Over the last two years, employment has become a much more international affair. People have relocated, hiring managers have looked beyond the borders of their vicinity in search for great talent. That has impacted not only where people dial and how remote companies have become but also how employment is set up. Companies that want to keep employing their internationally remote people fully compliantly have two options - one is to establish an entity and register as an employer in the jurisdiction where the person lives or alternatively use the services of an Employer of Record (EOR). Working with independent contractors long term is a bad idea and not something you should consider.
In this post, we explain in detail what the Employer of Record Model is and what to expect from such a service provider. Firstly, however, it’s important to understand what employment itself means.
An Employer of Record takes care ofemployment not performance management
We often put employment and managing someone's performance under the same umbrella. That, however, isn't the case, as one is a legal relationship, while the other is a working one.
Giving someone the wrong assignment, versus assigning them the false statutory obligation, doesn't carry the same weight of consequences. Employment is a legal status that comes with legal responsibility for ensuring that a person benefits from all of the employment rights in a particular territory, governed by local employment law. Performance management, on the other hand, is a working relationship around the nature of work itself.
When both employer and employees are based within the same jurisdiction, the company typically takes care of both the legal responsibility and the performance management. Geographical separation changes that, as a new jurisdiction requires a separate employer registration. To solve this, a company can either take the arduous task of registering as an employer directly, which involves setting up international payroll, or it can employ the services of an EOR.
What is an Employer of Record?
An Employer of Record is the legal employer of a worker in a certain country. As such, the Employer of Record takes care of all compliance aspects of employment, including payroll, taxes, statutory benefits, employment contracts and more.
The EOR model is nothing new, first originating in the US in the 1960s in an attempt to address the challenge of employing people across state lines. In the US, people are tax residents of the state they live in. Their employer is legally obliged to be registered for taxes in that same state and produce tax returns every year on their behalf. If a small business has multiple employees in multiple states, it can quickly find itself in a reporting and compliance nightmare. An Employer of Record comes to the rescue.
When using an Employer of Record, a company enters into a three-sided, co-employment contract, signed by the company, the employee and the PEO:
The company maintains a direct relationship with the employee, allocating them work tasks, and managing their performance.
As the one responsible for the legal employment, the EOR takes care of the operational side of things such as payroll, taxes, benefits, etc., ensuring the employee and the client are compliant with all legal regulations when it comes to employment.
The third party to the agreement, the employee, fulfils all of their obligations as a worker for the company.
Companies are now more frequently employing people in countries around the world, often in places where it takes far more than merely registering a tax number and filing annual returns to be legally compliant with all of that country’s tax regulations and employment legislation.
An Employer of Record offers an effective solution to deal with compliance challenges and the stress and uncertainty of employing people in more complex/higher-risk jurisdictions.
What are the benefits of working with an Employer of Record?
An Employer of Record is the legal employer of your workers, which means that they will handle a variety of compliance aspects that you don't have to worry about such as:
Producing the employment agreement
Filing employer payroll taxes
Filing employee taxes
Managing workers' compensation or other similar insurances
Providing health benefits (mandatory in many countries)
Offering retirement vehicles and pension schemes
Assisting in regulatory compliance
Advising on local employment regulations and practices.
Beyond producing the employment agreements and making sure they include all of the obligatory legal terms for that territory, an EOR also makes sure that employees are provided with any required notices or materials. For example, in Ireland, employers have to provide detailed information on disciplinary policies within a specific time frame after the employee's start date.
Once the employee is up and running, the EOR is the official keeper of records and is the point of contact for all employment regulations and HR compliance questions.
The Employer of Record will process the payroll every month, ensure that the appropriate taxes are filed, tax authorities notified, and payments made, and stay on top of all other statutory obligations. What this means is that you are not exposed to any compliance risks and can rest assured your workers are taken care of.
How to end an employment contract when working with an Employer of Record?
Your company handles the day-to-day working relationship with the employee, and your company is ultimately the party making decisions about your organisation’s strategy, and how that impacts your workforce. As one of the most complex and plain uncomfortable parts of employment relationships, the question of how to end employment agreements under the EOR model is one we are often asked.
If this situation arises, an EOR can support the company with the local knowledge of how to comply with the relevant country’s employment regulations. In addition, a good EOR should work with the company to ensure that the employment contract is ended in a sensitive manner: advising on the due process that has to be followed in the jurisdiction, and guiding the company in making sure the employee is treated respectfully.
While many US companies operate from "fire at will" states, where an employer can tell an employee, "Don't turn up tomorrow, you're done," in much of the world, employees have rights to be taken through a very clear and fair process, before a decision on ending their employment is made.
An EOR should have the local knowledge and deep understanding of appropriate steps and will act as an essential advisor for the company throughout this process. I can't emphasise strongly enough how important it is that a company consults its EOR and their local experts before going ahead with ending someone's employment. As tempting as it may be to follow a checklist, it's far too risky for a company to do this without appropriate support. Here are a few reasons:
Terminating a contract is an emotional ordeal, which is so taxing for both sides that mistakes can easily be made.
It can be incredibly daunting to handle a termination in-person, while in the same country. Adding cultural differences and the fact that conversations may not be happening face to face, makes it even more challenging.
Many managers have no formal training in handling terminations. Even if scripted, it can be easy to go off script and say something inappropriate. Managers need specialist coaching and support to handle these sensitive situations.
If the process isn't followed strictly, depending on the country, there can be severe consequences. In Ireland, for example, employment tribunals are not uncommon, and if a company mishandles even one step of the process or does not comply with the strict timeframes, the employment tribunal may find in-favour of the employee, incurring financial penalties for the employer.
Do I need an Employer of Record?
If you want to be fully compliant without getting a degree in international employment law, you do need an Employer of Record. Multi-country payroll providers or HR consultancies that do not specialise in Employer of Record services, will not be able to help you. Alternatively, acquiring the local knowledge, establishing that infrastructure and finding reliable partners locally will take a huge amount of time. At Boundless, we only work with established local experts that have been focused on the territory for many years, ensuring we can be the best Employer of Record in Europe and beyond. Learn how you can start employing your international workers with ease.
Need help in figuring out how to employ your international workers?
The making available of information to you on this site by Boundless shall not create a legal, confidential or other relationship between you and Boundless and does not constitute the provision of legal, tax, commercial or other professional advice by Boundless. You acknowledge and agree that any information on this site has not been prepared with your specific circumstances in mind, may not be suitable for use in your business, and does not constitute advice intended for reliance. You assume all risk and liability that may result from any such reliance on the information and you should seek independent advice from a lawyer or tax professional in the relevant jurisdiction(s) before doing so.
Written by Dee Coakley
Before founding international employment platform, Boundless, Dee Coakley was a three-time COO, having spent 10 years with B2B SaaS businesses (Masabi, Bizimply & Axonista). In her COO roles, she experienced first-hand the operational challenges of setting up employees in new countries, and so set about building a solution.
Boundless handles cross-border HR compliance and payroll for small and mid-size businesses, removing the barriers to growing teams internationally.
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