When should you use an employer of record, and which one should you choose?

The workforce has evolved before our eyes. Over the past year, we saw more workers going remote and more collaboration happening online, changing not just work but hiring forever.

It’s no wonder that the world’s top companies now recognize global hiring as a business advantage and opportunity, allowing them to gain insights into new markets and greater diversity in ideas. Additionally, international hiring helps solve challenges around finding the right talent and retaining talent among the growing number of workers who wish to relocate. But it’s not without risks and complexity, which have long created barriers to entry for recruitment teams who want to hire across borders.

So, what is a hiring manager to do? In many hiring scenarios, the most straightforward approach is working with an employer of record, or EOR.

Why use an employer of record?

Most recruiters have experienced the pain of finding the perfect candidate for a role, only to turn them down because of the country where they reside. Employers of record provide the solution to this problem.

What is an employer of record?

An employer of record is simply an entity through which you can legally (and efficiently!) employ your dream hires, regardless of where they live. The EOR acts as the worker’s employer on paper, but effectively, your hire will work for your business just like anyone else on your team.

Your EOR will typically manage hiring, compliance, payroll, benefits, and more for your foreign employees, thereby eliminating much of the cost and complication from the process of global hiring.

To learn more about what an employer of record does, see our previous article.

Why businesses need employers of record

The reality is that most companies don’t have the resources or expertise needed to make global hiring work, and mistakes can come with considerable risks.

Sean Page, a talent branding and hiring expert who has worked for some of the world’s top startups, agrees. “[Global hiring] is a resource-intensive process…It can take a minimum of six months to plan thoughtfully, get a vendor who has the knowledge to set up an entity in that particular country, and then get the IT, finance, people, talent, and legal teams all in alignment…In my previous roles, we normally wouldn’t even set up an entity until we knew that there were going to be multiple role openings in that particular country or region.”

For companies with the resources, opening an entity may not be the best use of their time or money. Partnering with an EOR that already has established entities in the countries where they want to hire is often faster and more cost effective. For example, Remote is an employer of record with business entities in dozens of countries, with all services set at a low flat rate with no hidden fees and no deposits. Remote's approach to transparent pricing is outlined in more detail in our Fair Price Guarantee.

Reducing cost and complications of global hiring are advantages of EORs, but far from the only ones. Hiring managers also need to be mindful of the risks of misclassifying workers or running astray of labor laws in the foreign countries.

See also: The consequences of misclassifying employees as contractors

Christy Zajack, a talent acquisition expert who has hired employees for companies like American Airlines, Hilton, and Pfizer, explains that, “Labor laws are often very confusing, different in actual practice [than in writing], or ill-defined until there are court decisions.” Laws around work hours, overtime, terminations, domicile, workplace, payroll, and taxes are just a few of the things Christy says employers must consider before hiring in another country.

Fortunately, by working with an EOR, businesses can tap into the expertise of employment lawyers and business experts whose entire focus is getting global hiring right. This means that internal talent specialists can focus on doing what they do best, like attracting and retaining the right talent on their teams. Not struggling to keep up with changing laws in multiple countries.

What makes an employer of record different?

Many recruitment teams have experience working with staffing agencies, payroll companies, and professional employer organizations (PEOs). But these providers are not the same as employers of record. It is vital to understand the differences when deciding on a solution for global hiring.

What is the difference between an EOR and a staffing agency?

Staffing agencies focus on matching businesses with talent, usually to help with their temporary or medium-term hiring needs. They offer up their talent network, review resumes, initiate contact between candidates and hiring managers, and collect feedback from both sides. However, unlike an EOR, they cannot actually hire an employee on behalf of a client’s business.

On the other hand, an employer of record manages everything involved with hiring a candidate, up to and including managing the employment contract. Employer of record services include payroll, taxes, benefits, compliance, and much more, making EORs a very different offering than a traditional staffing agency.

What is the difference between an EOR and a payroll company?

Payroll companies offer software services to automate the processing of their client’s payroll obligations and accounting for year-end taxes. Some also provide limited HR services but are not equipped to hire employees on behalf of their clients in countries worldwide.

The extent of an EOR’s services goes far beyond what a payroll company can offer for businesses that want to hire internationally. While a payroll company provides mostly financial services, an employer of record handles everything related to compliance, payroll, and benefits management in the countries where your employees work.

What is the difference between an EOR and a PEO?

A PEO, or professional employer organization, is essentially an outsourced HR department that handles things like payroll and benefits on behalf of their clients’ businesses. On the surface, this might seem quite similar to the services provided by an EOR, but there are significant differences.

A PEO requires your company to own a local legal entity in the country where you want to hire. In addition, a PEO requires your business to enter into a co-employment arrangement, in which both you and your PEO employ the worker at the same time.

You can read more about the differences between a PEO and an EOR in our previous article!

Use an EOR to stay safe when hiring internationally

If you’re interested in making your first global hires, an EOR is the safest and easiest solution. Whether you want to hire for fully remote roles, hybrid teams, or globally distributed offices, EORs will serve as your partner to protect your business throughout the hiring process as well as the lifespan of your employment agreements.

Avoid misclassification and other mistakes with local labor laws

Understanding local labor laws is perhaps the most daunting aspect for any HR or hiring manager considering their first international hire. This is why some companies go the route of hiring their workers as independent contractors instead of employees — a mistake that, unfortunately, can be costly.

Suppose benefits-eligible employees are found to be misclassified as independent contractors. In that case, it can cost the business thousands in back payments on employee taxes and social security benefits, in addition to the gross amount already paid to their workers. There may also be fines, interest, or other penalties depending on the specific situation and the misclassified worker’s country of residence.

Working through an EOR is an easy and cost-effective way for businesses to switch misclassified workers over to legitimate employees and avoid these penalties.

See also: When should you convert a contractor to an employee?

In addition to the risk of misclassification, staying abreast of changes in local labor laws in foreign countries falls well outside the scope of most talent and HR roles. Instead, when laws change in the countries where you have employees, your EOR notifies you swiftly and makes changes on your behalf, protecting your business and letting you rest easy.

Locally compliant benefits packages

Statutory and supplementary benefit packages are another essential thing to consider when deciding to hire internationally. It is important that what you offer your employees is compliant with local laws.

To secure the best talent, you need to be competitive with the packages you offer. This requires you to understand the expectations of workers in those regions, which may include supplementary benefits. This is where an employer of record can help, tailoring benefits packages to match what is customary in the country where you wish to hire.

Assistance managing terminations

Unfortunately, the reality of hiring workers anywhere is that you will sometimes have to deal with terminations. When the employee in question is in another country, the requirements change — and the consequences of mistakes become more severe.

Every country has its own laws around termination. Failure to comply can result in expensive international legal disputes. Hiring in the United States is based on “at-will employment,” for example, meaning an employee can be terminated at any time. But terminating employees in countries like the Czech Republic, for example, requires a two-month notice period.

An employer of record will understand the protocols for termination from the beginning of your new employee relationship, which is essential when drafting employment agreements with clauses for notice periods and severance. Your EOR can also help manage issues like safeguarding sensitive company data and intellectual property after termination.

Intellectual property protection

Risks around intellectual property ownership are crucial for companies to consider when hiring an employee in another country. Laws regarding intellectual property rights are complicated enough in one country. Add multiple to the mix, and questions of ownership quickly arise.

See also: Intellectual property and invention rights for remote teams

Employers of record either work with local legal experts or hire their own to handle IP transfers. At Remote, every company is protected by Remote IP Guard, an ironclad IP protection service that guarantees the maximum retention of your intellectual property rights when you employ internationally. Companies approaching major financial events, such as IPOs or acquisitions, must be especially vigilant about their IP.

Centralized management of international hires

When working with an employer of record like Remote, all necessary documentation for your hires is centralized in one place. This makes it easy to manage and review employee information at a glance. Your EOR will also ensure your recordkeeping is in line with local requirements, including maintaining documentation for terminated employees. The ease of managing and keeping records is just one additional benefit to consider when considering the value of an EOR.

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How to select the right employer of record for you

If you have decided that an employer of record is the best approach for your international hiring needs, the next step is deciding on the right EOR to meet those needs.

What to look for in a good EOR

The right employer of record will offer global HR solutions, salary simulations, onboarding, payroll approvals, benefits, local taxes, and more — all managed in one place.

But this is just the beginning of what a good EOR can provide to their clients. Security, which encompasses data protection and compliance, is also essential, as is IP protection.

You should also understand the way your EOR handles your business behind the scenes. Your employees deserve a great experience with your company, no matter where they live and work. A good EOR will prioritize the experience of your employees to ensure they feel like full, valued members of your team.

Why working with an EOR with owned entities is crucial

One of the most crucial things to understand when evaluating different employers of record is whether they own legal entities in the countries where they operate or whether they rely on a network of third-party partners.

Imagine you have a request for your employer of record. A partner-dependent EOR will have to go down a chain of vendors to get the correct information and execute on it. This could take days to complete, and any miscommunications between the various parties will create complications. This also makes EOR services more expensive: since there are so many intermediaries involved, everyone wants a cut of the money.

Alternatively, an owned-entity EOR has established legal business entities in the countries where you want to hire. They can control the entire hiring process and manage your global employees, which means less friction, lower cost, and a superior experience for you and your team.

Learn more about owned-entity versus partner-dependent employers of record in our helpful on-page guide.

Questions to ask an EOR before signing the contract

Before signing on with your employer of record, there are a few questions you should be sure to ask:

• Do you own an entity in this country, or are you dependent on third parties? Be cautious: some EORs own entities in some places and not in others, creating a chaotic experience for your employees (and unreliable pricing for you).

• Do you handle IP transfers and protection? Ask hard questions about how the EOR handles IP transfers. The best ones know exactly how the laws of the country will affect your IP and what you need to do to retain your rights.

• Are you sharing our data with any third parties? Again, EORs dependent on third parties have long lists of partners. Many of those partners have partners of their own, creating a web of companies with access to your sensitive data.

• Is all documentation and information centralized in one software hub? Your EOR handles the hard legal work on the back end, but your user experience is also critical. Try out the software to see whether you can manage everything you need in one place.

Getting answers to these questions will help you make the right decision on which partner to trust for your international hiring needs.

The best employer of record for your global team

You now know when to use an employer of record and how to find the best EOR for your business needs. So what comes next?

Remote can help you hire, pay, and onboard your global hires in just a few clicks while keeping your company compliant every step of the way. We don’t just manage the paperwork, though. Remote fully owns legal entities in every country where we operate, so you know you and your team will always receive the best experience. As you grow your global team, Remote will be there to help every step of the way.

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