What is Employer of Record (EOR)?
An Employer of Record (EOR) is a convenient service that helps companies hire employees legally in other countries. They take care of essential tasks such as managing payroll, benefits, taxes, stock options, and ensuring compliance with local laws. This way, companies can focus on growing their workforce abroad. Companies count on EORs when they want to hire employees in different countries without setting up local branches. This is a great solution for businesses of all sizes, as it simplifies the process of employing and paying workers in foreign locations. To sum it up, the EOR steps in as the official employer for a company’s employees, while the company continues to oversee daily management and operations.
Why its important to choose the right EOR?
Choosing the right EOR is of paramount importance because it can greatly influence your ability to expand your business internationally and manage a diverse, remote workforce. A reliable and compliant EOR will not only ensure that your company stays on the right side of local labor laws and regulations, but also enable you to attract and retain top talent from around the world. With hundreds of EORs to choose from, each offering varying levels of service, expertise, and support, it’s essential to carefully evaluate your options and select the one that best aligns with your company’s unique needs and objectives.
To help you with this process, you can refer to the articles on the top 10 most popular Employer of Record (EOR) providers and the Top 12 European Employer of Record Providers (EORs) which provide in-depth comparisons of leading global and European EORs, respectively. Making the right choice will empower your business to thrive in an increasingly competitive global market, fostering growth and long-term success.
Factors to consider when choosing EOR
Reach
Before partnering with an EOR, it’s crucial to verify that they can provide employment services in the country where you’re looking to hire. Don’t just rely on their website; reach out to their sales team and double-check that the service is active in that particular country. Also, consider any other countries where you might hire employees in the near future, and ensure that the EOR has the capability to service those locations as well.
While you’re not restricted to using a single EOR, having one with an extensive reach enables you to access a wider range of talent pools and grow your business into new markets. However, don’t be swayed by EORs that boast coverage in 160+, 180+ countries alone. While extensive reach is valuable, it shouldn’t be the sole factor in determining the best EOR for your needs. Instead, focus on the countries where you realistically plan to hire.
Fixed Fee or Percentage
There are various fees to consider when choosing an EOR, but the primary one is the monthly service fee. Some EORs charge a percentage of the employee’s remuneration, while others charge a fixed fee.
Keep in mind that a percentage-based fee isn’t solely based on gross salary. It also includes all taxes, statutory employer payments, pension contributions, and any other benefits or additional payments processed through payroll. Percentage fees usually start at around 8%.
As the name suggests, a fixed fee doesn’t fluctuate from month to month. If you pay a bonus to your employee or give them a salary raise, your cost will remain the same.
However, consider that both % and fixed fees can differ within the same EOR based on the country you want to hire. For example, one of the EORs charges 8% of the total invoice amount if the employee is based in Germany, but 10% if they are in South Africa.
In general, if you’re offering lower salaries, the percentage-based fee is more economical. If you’re offering higher salaries, a fixed fee tends to be more cost-effective.
Own Entity, Partners, or Marketplace
The ongoing debate revolves around which EOR model is the best, as each comes with its own set of benefits and risks. Let’s break it down.
Some EORs use the “own entities” model, meaning they establish an entity in each country they operate in, and your employees are hired directly through these entities. While this approach can be great, there have been cases where EORs expanded too quickly, opening numerous entities without being fully prepared operationally. Legislation varies greatly between countries, and you want to ensure that your provider has everything under control.
That’s where EORs using local partners come in. Instead of rushing to set up multiple entities, they rely on experienced local partners who understand the intricacies of local laws. However, if the local partners are chosen based on cost rather than expertise, this can be problematic. Unfortunately, you may not have the opportunity to vet these sub-partners.
It’s common for EORs to use their own entities in key locations while relying on partners in areas with fewer clients. From a client perspective, accessing data, payslips, and other information is usually handled through a platform, so you don’t need to worry about dealing with multiple partners. However, remember that the rights to your intellectual property will pass through more hands in this model.
The third type is the Marketplace model, where the EOR serves as a technical facilitator that builds a network of local payroll providers. In some cases, you can simply log in to your account, request a quote for a specific country, and receive offers from local EORs. Everything will be managed via the platform overseeing the marketplace, but you’ll have the ability to choose your end provider.
Hiring Employees and Managing Contractors
Wouldn’t it be fantastic to manage your foreign employees and ad hoc contractors all on one platform? Pay salaries with a single click and have easy access to payslips, invoices, and more.
However, not all EORs offer the option to manage contractors through their platform. Why? The core specialty of an Employer of Record, as the name suggests, is employing people, and some providers prefer to focus solely on that. They may also want to avoid the gray area of potentially misclassifying the contractor-worker relationship.
If you work with contractors and would like to manage both types of workers on the same platform, consider choosing an EOR that offers contractor management within their platform.
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Required Deposits
Since EORs are the legal employers, they bear the liability if your company fails to pay bills on time. As a result, EORs often require deposits. Most EORs will ask you to pay upfront for at least one month of full payroll. However, some EORs may require three full payroll advances. Keep in mind that these deposits are refundable at the end of the employee contract, but you should consider the impact of having up to three months’ worth of payroll multiplied by the number of employees you hire through the EOR tied up for the entire duration of their employment. It’s also quite common for EORs to require different deposits in various countries. For instance, France is known for longer two or three-month deposits, even if that particular EOR only requires a one-month deposit in other countries.
Contractual Relationship: Two-Way vs. Three-Way Contracts
Most EORs use two-way contracts, which means the employment contract is between the employee and the EOR or the EOR’s partner (local entity). You then sign a separate agreement with the EOR for the services they provide to you. Some EORs may not even show you the actual contract signed by the employee, as you are not a party to that contract. Some EORs will allow you to make minor changes to their standard contracts in specific countries (as long as they remain compliant with local laws), while others will not.
On the other hand, some EORs use three-way contracts, in which both you and the EOR are mentioned as employers. This approach has its pros and cons. For employees who might be uncomfortable signing an employment contract with an EOR rather than the company they’ll be working for, this could be a great solution. However, as a part of this agreement, you become legally responsible for the employee as a secondary employer. One of the benefits of using EORs is that you are outsourcing the responsibility of managing legal compliance, so this arrangement may not be ideal if you want to minimize your liability.
Payment Flexibility
Suppose you have employees in the UK, US, and Europe, and your business operates three separate bank accounts. Ideally, you would want to pay your British employees from your GBP account, your Italian and French employees from your EUR account, and your American employees from your USD account. Some EORs will allow you to use multiple payment methods across different currencies, while others may only accept a single payment method for your account.
Additionally, some EORs excel in offering the best possible exchange rates, while others charge a percentage for converting your money from one currency to another. These fees can add up quickly, so it’s essential to consider payment flexibility when choosing an EOR to ensure you’re optimizing your financial processes.
Integrations
Some EORs offer a wide range of integrations, allowing you to connect your EOR platform with accounting (e.g., Xero, Quickbooks, Netsuite) and HR systems (e.g., Asana, Greenhouse, BambooHR). The more employees and contractors you manage, the more these integrations can streamline your operations and save time, from effortless onboarding to avoiding errors and manual work with automated accounting, as well as managing expenses and holidays.
If integrations are essential for your business, make sure the EOR you’re considering integrates with your existing tech stack.
It’s worth noting that some EORs are only beginning to add integrations, while others may not provide integrations at all, as this could potentially undermine the principle that the EOR employee is legally separate from your company and should not be integrated with your systems.
Customer Service
Consider your goals and expectations when selecting an EOR. Are you and your employees comfortable with a self-service solution, which focuses on automation and provides a platform that guides you step-by-step (usually a more cost-effective option)? This approach relies on technology to streamline processes and reduce the need for direct human interaction. If you need to speak to someone, chat options are usually available, and you’ll be routed to the relevant team.
On the other hand, you might prefer having a dedicated onboarding manager, account manager, and contact person for your employees or contractors. This option usually comes at a higher cost but provides more personalized support and assistance throughout the process.
Choose an option that aligns with your desired level of service and fits within your budget.
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Data Security
Ensuring the security of your employees’ data is a crucial consideration when selecting an EOR. Some EORs have obtained external certifications, such as SOC2 or ISO 27001, which provide an additional level of confidence in their data security practices. These certifications demonstrate that the EOR has met stringent security standards and implemented proper controls to protect sensitive information.
However, not all EORs have taken visible steps to externally validate their data security. When evaluating an EOR, inquire about their data security policies, practices, and any certifications they may hold. Consider their approach to safeguarding data, including encryption methods, access controls, and incident response plans. By prioritizing data security, you can protect your company and employees from potential risks and ensure compliance with relevant data protection regulations.
Platform UX/UI
EORs can vary in their approach, with some focusing on their platform and automation as SaaS companies, while others prioritize compliantly hiring employees as non-tech companies. It’s essential to be clear about your expectations. If the user experience (UX) and user interface (UI) of the EOR’s platform are important to you, make sure to request a demo before committing.
An EOR platform with intuitive navigation, clear visuals, and easy-to-use features can make managing your international workforce more efficient and enjoyable. Look for an EOR that offers a comprehensive, user-friendly platform to help you streamline your HR processes, access important information, and ensure a smooth experience for both you and your employees.
Other Fees
Be sure to request a full pricing list when considering an EOR. The cost of EOR services is not limited to the monthly fee. Many EORs charge setup fees, termination fees, additional service charges, markups on currency exchange, up to 5% markups on expenses, or 10% fees for extra benefits offered to your employees. There may also be bank fees, such as a 1% bank fee charge applied to the total monthly invoice.
On the other hand, some EORs provide volume discounts, for example, if you have multiple employees in the same country. Always be aware of all potential costs and discounts to make an informed decision when choosing an EOR that best fits your budget and needs.
Auxiliary Services: Insurance, Background Checks, Visa Assistance
Some EORs provide additional services, such as background checks, health insurance, visa assistance, and other employee benefits. These services can be beneficial in ensuring a smooth onboarding process and minimizing the extra tasks you need to handle. When choosing an EOR, consider whether these auxiliary services are important for your business and employees, and evaluate the added value they bring to the overall offering.
Onboarding Speed
Onboarding speed is a crucial factor when considering an EOR, as it directly impacts how quickly you can scale your remote team and get new hires up and running. If you need to quickly expand your workforce, it’s important to choose an EOR that offers a fast and efficient onboarding process.
Some EORs have streamlined their onboarding processes through automation, reducing the time it takes to onboard new employees. This often includes digital document signing, online submission of required paperwork, and the efficient handling of background checks and other pre-employment tasks.
The speed of onboarding can also be influenced by the EOR’s knowledge and expertise in local employment laws and regulations. An EOR with a strong presence in a particular country may have a more efficient onboarding process in that location compared to others.
Enhancing Employee Experience: Perks and Advanced Features
Employee access to perks and advanced features can play a significant role in creating an engaging and positive work experience for your remote employees. When choosing an EOR, it’s worth considering the added value they provide to your team through these extras.
Some EORs have partnered with various companies to offer perks and discounts on products and services, such as gym memberships, professional development courses, or exclusive deals on software subscriptions. These perks can help boost employee satisfaction and make your company more attractive to potential hires.
EORs that focus on enhancing the employee experience may also provide advanced features, such as:
Salary advances: Some EORs offer the option for employees to access a portion of their salary early, without involving their employer. This service, usually provided for a fee, can be helpful in cases of unexpected expenses or emergencies.
Virtual cards: To streamline the payment process, certain EORs offer virtual cards that give employees faster access to their funds. This can be especially beneficial for employees in countries with slower banking systems or for those who need to make work-related purchases without waiting for a traditional bank transfer.
Customizable benefits packages: Some EORs allow you to customize the benefits packages offered to your employees, ensuring they receive a tailored solution that best fits their needs and preferences.
Global Payroll
Some EORs offer the option to run payroll in countries where you already have established entities. This allows you to streamline your operations, centralize payroll management, and maintain consistency across your international workforce.
In conclusion, selecting the right Employee Outsourcing Company (EOR) is a crucial decision that can significantly impact the growth and success of your business. By considering these 16 key factors, you’ll be well on your way to making an informed choice that supports your global expansion and helps you manage your international workforce effectively.
Stay tuned for our upcoming ebook, where we'll delve even deeper into the world of EORs and provide even more valuable insights to help you navigate this complex landscape. In the meantime, if you have any questions about EORs or need assistance with international talent sourcing or hiring across countries, feel free to reach out to me. You can connect with me on LinkedIn or send me an email at anna@annasieniawska.com. I'm always here to help you find the best solutions for your business and ensure that you're well-equipped for success in the global marketplace. Happy hiring!