Legal

Understanding employer of record (EOR) services and their importance for distributed companies

What you need to know.
June 6, 2022
Oyster Team
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For supporters of a distributed workforce, the “why” is clear—work-life balance, productive and engaged employees, access to a diverse talent pool, and more.

It’s the “how” of global hiring that can be a struggle for people leaders. Do you sign up with an employer of record (EOR) service that relies on partner networks, or one that operates legal entities in the countries you’re looking to hire from?

We don’t think it’s an “either-or” situation. 

Read on to learn all you need to know about EOR services and why they matter for distributed companies. From how EOR services work to which EOR model is right for you, we cover it all. 

Let’s get right into it. 

What are employer of record (EOR) payroll services?

An EOR is your one-stop external HR service—an intermediary between your firm and an international employee.

EOR services enable you to hire workers in international markets. These companies have often already done the heavy lifting of setting up legal entities in these countries.

When you hire through an EOR, they formally become the employer of your new hire. This reduces all the legal and compliance issues associated with payroll services, benefits, and HR operations for your distributed workforce.

International HR regulations are complex and vary depending on the country. With an EOR service, hiring international employees can feel like a simple, seamless process.

How do employer of record services work?

An employer of record:

  • Handles all tax, benefits, insurance, and banking requirements of your distributed workforce.
  • Onboards international employees with compliant contracts.
  • Handles all in-country HR needs of your employees.

All you have to do is manage your employees’ day-to-day tasks—no need to set up a new legal entity in a foreign market, or worry about violating local employment laws.

Difference between owned-entity (direct) and partner-dependent (indirect) EOR services

In the owned-entity/direct EOR service model, the service provider has legal entities in each country or state of employment. The legal entity can put your employees on payroll and provide all the required benefits.

With the indirect EOR services model, the service provider operates through third-party partners in each country or state of employment.The EOR company provides all payroll services and benefits to your employees through a network of local companies—often referred to as independent in-country partners (ICPs)—that provides these services for them.

Both models have their benefits (more on that below); which one you should choose really depends on your company’s specific HR needs. 

Important distinctions between EOR and other similar services

Employers of record payroll services are not to be confused with other global employment services. This is how EOR differs from the most common ones: 

Employer of record (EOR) vs. professional employer organization (PEO)

EOR definition

These two services may seem similar or related, but one is actually an evolution of the other. 

A PEO manages some of your HR functions like payroll remittances, payroll taxes, and benefits enrolment. They will only take on responsibilities termed as “general” functions. Once you decide to work with a PEO, you sign a co-employment agreement.

The National Association of Professional Employer Organizations defines co-employment as:

“Both the PEO and the client company will be responsible for certain obligations of employment, while both parties might share responsibility for other obligations and be “an” employer, but neither party is “the” employer for all purposes.”

TLDR: In this partial outsourcing arrangement, your company and the PEO both contractually share the employer responsibilities.

Here’s where it gets sticky:

Because the employee risk is split between the client company and the PEO, neither party is fully responsible. This sharing of risk and employee responsibilities can be challenging and, in some cases, has led to legal exposure, such as in the Stephanie Perez vs. Dermatology Group, PC, vs. ADP case.  

The employee sued the company and their PEOs for claims of pregnancy discrimination, failure to reasonably accommodate, and unlawful retaliation.

The legal and compliance challenges of the PEO model led to the creation of a new wave of nimble, global HR services—the employer of record (EOR). 

Both services are employment solutions, but that’s where the kinship ends.

An EOR does more than “general” HR outsourcing.

It takes on the risk of hiring employees overseas while the client company focuses on its day-to-day operations. When you partner with an EOR payroll service, your company enters into an agreement that allows the EOR to legally employ workers on your behalf through its local entity.

The EOR is responsible for the HR needs—compliant employment contracts, onboarding, payroll, benefits, training, and taxes—of the employee and the client company throughout the length of the employment contract, be it a nine-month contract or a permanent position.

Employer of record (EOR) vs. global employment organization (GEO)

At a high level, an EOR is a sub-unit of a global employment organization (GEO).

GEOs are employment solutions or legal entities that enable companies looking to expand internationally to delegate their employer responsibilities to an EOR. The GEO hires workers on the client company’s behalf.

The GEO acts as the EOR in each country, taking charge of all the client company’s responsibilities such as payroll, administration, and taxes.

While the client company retains managerial control over the employees and the business, the GEO is liable if a contract breach or any other legal issue occurs. Legally, the GEO is responsible for the new employee.

So, an EOR often focuses on payroll and benefits administration, while the GEO coordinates the entire employment process and sets up the legal entities that keep your company compliant with local labor laws. 

Employer of record (EOR) vs. staffing agency

A staffing agency acts as an intermediary between talent and the hiring company. Their main goal is to support the client company in hiring the right candidate that matches the role they’re trying to fill.

Some staffing agencies also offer additional services such as:

  • Advertising the role on job boards.
  • Running background checks.
  • Reviewing applicants and filtering for role-fit.
  • Filing paperwork.

On the other hand, an EOR payroll service only kicks in once an employee has scaled through the recruitment process. EOR services don’t participate in the talent search and vetting process.

Why use direct employer of record services? The benefits of owned-entity EOR services for distributed companies.

Why use direct EOR services

When considering an EOR payroll service, the decision often comes down to speed, consistency, and cost. These are areas where an owned-entity EOR service excels.

For starters, an owned-entity EOR service owns the entire HR experience. This means you can quickly onboard your new international hire and set up payroll faster than with other global employment solutions.

There are no vendor hiccups to disrupt or slow down the employee onboarding experience.

Also, controlling the entire experience means your speed to market is significantly faster, especially if you are hiring in new markets. Your EOR payroll service doesn’t need to waste valuable time hunting down third-party partners before sending across a project plan.

Lastly, owned-entity EORs are less expensive as they don’t incur additional expenses and services fees from third-party service providers. Plus the operating structure is streamlined, which makes them easy to manage.

Working with a direct EOR means you won’t need to speak to multiple partners to get your hiring process going, which can save you time and effort.  But depending on your circumstances, an indirect EOR could also be worth considering.

Why use indirect employer of record services? The benefits of partner-dependent EOR services for distributed companies

Why use indirect EOR services

While owned-entity EOR payroll services take the prize for speed and cost, the indirect model more than makes up for it in many ways:

Reach more countries

Speed to market is only beneficial if there is already an existing legal entity in-country. You won’t be waiting around for the EOR payroll provider to set up a legal entity before starting your hiring process.

With an indirect EOR service provider, this is rarely an issue. The indirect model enables the employment solutions provider to quickly mobilize in-country partners for all your payroll and benefits needs.

Indirect is just as compliant

An indirect EOR model means all contracts go through a form of two-factor authentication. The ICP first processes all data and contracts, which then goes through the second layer of audits by the EOR payroll provider. While one could argue that the additional layer reduces speed, it more than makes up for the time it takes by keeping the client company compliant with all tax and employment laws and regulations.  

More flexibility for edge cases

International recruitment is a minefield—every country has its own regulations and policies. And every distributed team leader is bound to come across these landmines now and then.

Partner-dependent EOR service providers usually work with multiple ICPs in any location, and can quickly provide the needed expertise at the drop of a hat in such situations, and at no extra cost. This is unlikely to be the case with a direct EOR service provider.

Advanced IP protection

Partner-dependent EOR service providers understand the consequences of a breach of a client company’s intellectual property.

To minimize this risk, they often go to great lengths to set up legal clauses and contracts that guarantee IP protection for their clients irrespective of the local IP laws.

Greater flexibility for employee benefits and compensation

 Attracting and retaining the best talent means companies need to offer competitive compensation packages and benefits.

The pool of ICPs an indirect EOR service provider works with provides clients the flexibility to accommodate different tiers of talent—no matter the skill level or role.  This way the client company can always put forward a competitive compensation package

Which employer of record model is right for you?

Consider the following before you decide which EOR model works best for you:

Is speed to market important to your business?

If you need to get your potential international hires set up as soon as possible, it might be wise to work with a direct EOR payroll service provider that owns the entire HR experience.

That way the hiring and onboarding process is quick, and your new employee can hit the ground running. An indirect EOR partner is likely to slow you down in this sort of situation.  

What level of support do you require for your international hires?

Is your HR team capable of managing your distributed team, or do you plan to outsource that function to your EOR partner?

A direct EOR service provider often acts as a single point of contact for all employee needs. This guarantees a faster turnaround time in most cases and a seamless experience as employees always know who to reach out to. 

With an indirect EOR service provider, your employees might need to engage multiple ICPs for their various requests. This experience may leasve a badr taste in their mouth and result in frustrated and demotivated employees.

Are you hiring in multiple countries at once?

This is where a direct EOR service provider can get tripped up. The complicated nature of global employment regulations can often mean they either don’t have a legal entity in one or more countries, or they need to hire a local consultant to handle areas where they lack local expertise.

Either way, this not only slows down your international expansion but also means additional costs. An indirect EOR partner can quickly source a partner and get the regulatory bottlenecks out of the way.

Final thoughts

In a world where seamless communication and collaboration across borders is the standard, an EOR service provider is an excellent tool for companies looking to reap the benefits of a distributed workforce. But you don’t have to choose between an indirect or direct EOR partner. There are benefits to both models, and as we mentioned earlier, this isn’t necessarily an “either-or” comparison..

An ideal solution for distributed companies looking to hire in multiple countries is to contract a company such as Oyster 😀that offers a combination of direct and indirect EOR services. Like an EOR, Oyster facilitates cross-border employment on behalf of your company, but with the added benefit of being fully automated, self-serve, and free to start. In addition to compliant, local contracts, Oyster manages payroll and benefits for your team around the world, empowering you to truly care for your team members, regardless of their location.

Learn more about how Oyster can support your global employment needs here.

Disclaimer: This blog and all information in it is provided for general informational purposes only. It does not, and is not intended to, constitute legal or tax advice. You should consult with a qualified legal or tax professional for advice regarding any legal or tax matter and prior to acting (or refraining from acting) on the basis of any information provided on this website.

About Oyster

Oyster is a global employment platform designed to enable visionary HR leaders to find, hire, pay, manage, develop, and take care of a thriving distributed workforce. Oyster lets growing companies give valued international team members the experience they deserve, without the usual headaches and expense.

Oyster enables hiring anywhere in the world—with reliable, compliant payroll, and great local benefits and perks.

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