What Is an Employer of Record?

by Jennifer Kiesewetter in

TLDR

  • As a founder of a startup, you want to attract top talent and sometimes, that means reaching outside the borders of the U.S., which in the tech world means hiring STEM talent from China, India, or Russia or other overseas countries while you are located in California.  
  • To employ foreign STEM workers, you’d have to spend an excessive amount of time learning the rules and regulations of each country related to payroll, taxes, and benefits — time you simply don’t have as a startup.
  • One way to solve these problems is to hire an employer of record (EOR).
  • An EOR is a third-party organization that administers payroll and benefits for employees in different countries, complying with all local rules and regulations related to employment.
  • By serving in this capacity, the EOR acts as the “registered employer” for a foreign worker but does not supervise the worker or assign duties, or make decisions about compensation or termination. These decisions are left up to you, as the employer client of the EOR.
  • Using an EOR, you can legally hire foreign workers or send a U.S. co-worker to a foreign country without setting up a local office or potentially violating local employment and tax laws.
  • For a startup, the primary benefit of working with an EOR is the ability to conduct business in a foreign country without running afoul of local labor and employment laws and regulations.
  • Working with an EOR also eliminates your need to establish relationships with attorneys and accountants in multiple foreign countries.
  • EORs are not cookie-cutter solutions for your startup. As each one differs, you’ll need to complete your due diligence on how an EOR fits your business model and strategy for growth.

Thanks to technological advances and globalization, the world is much smaller today than even 10 years ago. And with a significant part of the global population working from home or other remote locations because of the COVID-19 pandemic, many employers worldwide are using freelancers or employees in geographic areas other than their own.

Although this is a positive for attracting top or specialized talent from other countries, it’s often difficult for companies of all sizes to expand into an unfamiliar market. Imagine your startup using STEM talent from China, India, or Russia while you are located in California.  To employ foreign STEM workers, you’d have to spend an excessive amount of time learning the rules and regulations of each country related to payroll, taxes, and benefits — time you simply don’t have as a startup.

Or, instead of engaging local STEM workers in foreign countries, your co-founder may want to spend several months in a foreign country, researching markets outside of the U.S. How do you compensate them during their time abroad? Are there any local rules and regulations of which you should be aware?

One way to solve these problems is to hire an employer of record (EOR). An EOR is a third-party organization that administers payroll and benefits for employees in different countries, complying with all local rules and regulations related to employment. Using an EOR, you can legally hire foreign workers or send a U.S. co-worker to a foreign country without setting up a local office or potentially violating local employment and tax laws.

If you want to take advantage of talent outside of your local geographic area or explore new marketplaces globally, using an EOR may be the most efficient and effective way to do so for your startup. In this article, we’re going to explore the pros and cons of an EOR for your startup.

What Does EOR Stand For?

An EOR stands for “employer of record.” Simply, an EOR is a third-party entity that serves as an intermediary in an employer-employee relationship. For example, the EOR hires a foreign worker and engages in payroll and benefits administration for them. However, the EOR does not participate in the day-to-day running of your startup but instead helps you avoid the complexity and potential noncompliance with foreign employment laws and regulations.

By serving in this capacity, the EOR acts as the “registered employer” for the foreign worker but does not supervise the worker, assign duties, or make decisions about compensation or termination. These decisions are left up to you, as the employer client of the EOR.

What Is the Difference Between an Employer and an Employer of Record?

As we mentioned above, the employer makes decisions about employee compensation, daily duties, performance, and termination. On the other hand, the employer of record serves as an intermediary between you — the startup — and the foreign worker by maintaining the foreign worker on its employee roster and administering payroll and benefits in compliance with local laws and regulations.

The primary benefit of using an EOR is to relieve you of having to navigate overseas employment laws and making sure your startup is in compliance. If you are using freelancers in several different countries, this would become an administrative nightmare. As a founder, you need to expend your resources in successfully launching and growing your startup.

Let’s look at what an employer of record does in more detail.

  • Provides a registered entity for running local payrolls
  • Complies with local labor and employment laws and regulations
  • Serves as an intermediary between the foreign employee and the governmental entities of the applicable country
  • Arranges work permits or visas as necessary
  • Advises the employer of what notices or disclosures must be made to the foreign employee

EOR vs. GEO

A GEO is a global employment organization that utilizes individual EORs in different countries for compliance. The GEO establishes and maintains oversight of the employer client relationship, whereas individual EORs administer payroll and benefits for their respective countries. While the GEO creates a single business structure, it may have multiple EORs under its umbrella, serving numerous host countries.

PEO vs. EOR

Now let’s look at the difference between a PEO and an EOR. A PEO, or a professional employment organization, provides turnkey human resources administration to your startup’s employees through a co-employment relationship.

In other words, your startup and the PEO share specific employer responsibilities, such as processing payroll, submitting employment taxes, administering employee benefits, maintaining workers’ compensation policies, and providing other human resources tasks and strategic guidance. In this co-employment relationship, a PEO serves as a professional employer of your startup's employees. 

For example, PEOs can process payroll for your employees as well as withhold and pay employment taxes, including federal income, federal unemployment, Social Security, and Medicare. PEOs can also offer and administer competitive benefits to your employees, such as health, dental and vision insurance as well as retirement plans.

Although PEOs oversee and manage payroll and benefits, they do not do so in foreign countries, as EORs do. Additionally, PEOs do not hire employees and maintain them on their payrolls like EORs. PEOs are primarily a U.S. creation, rooted in American laws and regulations. An EOR, however, handles labor and employment law issues in foreign countries where you may want to access talent for your startup.

Pros and Cons for a Startup

Like most business decisions, there are ups and downs to using the services of an employer of record. Before signing on the dotted line of an EOR’s service agreement, be sure you analyze both the pros and cons specific to your startup's needs.

Let’s look at some benefits and disadvantages of working with an EOR.

The Benefits of Working with an EOR as a Startup

The primary benefit of working with an EOR as a startup is the ability to conduct business in a foreign country without running afoul of the local labor and employment laws and regulations. Working with an EOR also eliminates the need to hire attorneys and accountants in those overseas countries where you employ freelance talent. The EOR will be equipped to deal with employment compliance issues specific to the country in question.

EORs can navigate the constantly shifting local immigration laws on your behalf. With increased scrutiny on visas and work permits, immigration compliance is an expensive and complicated area of the law. If, for example, you are using workers in a foreign country who are legally permitted to work there, there is not a risk of entering and exiting the country multiple times. Additionally, if choose to send U.S. citizens to a foreign country for an extended period, the EOR can help secure the appropriate immigration documents, such as work visas, minimizing your startup's non-compliance risk.

In many countries, remote payroll is not permitted, especially for longer work assignments. Because you are using an EOR incorporated in a foreign country and that EOR can run payroll locally, your startup avoids additional scrutiny. Your EOR will process the payroll in compliance with local employment and tax laws -- ensuring compliance. By making sure you don’t run afoul of local rules, you have saved time and money that you can put right back into your startup.

The Disadvantages of Working with an EOR as a Startup

EORs are not cookie-cutter solutions for your startup. As each one differs, you’ll need to complete your due diligence as to how an EOR fits your startup's business model and growth strategy.

For example, suppose you have experienced significant growth in your startup, and you’d like to engage 10 or more workers in a foreign country. In that case, it may be more cost-efficient to incorporate an entity in that country. It would make more sense financially to hire locally in that country. 

Additionally, you would more than likely administer your payroll and benefits yourself, in-house. In this case, you may use an EOR transitionally to help you get up and running, but an EOR would not be a long-term solution.

Another potential drawback is that as the employer-client, you lose control over local payroll and benefits. This is a different business model, often hard to get used to, as it contradicts that traditional direct employment model in the U.S. However, in weighing this potential loss of control, startups should consider this disadvantage against the advantage of having an entity familiar with local laws administering payroll and benefits.

Because the EOR handles the initial hiring and management of payroll and benefits, the employer-client may feel like there is a distant, or arm’s length, employment relationship. In these cases, the employer-client relies on the EOR’s knowledge and interpretation of local rules, including those impacting employee rights. Startups can mitigate this concern by confirming in writing, such as in the services agreement with the EOR, that the EOR must act in the startup's best interest when making employment-related decisions.

We can help!

At AbstractOps, we help early-stage founders streamline and automate regulatory and legal ops, HR, and finance so you can focus on what matters most — your business. If you're looking for help in vetting or hiring an EOR, we help by overall shepherding the process to ensure it's done right. Sign up to get started.

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