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What Is An Employer Of Record?

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What Is An Employer Of Record?

Employer of record meaning. PEO benefits. Difference Between PEO, GEO and EOR.

Workpay
March 28, 2022
10
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March 28, 2022
8 min read
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What Is an Employer Of Record? Laying the jargon bare

Due to the COVID pandemic, thousands of businesses operate globally with a distributed workforce, and all indications are that they will continue to do so.

It can be tasking for HR teams to wrap their heads around the complex local and legal regulations concerning taxes, bonuses, employee benefits, and salaries that may be in force in specific countries.

Particularly for smaller organizations taking the DIY route, it could entail overwhelming risk, time, and cost factors. The stakes are exceptionally high if you want to take a to-in-the-water strategy to establish a small presence in a foreign country and grow your footprint there over time.

To simplify their global expansion strategies, many intelligent businesses of all sizes today utilize various plans to manage their distributed workforce: PEO (Professional Employment Organisation), (AOR) Agency of Record, GEO (Global Employment Outsourcing), and EOR (Employer of Record).

We will examine each of these terms and help you figure out which strategy works best for your business.

Understanding the Difference Between PEO, GEO and EOR

A PEO is a third-party service standard in most countries, where employment requirements vary significantly from one country to the next, and employers must provide employees with health and medical benefits.

For many smaller businesses, meeting all the different regulations and offering the benefits required by their remote employees is often too complex to tackle on their own, so they contract a PEO service provider.

Instead of fully assuming the legal role of an employer, the PEO service provider works alongside you as a co-employer of your workers. A PEO will take responsibility for all payroll administration tasks, HR support, and payment of benefits, leaving you to assign employees their daily tasks and focus on the aspects of their employment that impact your company's success.

The Benefits of PEO Services

The PEO employment model provides businesses with several advantages and benefits, including:

  • Flexibility: PEOs enables the flexibility to hire remote full-time employees (instead of contractors) risk-free. You do not need to open a legal business entity in the state or country where employees reside.
  • Local knowledge: The PEO allows you - the employer - to get a handle on all relevant local regulatory requirements and laws. You can place all your international payroll solutions and compliance needs in the hands of a local organization.
  • Cost: A PEO can save your company some costs by allowing you to hire local talent without the hassle and expense of establishing a local entity. The PEO will levy a service fee that varies from different vendors.
  • Time: A PEO will enable your company to assemble teams of remote workers with the skills you need in a fraction of the time it would take for you to hire through conventional means.

An important point to note is that US law recognizes the 'co-employment' model used by PEOs. However, throughout the rest of the world, things may not be as simple. In many cases, you will not have an entity that understands local laws or legally operates in the host country. For this reason, many companies hiring overseas workers opt for the GEO model and EOR firms.

The GEO - An International PEO

The GEO acts as a form of 'international PEO.' Popular in Asia and Africa, where many companies from the US and Europe outsource talent, a Global Employment Outsourcing company offers you a comprehensive international solution. A GEO is ideal for hiring employees abroad when you do not have a subsidiary or branch in a foreign country.

The GEO, therefore, acts as an Employer of Record (EOR) in each country where there are employees - set up and ready to bring them on board and add them to the payroll. This service streamlines your entire hiring process and ensures that your company stays compliant with the host country's laws, where your GEO relies on local experts and partners.

A GEO service is an excellent choice for you if:
  • Your business is testing out the potential of a new foreign market
  • You do not have a local business entity already set up
  • It is complicated or impossible to pay foreign workers in their local currency
  • You need global access to bring hire top talent
  • Your HR strategy heavily involves cost management and compliance
  • Risk management is your priority

In reality, having a GEO as the Employer of Record gives you a more comprehensive solution than using a PEO if you need to hire abroad for the short or long term. When the GEO acts as - or partners with - a local EOR, the company handles all aspects of employment administration on your behalf. Although there may be a single GEO structure, it may contain several different EORs operating locally in multiple countries or territories.

What Does an EOR Do?

Their legal obligations determine the definition of an Employer of Record (EOR) within the jurisdiction or country in which they operate. Across the world, there are several different terms used to indicate that a third-party EOR is engaged, including a local partner, local employer, back-office staffing, local EOR, and specifically in China, a Foreign Enterprise Service Company (FESCO).

While your company continues to carry out supervision of the workers' day-to-day tasks, the EOR carries out the following duties in consultation with your company:

                                                      Handling Taxes

The local tax authorities register an EOR as the employer of local staff. As a result, the regulations require the company to withhold certain taxes from the employee's payments, specifically income and payroll taxes. Additionally, the authorities require the EOR to submit taxes regularly while complying with all reporting requirements.

                                                     Processing Payroll

An EOR processes payroll for all of your foreign employees in line with their jurisdiction's legal requirements. This process includes managing all required deductions, expense reimbursements, leave entitlements, and garnishments. Local custom and your company's wishes govern the payment methods and cycles they follow.

                                                    Social Contributions and Employee Benefits

The EOR is responsible for registering your employees with health insurance, workers' compensation and pension funds, and other benefits providers. Provision of benefits may be for compliance with legal requirements for employers within the jurisdiction or in addition to a legal mandate. If an EOR offers benefits to employees, they are commonly known as PEO insurance.

                                                    Drafting and Signing Employment Contracts

An EOR employs foreign staff on your behalf under locally compliant employment contracts.

Termination of Employment and Renewal of Contracts

The EOR can terminate an employee on your advice according to their contract terms and local laws when necessary. Similarly, they handle the renewal of contracts when due.

Advantages and Disadvantages of EOR

Like any other business strategy, you have to weigh the pros and cons of using a GEO or EOR structure against the different options you have available.

Pros:

1.Time-Saving:

There are many steps you would need to take to establish a legal foreign business entity - company registration, drafting employment contracts, etc. When you consider the possible cultural and language barriers that setting up a subsidiary may involve, you will find genuine value in engaging with an EOR to handle your foreign employment needs. You can plan and execute quickly with their local knowledge, taking on new hires with minimum delay.

2.Easier International Expansion:

When seeking to build a team of professionals from multiple locations or countries, local laws may require you to have a local entity formally employ your foreign staff.

An international Employer of Record vendor can recruit professionals from multiple countries without the need to have local entities. You benefit through saving on the cost of establishing international subsidiaries in each country or region, allowing you to onboard new employees quickly.

Your Employer of Record solution will also ensure that all foreign staff are fully compliant with immigration and visa requirements.

3.Legally Sound Employer / Employee Relationship:

A GEO model, along with its associated EOR structure, gives you access to a legally recognized employer in a foreign country, not just a mere payroll provider. An EOR also offers valuable local expertise, knowledge, and on-the-ground experience. In addition, your employees can easily access a tangible resource to support any of their administrative needs, no matter where your headquarters are.

4.Lower Costs:

Using a GEO service will help you manage the costs of hiring employees overseas, particularly if your country is simultaneously entering multiple countries or setting up remote teams across regions. Furthermore, as a separate entity, the EOR helps insulate your company from any permanent establishment taxes triggered when your company sets up a foreign branch office.

5.Reduced Risk and Better Statutory Compliance:

Your company's most significant risk when hiring overseas is failure to comply with foreign tax and employment laws. A GEO ensures that your company meets all local statutory regulations, which is crucial when hiring employees overseas since they may be more familiar with their home country's employee protections and labour rights than your HR department.

Pension contribution requirements, health insurance, and payroll obligations are complex and based on frequently changing laws. Other tax issues, like handling stock options given to your foreign employees, are incredibly complicated.

As a compliance expert, your EOR understands all necessary legal requirements and takes on the liability for non-compliance.

6.Handling Insurance and Benefits:

A GEO ensures that you provide your employees with all the insurances needed by the host country, including workers' compensation, professional liability, and health cover.

Accessing competitive insurance packages for your employees can be especially difficult if you are a small or medium-sized enterprise (SME). For instance, improving employee access to pension plans is one of the main reasons for introducing EOR services in the first place.

7.Avoid Misclassification of Employees:

When hiring foreign talent, there is the temptation to avoid employing permanent staff altogether and instead engage individuals from overseas as independent contractors.

However, this contracting arrangement is a precarious move. If the host country's employment or tax regulators or courts determine the nature of your talent's engagement to be employed, you could face severe liabilities and penalties.

Since the EOR talks about workers as bona fide employees, you reduce the risk of misclassification.

Cons

Although there are many advantages to using a GEO as your foreign EOR, we understand that no business solution is a perfect fit for every company. Here are a few reasons you might choose not to use a GEO:

1.Cost:

As with any other professional service, your GEO has a cost. Although the fee is affordable compared to the cost of opening a branch or subsidiary, you may prefer to do things on your own.

2.Ceding Some Control Over Employees:

Your HR department may find it difficult to hand over a large part of their payroll and employment tasks to a separate company in a foreign country, even if the EOR has the required expertise and experience.

Although your foreign employees work under your supervision when carrying out their day-to-day duties, all formal disciplinary action is the responsibility of the EOR. As a result, many HR tasks require the EOR's cooperation. There could be possible delays in effecting this that the EOR fails to comply with your company's directions.

However, you can mitigate this disadvantage by having explicit terms of engagement in your contract with the EOR. The contract should specify that the EOR must act on your company's directions.

3.Non-Alignment with Your Company's Overall Strategy:

If your company is a large multinational, you may have the resources you need to enter a new market and set up an entity by yourself; You may feel that getting assistance from a local partner is unnecessary.

We Provide GEO Services and Access to Top African Talent

To many businesses, the GEO/EOR service models have enabled quick access to markets in different regions worldwide using local expertise and at a fraction of the cost of incorporating overseas. However, whether this model works for your specific situation depends on your company's objectives, how many employees you need to hire abroad, and your long-term commitment to working in the host country.

If you want to know if the EOR model can work for you, contact us and let us help you make the best decision from Day One.

Workpay
Workpay Africa

Workpay is a HR and Payroll software company that offers time & attendance, payroll, human resource, leave, expenses and remote teams solutions to businesses across Africa.

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