What is an Employer of Record (EOR)?

It can be tasking for the human resource team to manage navigating every responsibility and tasks attached them as they involve many complex and intricate processes that could entail overwhelming risk, cost and time factors. To forego these  processes, An Employer of Record is one of the strategies that companies adopt.

An Employer of record (EOR) is a third party organization that assumes the duties of the  human resource  and becomes the legal employer of your workforce and all the employer tasks and  responsibilities attached to the human resource manager on behalf of the company. An Employer of records onboards, generates payrolls and manages employees as the human resource team is maintaining and controlling other day to day tasks and operations. 

What Does an Employer of Record (EOR) Do?

Their legal obligations determine the definition of an Employer of record (EOR)  within the jurisdiction in which they operate. There are various distinct terms used to indicate that a third-party is engaged ( EOR), including a local paryner, local employer, back-office staffing, local Employer of record, and specifically in china, a Foreign enterprise Service company (FESCO).

While the human resource team is attending and carrying out supervision of employees day to day tasks, the Employer of Record carries out the following duties ( Not limited to) in consultation with your company.

Handling taxes

The Employer of Record navigates the complexity of local and national tax regulations by ensuring compliance and accurate filing and submission. The local tax authorities enrolls an Employer of Record as an employer and mandates it to withhold certain taxes from the employee’s payment specifically income and payroll taxes.

Payroll

The Employer of Record processes and funds employee salaries, deductions and withholdings for taxes and benefits. This process is normally governed by parent company’s guidelines and wishes based on local customs and regulations.

Human resource onboarding and management 

The Employer of Record model handles  performance management, employee onboarding and contract termination on behalf of the human resource team when advised to do so by your company based on their contract terms and local laws when necessary.

Social contribution and employee benefits 

The Employer of Record is legally mandated to register your employees with health insurance, worker’s compensation and pension funds and other benefit providers. Provision of benefits may be for compliance with legal requirements for employers within the jurisdiction or in addition to a legal mandate. Benefits offered to employees by Employer of record are commonly referred to as PEO Insurance.

Understanding the Difference Between EOR, IOR and PEO.

All the above strategies operate as third party organizations but they possess distinct features, similarities and differences.

Employer of Record (EOR) Versus Intermediary of Record 

An Intermediary of Record (IOR) is a third party organization that acts as an intermediary between your company and the employee to perform administrative processes on behalf of your company’s human resource team. While both Intermediary of Record and Employer of Record act as third party organisations, EOR takes a wider responsibility by assuming all legal employment obligations unlike Intermediary of Record who handles administrative responsibilities provided by your company without becoming the employer.

There are various advantages attached to the application of Intermediary of Record.

• Efficiency: Intermediary of records assists in streamlining passage of information between parties and therefore minimize the burden and complexity of direct contacts and interactions
• Expertise: IOR have adequate and specialized experience to handle different dimensions within industries and markets which consequently helps in boosting quality, efficiency and compliance
• Confidentiality: Application of IOR helps in maintaining confidentiality and privacy between the hiring company and the employee due to limited direct interactions  between the two parties. Sensitive data and information is only shared with the intermediary of record rather than addressing it to the employee.
• Dispute resolution: The IOR helps in offering conflict resolution services to the two parties where dispute might have arose during transaction of business.

Employer of Record (EOR) Versus Professional Employment Organization 

Professional Employment Organization (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. Handling all the regulations and offering all the benefits required by every remote employee is often too complex and tasking to tackle especially for smaller businesses. In this case, the contact PEO to provide these services on their behalf. Unlike the EOR, the PEO also does not fully assume the legal role of an employer. PEO works alongside you as a co- employer of your workforce. The following are some of the advantages that come along with the application of PEO.

• Flexibility: PEO enables flexibility to hire remote full-time employees. In this case you do not have to open a legal business entity in the state where employees reside.
• Local knowledge: The PEO allows the employer to stay Informed and in adherence to all relevant local regulatory requirements and laws. You can place all your payroll solutions and compliance needs in the hands of a local organisation.
• Cost: A PEO can  save your company the cost of hassling talents by allowing you to hire local talent without the expense of establishing a local entity.

The PEO can also exist in another form known as the Global Empowerment Outsourcing ( GEO) which operates as the international version of PEO.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 in each country where there are employees ready to onboard them when required. A GEO service is convenient if

1. Your company needs global access to hire top talent.
2. You do not have a local business entity already set up.
3. Your business is testing the potential of a new foreign market.
4. It’s complicated or impossible to pay foreign workers in their local currency.
5. You have the desire to manage risks attached to human resources management and administration.

The application of GEO grants the employer a comprehensive solution compared to PEO at all costs. When the GEO acts as or partners with a local employer of records, the company handles all aspects of employment administration on your behalf. Although there may be a single GEO structure, it may comprise of several distinct Employer of Records operating locally in multiple countries or territories.

Employer of Record (EOR) Risks 

Just like any other business managing organization, EOR is subject to various risks in their operations. The following are some of the risks that an Employer of Record may encounter during transaction of business.

• Legal Compliance: Employer of Record should ensure that there is full compliance with all the state and local employment regulations and laws. Failure to comply may result in fines, penalties and severe legal consequences.
• Payroll and Taxation: Employee’s salaries and tax appropriations should be done accurately and tax filings done timely. Errors committed during this operation exposes the Employer of Record to potential financial penalties and legal issues.
• Worker compensation schemes: Employer of Record is liable to cover claims of compensation made by the employee in cases where injuries or illness occur while they are on duty. This is inclusive of appropriate insurance coverage and effective claims management.
• Worker classification: Error in classification of workers as independent contractors instead of employees may lead to severe financial and legal implications in taxes and penalties.

Advantages and Disadvantages of Employer of Record (EOR)

Like any other business strategy, you have to weigh the pros and cons of using an Employer of Record structure against the different possible options you have available.

Pros

• Easier Global Expansion facilitation.

Employer of Record minimizes obstacles and simplifies the process of building a team of professionals from multiple locations or countries. In most cases, local laws and regulations may require you to have a local entity to formally employ foreign staff. This requirement will be bypassed by the application of an international Employer of Record. You will benefit through saving on the cost of establishing international subsidiaries in each country or region allowing you to onboard new employees quickly.

• Risk Mitigation in Employment Relationships

The EOR acts a the legal employer and therefore assumes all the risks associated with employer- employee relationships such as liability issues, conflict and dispute, and employee compensation claims. This protects the parent company from potential legal liabilities in foreign jurisdictions.

• Cost Savings and Scalability

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.

• Timelines

The process of recruitment and onboarding is always time consuming and may task the Human resource team as they are also occupied with day to day operations and supervision. An EOR assists in curbing this process as they have a list of Professional candidates ready to be on-boarded. An Employer also minimises the lengthy steps you would need to establish a legal foreign business entity in order to access these foreign talents.

• 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.

Cons 

• 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 a subsidiary, you may prefer to do things on your own.

• Complexity

An EOR may introduce complex structures into your business operations. You will be required to to adhere to every legal and administrative regulation to work with a third party service provider.

• Loss of control

Your Human resource team may find it difficult to hand over a large part of their payroll and administrative tasks to a separate company in a foreign country, even if the Employer of Record has the required expertise and experience. 

• Differing strategies and culture

Different companies of different localities have different ways of doing things. Constraints may occur where companies find it difficult to embrace and apply strategies applied by the EOR. The employer also is exposed to limited flexibility to staffing changes and cultural differences due to contractual obligations with the EOR.

Workpay as an Employer of Record (EOR)

Choosing  the right Employer of Record plays a pivotal role in ensuring a streamline in human resource operations. This is a process that tends to be complex and expensive and thus challenging. Whereas it doesn't have to be arduous to you when Workpay can effectively offer you all these functions in a blink of an eye.

Workpay is an outstanding EOR service provider exclusively focused on supporting businesses that seek to hire employees in African countries without establishing local entities. It takes care of functions such as recruitment, onboarding, employee benefits administration, work permits/ visas, tax withholding and employee compliance.

Workpay is purely run by leading experts with vast experience in every function of EOR. We are highly affordable with utmost transparency in pricing by ensuring that it is tailored to suit your business needs and objectives. We provide efficient and reliable end-to-end payroll processing and ensure full compliance as we understand different payroll and tax models applied in African countries and their complexities.

Conclusion

The application of this model is reliant on your company's preference, nature of needs and the long-term commitment to working in the host country. Contact us today and let us partner with you in realizing your objectives and making the best decisions.