This article is part of a larger series on How to Do Payroll.
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. 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. Partnering with an EOR lets you hire anywhere in the world without having to set up a new business entity. If you’re looking to expand abroad, consider Papaya Global. It provides hiring, payroll, benefits administration, and workforce management support in over 160 countries.
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 and payroll regulations.
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.
Employer of Record vs Professional Employer Organization
A professional employer organization (PEO) offers your small business similar services as an EOR. Operating under a co-employment relationship, a PEO becomes the employer of record for your employees. However, PEOs operate domestically and must be registered in the state where you have workers.
What makes an EOR different from a PEO is that an EOR operates internationally, saving 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 while you keep day-to-day management responsibilities.
Benefits of Using an Employer of Record
Today, small businesses look for ways to stay competitive and hire the best talent. One way to do that is to hire international employees, and an EOR can help your business expand to a global workforce. Click through the tabs below for the primary benefits of using an EOR.
Registering as a local business entity and setting up payroll can be expensive and time-consuming. Partnering with an EOR reduces the administrative burden of hiring a foreign worker, letting you hire high-quality employees quicker and more efficiently. It will pay your global workers in their local currency and make appropriate deductions. At the same time, you retain control over the work that your international employees do.
The EOR will be familiar with the local labor laws and nuances, ensuring compliance with both US and foreign laws. By partnering with an EOR, you can reduce your risk of compliance violations and fines.
In the event of an employment or labor law violation, your company will not be held responsible. Liability will fall on the EOR. Even though you don’t expect this to happen, if it does, you won’t have to worry about legal repercussions.
EORs take care of much of the administrative work for you. You already have enough to do, so dealing with payroll compliance, onboarding paperwork, benefits administration, and time sheets are things you need not handle. It will also deal with any issues relating to paying international employees and taxes, so you can focus on growing your business.
When you hire employees, you have substantial overhead, which is why many companies look to hire independent contractors or freelancers. However, you cannot dictate their daily activities or work schedules. If you do, you risk fines for misclassifying them as an independent contractor when they’re really an employee.
The same can occur with international employees. Small businesses often partner with international independent contractors to get access to highly skilled workers. But the company may cross the line of misclassification, something an EOR can help you avoid by hiring employees directly and shouldering the burden of being the employer.
How Employer of Record Pricing Works
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 disincentives you from raising wages or hiring more employees. 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.
How to Find an Employer of Record
If you have decided to expand your business globally, considering an EOR is a good option. Be diligent in your search as you want to make sure you partner with an established EOR but also one you feel comfortable with and can trust.
Consider companies that have experience in your industry and the country where you are looking to hire workers. When you narrow your list down to a handful of options, we recommend asking the following questions:
- 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 they don’t have a presence, then you’ll need to look elsewhere.
- 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.
- 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.
- 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.
- 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. 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.
Instead of having to hire a lawyer to set up an international entity, accountants to deal with international taxes, and a payroll company to pay international employees, partner with an EOR to provide all of those services for you. Since hiring international employees can present a number of legal and compliance challenges, using an EOR will help you manage those complexities and keep your focus on serving your client base.