What Is an Employer of Record and How Can It Be Used to Expand Globally?

Key Takeaways

1. An Employer of Record (EOR) solutions means that a third party company takes over as the legal employer for your workforce 

2. Employer of Record solutions are commonly offered as an international expansion solution by Global Professional Employer Organizations (‘Global PEOs’)

3. An Employer of Record is responsible for payroll and ensuring that all necessary witholding and deductions are made 

4. Employer of Record solutions are usually a more cost-effective, and more compliant, international expansion tool than setting up your own company or subsidiary overseas. 

What Does ‘Employer of Record’ Mean?

‘Employer of Record’ is a service commonly offered by Professional Employer Organizations (PEOs). A PEO is a third party contracted to take over a range of human resources and employer-related tasks for a client company. When operating internationally, these companies are commonly referred to as ‘Global Employer Organizations‘. 

When a PEO offers an Employer of Record service they offer to become the legal, registered, employer for a client’s workforce

For example, in the US, this means that state tax authorities will have the PEO registered as the employer (usually with an Employer Identification Number), and liable for withholding payroll taxes. The PEO may also be required to register with the state Department of Labor for unemployment taxes. In other countries, such as the United Kingdom, registration as the Employer of Record occurs on a national basis.

An Employer of Record solution can be useful for companies that choose not to directly employ a worker on assignment, either in a different state or foreign country.

There are a few terms used to signify a third-party Employer of Record has been engaged, such as a ‘local employer’, ‘local partner’, ‘local EOR’, ‘back-office staffing’ and in China, a FESCO (Foreign Enterprise Service Company).

What Does an Employer of Record Do?

In essence, the EOR is the registered employer for the worker, but does not have any supervisory or management role vis a vis the employee’s position

The client company maintains the substantive work relationship with the worker, making all decisions on compensation, position duties, projects, and termination.

Specifically, the employer of record is the legal entity that:

  • Ensures that workers have a legal right to work in the country in which they are located. They arrange all visas and work permits for the employee, avoiding delays or refusals.
  • Provides a registered entity for running a local, compliant payroll inside the country.
  • Makes all other necessary deductions for employees such as garnishments, court orders and child support.
  • Arranges for and provides employee benefits such as health insurance and pension contributions.
  • Meets all host country labor laws pertaining to local contracts and worker protections.
  • Advises the client of required notice periods, termination rules and severance pay.
  • Is the host country interface between the employee and government authorities.

Is an Employer of Record and a PEO the Same Thing?

It would be more accurate to say that an Employer of Record is a specific solution commonly offered by a PEO

Not all PEOs offer Employer of Record solutions. For example, in the U.S. it is common for PEOs that operate only within the United States (sometimes called ‘national PEOs’ or ‘domestic PEOs’ to offer ‘Co-Employment‘ rather than Employer of Record solutions. In some cases, this means that the client is still the Employer of Record and remains ‘on the hook’ for attendant tax and employment liabilities.

When a Global PEO offers an Employer of Record solution it assumes complete legal responsibility as the employer

This means it takes care of payroll, taxes, benefits, and maintains employee records, among other duties. This leaves client companies with the peace of mind that their business is being taken care of by qualified professionals.

Employer of Record solutions can also be distinguished from:

  • Employee Leasing
  • While this term is sometimes used as a synonym for PEO, it is usually considered a distinct from of HR solution. In employee leasing, the third party leasing company employs a workforce which it leases out to clients, often on a temporary basis. By contrast, in a Global PEO Employer of Record solution, the workforce is exclusive to one client
  • Umbrella company
  • An umbrella company provides compliant payment solutions for self-employed workers. This is a particularly popular payment model in the UK.  While an umbrella company pays workers, those workers are not on the umbrella company’s payroll: This is the crucial difference with an Employer of Record solution.

How to Use Employer of Record services to Expand Globally & Benefits

There are many distinct benefits for a company to use Employer of Record services. In many cases, the EOR has the greatest benefit when doing business in foreign countries, where the cost, complexity and compliance risk of local employment may be prohibitive. Three key benefits include:

No Need for Local Incorporation

The benefits of using a PEO as the local Employer of Record for international assignments become apparent when a company considers the cost and time involved in the ‘DIY’ approach of setting up their own local subsidiary or company. While the approach differs substantially from country to country, setting up a local entity can include:

How to Use Employer of Record services to Expand Globally & Benefits

There are many distinct benefits for a company to use Employer of Record services. In many cases, the EOR has the greatest benefit when doing business in foreign countries, where the cost, complexity and compliance risk of local employment may be prohibitive. Three key benefits include:

No Need for Local Incorporation

The benefits of using a PEO as the local Employer of Record for international assignments become apparent when a company considers the cost and time involved in the ‘DIY’ approach of setting up their own local subsidiary or company. While the approach differs substantially from country to country, setting up a local entity can include:

  • Drafting ‘Articles of Incorporation’ or ‘Articles of Association’ which set out key particulars for the company including its directors, shareholders and officers/executives
  • Notarization of the above articles
  • Having the above articles apostilled/authenticated for the authorities where the head office is located
  • Establishing a registered address for the company
  • Opening a bank account
  • Contributing necessary share capital (e.g., share capital of €25,000 is required in Germany for the most common form of incorporation)
  • Registration with tax and/or labor authorities
  • Becoming a member of the local chamber of commerce.

And, of course, once established the company would then need to go about hiring its employees for itself.  This approach is likely to take a considerable amount of time, and require specialized legal and accounting expertise.

While some companies can justify the time and expense of setting up a foreign subsidiary, there are many instances where utilizing a PEO to become the local Employer of Record is a better alternative.

The Global PEO already has a legal entity in place that can handle all aspects of payroll, employment and immigration requirements in the host country.

Immigration Compliance

Immigration policies and rules are constantly shifting, and there is increased scrutiny by foreign governments of work permits, visas, and types of business activity. This makes compliance a key challenge for multinationals, and immigration violations can have lasting consequences for a company and its employees.

Instead of risking non-compliance with immigration laws, many companies choose to use a Global PEO solution and local EOR.

With this method, the staff on assignments are legally permitted to work in the host country, eliminating the issues with remote payroll, overuse of business visas and multiple entries into the country. The PEO’s local partner handles all work permit and visa requirements, avoiding any complications or scrutiny from immigration authorities.

Running a Local Payroll in the Host Country

Most countries will require a company with employees on assignment to run payroll according to local laws and regulations with a registered entity. The practice of ‘remote payroll’ (remitting by the home country payroll) is rarely permitted, especially for long-term assignments.

A key aspect of running a host country payroll is the calculation and withholding of statutory deductions from pay, including pensions, health insurance, and taxes. The EOR takes care of all of these critical details, to ensure the payroll is accurate and compliant for each employee on assignment.

The Employer of Record also takes care of any other pay deductions that are required by law such as garnishing of wages under a court order or child support.

Conclusion

Using an Employer of Record solution ensures that your local payroll is run in full compliance with host country withholding and tax rules

This ensures that there are no issues with local authorities, and is significantly more cost-effective than setting up your own local payroll. For more information about international Employer of Record solutions get in contact with New Horizons Global Partners.

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