How does an Employer of Record work?

Over the last two years, employment has become a much more international affair. People have relocated, and hiring managers have looked beyond the borders of their vicinity in search of 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).

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.

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 the 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, require 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.

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 where they live. 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, helping companies avoid global hiring mistakes.

The concept is straightforward in practice. Here is what the process looks like, from making the hire to running payroll:

1. You choose the person and agree on the role: You find the talent, make the offer, and set the terms of the job, just as you would for any hire.
2.  The EOR signs a compliant local contract and onboards them: The EOR becomes the legal employer, putting the person on a locally compliant employment contract and handling onboarding.
3.  The EOR runs payroll, taxes, and benefits each cycle: Every pay period, the EOR processes payroll, files the correct taxes, and administers statutory benefits, keeping you compliant.
4. You manage the day-to-day work: The employee sits in your team and reports to you; the EOR handles the legal and administrative layer, not the working relationship.

Because there is no entity to register, hiring through an EOR is usually a matter of weeks, rather than the months it takes to set up a local entity.

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
• Processing payroll
• Filing employer payroll taxes
• Filing employee taxes
• Managing workers’ compensation or other similar insurance
• 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.

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 that your workers are taken care of.

An EOR is often confused with a PEO (Professional Employer Organisation), but the two work quite differently, and the difference matters for how you hire and who carries the risk.

An Employer of Record becomes the sole legal employer of your worker in the country. It signs the local employment contract, runs payroll, files taxes, and takes on the compliance obligations, so you can hire in a country where you have no legal entity of your own. The person works for you day to day, but on paper, the EOR is their employer.

A PEO works on a co-employment model. It shares employer responsibilities with you, usually handling payroll, benefits administration, and HR support, while you remain the legal employer. Because of that, a PEO normally requires you to already have your own registered entity in the country. It is a way to offload HR admin where you are already set up, not a way to hire somewhere new.

A few practical differences:

• Legal employer: With an EOR, the EOR is the legal employer; with a PEO, you are jointly the legal employer. 
• Local entity: An EOR needs no entity of your own; a PEO usually requires one.
• Best for: An EOR is for hiring in a country where you have no presence; a PEO is for streamlining HR where you already operate.
• Compliance risk: An EOR carries the compliance liability; a PEO shares it with you.
• Geography: EORs are typically used for international hiring, while PEOs are most common within a single country (especially the US).

If you want to hire someone in a country where you have no entity, you need an EOR. If you already have an entity and just want help running HR and payroll, a PEO can do that, but the legal responsibility and the risk stay with you.

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 under “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.

EOR pricing is usually structured in one of two ways: a flat monthly fee per employee, or a percentage of the employee’s salary. That fee sits on top of the salary itself and the statutory employment costs, such as employer taxes, social contributions, and mandatory benefits, that apply in the country.

For most companies, and especially for the first several hires in a new country, an EOR works out faster and cheaper than registering and running your own local entity, which carries setup fees and ongoing accounting, legal, and administrative overhead. To model the true employer cost in a specific country, use our employment cost calculator, and check the relevant country guide for local specifics.