But what exactly is an EOR? In a sense, it depends who you ask. For overburdened HR teams, it’s a way to finally onboard that savvy foreign developer as a fully fledged employee. For a financial controller running a global payroll, EOR means something like “Efficient, Orderly Remuneration”. And for the legal experts they all rely on, an EOR provides reliable answers to all the perilous riddles of foreign labor law and tax compliance.
A (good) EOR is all of that – and a little more
From a thirty thousand foot view, it’s all three – and ideally, something more (if you’re familiar with the basics and you want to know more about the “more”, you can go ahead and skip to “Choosing an EOR”). Before we get there, we’ll be discussing what an EOR can and can’t do, the various types of EOR out there, and the questions that business leaders should ask before they partner with one.
EOR services: charting a safe course for global expansion
Most of the conversation around global talent mobility focuses on the opportunities it presents: global teams, broken barriers, growth in new markets. That’s all true – but there’s more than meets the eye. Before the glamorous LinkedIn posts of happy globetrotting employees get posted, there’s legwork that needs to be done – legwork that EORs specialize in.
In a nutshell, it works like this: an EOR employs and pays a company’s foreign workers on its behalf, acting as their legal employer. Through this relationship, companies can hire in countries where they do not have their own legal entities – and they can do it almost as quickly as if they were hiring someone from their own city. The alternative is far less elegant: without an EOR to represent them, businesses have to shell out for a Permanent Establishment (PE) of their own in each country where they want to hire.
Why a permanent establishment is seldom “Plan A”
Establishing a permanent establishment is a serious undertaking for any business, big or small. The time and cost that it takes varies from country to country. But those costs can be prohibitive, especially for companies who are just beginning to tap a new market, or who are not looking to work with large headcounts right away. EORs make it possible to land in a new territory and get started, without the expense and administrative burden of local entity incorporation.
So far, so good, but an EOR partnership doesn’t tick the local entity box. An EOR takes over key functions on its clients’ behalf. Let’s take a look at the most vital ones.
2 key functions EORs handle for globally expanding businesses – and 1 they don’t
EORs typically handle onboarding and compliance, including contracts and payments. But they don’t interfere with the day to day management of teams.
Local contracts and onboarding: where the buck stops
As the effective employer of your staff, an EOR issues contracts that meet legal requirements in the countries where they live. This simplifies hiring for internal HR teams, who already have enough to deal with. Rather than waste time on desktop research or expensive legal constants, HR specialists can focus on recruiting, interviewing and enabling new people (the stuff they actually need to do).
Staying compliant: today, tomorrow, and whenever regulations change (as they inevitably do)
Employers of Record also make it possible for their clients to comply with local labor and tax regulations as they expand into new territories. For executives, this is crucial: navigating the intricate details of foreign labor law is costly and exposes them to unnecessary risk. An EOR is a cost effective way of outsourcing this responsibility to seasoned professionals, while the C suite steers the ship.
Outsource responsibility, retain control
While they take on legal responsibilities on their clients’ behalf, EORs do not interfere with the management of employees’ tasks. The EOR is the employer on paper, but in reality, their clients manage their staff, just as they would ordinarily.
Can you hire international talent without an Employer of Record?
The short answer: yes. Companies can work remotely with foreign nationals on their own, without any global employment services provider. But only if at least one of these is true:
- The company has its own legal entities in the countries where they hire, to handle employment and payroll.
- All foreign nationals are brought on as independent contractors, not employees.
The second option is attractive, especially for companies who aren’t ready to put considerable resources on the line. But independent contracting isn’t a silver bullet. To work with independent contractors, companies must spare no effort to classify them correctly. Companies who misclassify employees as contractors in order to avoid paying tax and benefits face dire legal consequences.
Penalties for misclassification: nobody gets off lightly
Each country has its own rules, but none take this issue lightly. In the United States, companies who knowingly and fraudulently misclassify can face penalties of up to $10,000 per misclassified worker, and prison time. Even those who do it by mistake aren’t off the hook: they’re liable for fines and backdated taxes. For a more thorough treatment of this issue, check out our guide to classification for payroll officers.
Legal sanctions aside, in most cases, contractors can only get you so far. The really business-critical work that drives growth is almost always done by employees.
That brings us right back to the value of an EOR: employing people, wherever they are, and in the right way. But how should business leaders pick the right one?
Choosing an EOR: how to read between the lines of a polished sales pitch
The growth in remote work has fueled unprecedented growth in the availability of professional employment services. That’s good news for businesses, but it also makes it even more important to do due diligence before picking an EOR. Here are some key questions that all businesses should ask during their research process.
How many countries are covered?
While most EORs aim to cover as many countries as possible, some have definite strengths in particular regions. It’s worth discovering what those are, because an EOR that focuses on LATAM may not be the best option for a business looking to hire in EMEA, and vice versa. When it comes to the precise number of territories in an EOR’s range, don’t be distracted by impressive figures. Drill down on what they mean: in particular, you’ll want to know whether those entities are fully owned, which brings us to our next point.
Fully owned, or mediated by independent service providers?
Some EORs operate a network of international subsidiaries that they own. Others work with independent service providers in each country where they operate: in essence, this means that their clients have to work with intermediaries.
In most cases, it’s better to partner with an EOR who owns its network outright. They are able to provide far more transparency and accountability. It’s far easier to resolve urgent technical and legal difficulties directly with a single EOR partner. Involving intermediaries in these discussions adds complexity but no clear advantages.
Customer service: more than just troubleshooting
Before establishing a partnership with any EOR, it’s worth investigating the level of service that its clients get as part of their service level agreement. Because the services they offer touch on almost every aspect of a growing business, the customer support that EORs provide should always go further than run-of-the-mill SaaS training and troubleshooting. Most EORs advertise their extensive legal expertise and advisory capabilities – clients should be able to leverage that when they need it.
A customer service manager for an EOR client should be able to identify solutions to a wide range of business challenges. If that’s the level of service that an EOR offers, it’s bound to surface in what their clients are saying about them online.
Explore the world, one great hire at a time, with Playroll’s Employer of Record Services
Playroll’s technology-enabled global platform makes it possible for companies to expand their teams internationally and retain talent. With our fully-owned network of international subsidiaries, we make it possible for our clients to hire in over 170 countries, all without the need to set up local entities of their own. And as our customers tell us time and again, our customer service is second to none.
By removing the risk and much of the administrative burden of international hiring, Playroll lets businesses focus on what matters most: finding the people they need and building their global presence. To find out more about how Playroll could activate your global expansion plans, schedule a demo with our team. They’ll guide you through the platform and show you how Playroll ticks all the boxes on your EOR wish list.