign employees.

While the EOR pays the employees and manages compliance, your company is still responsible for the workers’ assignments, day-to-day duties, development, and performance evaluations. You’re also responsible for paying the EOR like you would any other vendor.

Administrative Functions an EOR Supports

The biggest value an EOR provides to a small business is taking over the complexities and risks of HR-related functions in numerous countries. This frees up your internal resources to focus on your core business operations.

It takes over certain key functions, such as:

• Payroll processing: It will manage your international payroll, ensuring employees are paid accurately and on time. Learn more about the basics of payroll in our how to do payroll guide, as well as the nuances of the global payroll process in our how to pay international employees article.
• Tax compliance: It will handle the administrative functions of tax compliance, ensuring your international payroll taxes are accurately calculated and paid.
• Benefits administration: It can help small businesses manage employee benefits, including health insurance, retirement plans, employee perks, and any other global benefits that may be required by a foreign country.
• HR compliance: It supports your business with HR compliance, including those regarding policies, procedures, and training. Check out our guides to payroll compliance and federal labor laws to learn about the basic regulations you have to follow.
• Risk management: An EOR helps you manage HR risks by managing your international workers’ compensation and unemployment claims.

Employer of Record Pricing

EOR costs can vary depending on your company’s needs. Some will charge a flat fee, while others charge by a percentage of the payroll they run for your company.

We recommend avoiding the latter pricing model. Although it initially appears that you’ll pay less, a percentage-based pricing structure disincentivizes you from raising wages. Even though an EOR may not be providing any additional services, higher payrolls result in higher costs to the EOR.

When you pay a flat fee, you can hire international talent without worrying about increasing your EOR costs each time a raise is given—the only time your costs go up is when you hire new employees. The fee ranges based on the services you need, but often falls around $200 to $500 per month, per employee. Knowing this cost will help you budget better and be prepared for the increase with each new hire.

When a Small Business May Need an EOR

If your business is struggling with HR responsibilities abroad, it might be time to consider an EOR. Some signs that indicate it may be time include increased company growth, the need for international talent, and the desire to reduce administrative tasks in HR.

Here are some examples of situations where a business might need an EOR:

• Expanding into foreign markets: EOR services help you navigate the complex and diverse legal requirements of foreign countries while protecting your business from legal risks.
• Managing international employees: If you already have international workers, an EOR can be used to manage the payroll, benefits, and compliance.
• Reduce administrative inefficiencies: EOR services can streamline and simplify HR responsibilities, freeing up your resources to focus on core business functions.
• Mergers and acquisitions: During cross-border mergers and acquisitions, EOR services can help manage the integration of employees from different countries, ensuring compliance with local labor laws.
• Remote workforce management: As remote work continues to grow in popularity, EOR services can help manage the employment of remote workers across various countries, ensuring legal compliance and an efficient HR process.
• Simplify multi-country operations: If your business operates in multiple countries, using an EOR can centralize and streamline your international HR processes, reducing administrative burdens and ensuring consistent compliance.

Using an EOR vs a PEO

A professional employer organization (PEO) offers your small business similar services as an EOR. Though both a PEO and an EOR function in similar co-employment relationships, they are distinct entities. An EOR operates on both a domestic and international level, whereas PEOs only operate domestically and must be registered in the state where you have workers.

The fact that an EOR operates internationally can save your company the time and expense of setting up a legal entity in another country. The EOR retains legal and financial responsibility for your workers—just as a PEO does domestically—while you keep day-to-day management responsibilities.

Using an EOR vs Partnering With International Freelancers

Small businesses with a global footprint or those looking to expand globally need a reliable and compliant solution for managing employees across different countries. An EOR would be the best bet in these situations.

For companies looking for a lower-cost solution or to supplement their existing international workforce, an international freelancer may make more sense. However, it’s important to ensure that you have processes in place to manage legal, compliance, and tax requirements.

Partnering with international independent contractors or freelancers provides you with the flexibility to engage qualified professionals from anywhere in the world without the regulatory and compliance restrictions of employing someone. However, many countries have recently expanded protections for independent contractors and freelancers that may include a business paying certain benefits, registering with the country, and ensuring accurate classification.

When using an EOR, you can avoid legal headaches, as it is responsible for employment law compliance. It can also offer a more structured arrangement, taking on many administrative responsibilities that would be left up to your internal team to handle with international freelancers, potentially offering more peace of mind.

How to Find an Employer of Record

Here are some tips to help you get started in your search for an EOR:

• Search online: This is an obvious place to start. By visiting the websites of different EOR providers, you can get a sense of their services and possibly how much these would cost.
• Use your network: Reach out to your network individually and on sites like LinkedIn to help direct your search. This is a great way to get personal information about what it’s like to work with specific EOR providers.

When you narrow your list down to a handful of options, we recommend asking the following questions:

1. Do you have operations in X country? The EOR you choose must have existing operations in the country where you want to hire. Ask this question first because if it doesn’t have a presence, then you’ll need to look elsewhere.
2. How do you keep up-to-date on local employment laws? Just like when you hire an HR staff member, the employer of record you choose needs to have in-depth knowledge of local employment laws. This will help mitigate your risk and ensure your international workers get paid on time.
3. Will I have a single point of contact? Some employers of record outsource their base-level support, and you could end up calling into a call center and speaking with a different person each time you have a question. A best-in-class EOR, however, will assign you a dedicated representative you can call or email with questions. This person will get to know your business and your employees, giving them the ability to provide you with accurate and timely guidance and support.
4. How do you ensure international employees feel a part of the team? You don’t want your international workers to feel like they’re not a part of the team. Remote work presents challenges, but an established EOR will have ways to ensure the international team members feel connected to the rest of your company, creating a cohesive and collaborative work environment for everyone.
5. What benefits can you offer employees? The EOR will provide benefits to your international employees. While they may not match exactly with the benefits you offer domestic employees, you want to ensure your foreign workers have access to quality benefits, and any benefits required by the foreign country. At a minimum, you’ll want an EOR to offer insurance, vacation time, retirement plans, and training and development programs.

In addition to these questions, ask for references. Speak with current and former clients of the EOR. This will give you insight into what it’s like to be a client of the company and how you can expect to be treated. If an EOR refuses to give you references, that’s a big red flag, and you should look elsewhere.

Pros & Cons of Using an Employer of Record

Expanding operations abroad can be a daunting prospect for any small business. Hiring foreign employees may be seen as a risky investment, given the administrative and legal obstacles involved. Fortunately, partnering with an EOR presents numerous advantages for a small business seeking to improve its international position.

However, it’s important to be aware of the potential downsides associated with using EOR services. Here’s a breakdown of the pros and cons of using an EOR.

Bottom Line

Instead of going through the hassle of hiring a lawyer for an international entity setup, a payroll company to handle paying employees, and accountants to manage international taxes, partnering with an EOR is an all-in-one solution that can help you with all of those services and more. With the help and support of an EOR, you can navigate complex international employee laws and regulations while maintaining compliance and taking care of administrative tasks like payroll and taxes. It also frees up valuable time and resources to create exceptional experiences for your employees, expand your business offerings, and increase your profitability.