What are the Differences Between an Employer of Record (EOR) and In-House Human Resources (HR)?
When you hire workers in multiple countries, you have two main ways of employing them compliantly: employing them directly or working with an Employer of Record.
To make the right choice of how you should employ internationally and on whom the responsibility for them falls – predominantly your internal HR team versus predominantly the EOR – it’s important to understand the implications of each in terms of time, money, and workload involved. Choosing one over the other will impact your company differently, so it’s important to understand each option so you make the right choice for you.
Relying on in-house HR for employee management makes sense when all or most employees of a given organisation are within the same jurisdiction. But even if a small number of employees are overseas, mostly relying on in-house HR will quickly become a strain as each country comes with its own set of requirements and requires deep understanding.
All this to say, in-house HR teams can manage cross-border employees, but doing so is a significant challenge, requires a huge amount of time and money resources, and generally involves many teams of people, among other obstacles. This grows exponentially the more countries a company has employees in.
An EOR, on the other hand, is an external partner that takes on the legal and administrative responsibilities and workload of employing cross-border workers for a given organisation. When a company employs workers in multiple countries, enlisting the help of an EOR takes the questions and uncertainties out of remaining compliant in every country where the company employs its workers. Moreover, it spares the business the need to do complex legal, administrative and payroll work, thus being able to focus on what truly matters – growing the business.
The choice of whether to employ directly or through the help of an EOR depends on a company's global expansion needs, legal considerations, and preferences for HR management. It’s important not to underestimate the amount of time this would take, however, as setting up the infrastructure to be able to employ people is a very small part of the work involved. That said, it’s important to note that even when working with an EOR, a company can expect to involve the internal HR team to work with the EOR directly.
Why should my company hire an EOR instead of relying solely on our in-house HR team?
Simply put, it’s an Employer of Record’s domain expertise to effectively and compliantly employ people in different countries. By electing to work with an EOR, you skip all the arduous work of having to build the internal know-how of employing and paying people abroad. Just as companies elect to work with consultants and agencies in domains that are not their immediate expertise, such as marketing, advertising, recruitment, and so on, an EOR is the best possible help when it comes to the administrative and compliance-related responsibilities of employing people. Even when working with an Employer of Record, there are parts of global employment that your internal HR department will always handle. However, there are others better left to people who specialise in international employment.
The reality is that when managing a team overseas, the challenges dramatically increase for your internal HR team. Here are five major areas that become more complicated when managing a global team.
Adhering to all employee rights
Many countries share a list of similar basic rights for anyone employed in their jurisdiction, but some countries may extend additional rights to their citizens and tax residents. Employee rights must be protected, respected, and extended based on the local employee protection laws of the worker, regardless of where the company is based and the employee rights in the company’s primary location.
Employee rights include things like working hours, breaks, paid time off and its accrual, protection for whistleblowers, and protection against things like discrimination or harassment, among other issues. These can vary widely from country to country.
As employee rights can vary significantly from country to country, HR managers overseeing a global workforce have much more complicated responsibilities. In addition to their in-house responsibilities, they’re also responsible for ensuring every employee is compliant in every country. Consider countries like Portugal or Lithuania, where workers have a right to enrol in continued learning courses or programs to enhance their skills in their field. An HR manager attempting to keep tabs on all of these things will find it a challenge.
Creating locally compliant employment contracts
As with employee rights, all countries have strict requirements about what is or is not included in the employment contract between a worker and a company. Knowing how workers should be classified is extremely important, and mistakes and employee misclassifications can be costly and devastating for the organisation. An internal HR team will need legal advice on this.
Likewise, countries will require contracts to be written in the local language of the employee regardless of the local language of the company. An in-house HR team, when not working with an EOR, would be responsible for procuring these contracts from external legal advisors, making them available in both English and the employee’s local language, and updating them with changes as needed.
Most importantly, employers must remember that the local rule of law outweighs and supersedes any language in a formal contract. Depending on the dispute, the employee’s local government will rule on legal disagreements based on its jurisdictional regulations over any language in a written contract.
Managing employee benefits
Employee benefits packages include dealing with a mix of mandatory and non-statutory benefits such as holiday leave and pay; maternity, paternity, and parental leave; medical leave; social and pension contributions; healthcare coverage; and so on.
All Organisation for Economic Co-operation and Development (OECD) countries have mandated benefit packages that employees must legally contribute to and receive. In some countries, both the employer and the worker are expected to contribute to these benefit schemes. In others, participation is optional. For example, companies in Ireland with more than five employees must extend the opportunity for workers to contribute to a pension plan, but neither party is required to do so.
Benefits in kind also fall into the ‘employee benefits’ category and can further complicate things when it comes to taxation and payroll calculations, as they’re generally treated as taxable income in most countries. Most often, this tax falls to the employees to pay, but in places like Australia and New Zealand, the responsibility falls on the employer. Other countries may allow some benefits in kind to be tax-free up to a certain amount. Other countries, like Estonia, tax benefits in kind at a high rate that falls squarely on the shoulders of the workers to pay.
Again, tracking and ensuring every employee is receiving or has access to all the benefits they are afforded by law is a big job. When attempting to do this for more than one country, the burden becomes significantly heavier; it becomes nearly impossible when workers are dispersed across borders.
Filing taxes and payroll considerations
Workers must be legally taxed according to the laws of their local jurisdiction. Just as the tax rate is calculated based on the employee’s location, so too must the taxes be filed locally and by dates set in accordance with local laws and regulations.
Different countries or particular jurisdictions within countries may have varying tax regulations, some of which may be unusual to you. For example, several countries in the EU, including Germany, Finland, and Denmark, have what is referred to as a ‘church tax’ and is paid only by those who are members of specific religious groups.
Tax laws are subject to change from year to year based on government updates and must be closely monitored to maintain full compliance.
In addition, depending on the size of your organisation, your in-house HR team may be responsible for some payroll-related issues if you do not have a separate in-house payroll team.
When workers are employed by a company whose primary location is in a country different from their tax residency location, depending on where they reside, setting up international payroll to manage their salaries is necessary. Depending on local regulations, the organisation may or may not need to have a legal presence in-country in order to employ workers and do business there.
Moreover, workers’ salary amounts must be paid in accordance with regulations in their local jurisdiction, not the jurisdiction of the company they work for. This includes making considerations for pay frequency requirements.
Can I manage my global employees solely with in-house HR?
The simplest answer: It’s not likely.
Due to the complexities of employing workers in various countries and the necessary steps it takes to ensure you remain fully compliant in multiple, widely varying jurisdictions, things can quickly feel convoluted and difficult to manage effectively.
Even small, unintended mistakes can be expensive to correct and may lead to negative legal repercussions. If your organisation employs workers in multiple countries, the safest option is to work with an EOR.
An EOR serves as the legal employer of all your workers and takes responsibility for compliance with employment laws, tax regulations, and labour contracts in the countries where your team resides. Their specialised knowledge in global employment laws and regulations and their expertise in compliance means you never have to worry if things are running as they should be.
Stay compliant and get help managing your global workforce with Boundless
Managing a cross-border team is challenging and may extend beyond the capabilities of your in-house HR staff. It will also cost a huge amount of money, as our customer Next15 attests. Rather than stretching things to the limit, consider working with an Employer or Record like Boundless.
Boundless can help manage your HR systems in multiple countries and help ensure you remain compliant. Speak with one of our experts to get started.