An ‘Employer of Record’ (EOR) is a third-party contracted by a client company to take on the core compliance responsibilities of an employer, as specified under the law. In this article, we explain what an Employer of Record is and how it can benefit organizations.
1. An Employer of Record (EOR) solutions means that a third party company takes over as the legal employer for your workforce2. 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 generally responsible for payroll, ensuring that all necessary withholding and deductions are made, and meeting other compliance obligations of employers.
4. Employer of Record solutions are usually a more cost-effective, and more compliant, international expansion tool than setting up a separate company or subsidiary overseas.
Introduction: The History of Employer of Record solutions
As ‘Employer of Record’ is a third party contracting solution, understanding this concept requires an understanding of the history of ‘contracting out’ or ‘outsourcing’, in general.
Businesses have been outsourcing tasks to third parties for centuries. As a trivial example, it has long been commonplace for businesses to outsource the cleaning of their office space to a third party company.
In response to atrocious working conditions and mass labor movements, from the mid-19th century onwards, the specific role of the ’employer’ arose. Prior to that point, workers were essentially independent contractors.
Along with the concept of the employer, came a stable set of functions and responsibilities. Employers, generally speaking:
- recruited and hired workers
- negotiated with employees or unions on working conditions
- directed the day-to-day activity of workers
- paid workers through an organized payroll process
- withheld income, and sometimes payroll taxes (first introduced in the U.S. in 1862). These taxes were then submitted to the tax authorities
- took responsibility for worker health and safety
- ensured compliance with labor/employment laws, such as anti-discrimination laws.
From the late 19th century onwards, companies began to explore which functions or responsibilities of the employer might be contracted or ‘outsourced’ to a third party.
The modern recruitment agency — a firm to whom client companies outsource the task of finding staff — came about in 1873 in the UK with the recruitment of private school teachers by the firm Gabbitas & Thring¹ . In subsequent decades, recruitment firms tended to focus on engaging temporary labor, becoming ‘contract staffing‘ or ‘temp’ agencies.
Another famous outsourcing example is Automatic Payrolls Inc, founded in 1949 as a payroll outsourcing company. Today this firm is known as the Fortune 500 company ‘Automatic Data Processing’ or ‘ADP’.² This company took on the employer’s practical payroll tasks, printing checks and pay slips en masse for the employees of client companies. With the increase in computing power over the years, this changed from a manual to an automatic process.
At some point, enterprising individuals in the US started experimenting with the outsourcing of the compliance and tax responsibilities of the employer. This is the beginning of the ‘Employer of Record’ service or solution.
No one can say, precisely when the first Employer of Record solutions were introduced as (a), the term ‘Employer of Record’ was not used at the time and (b), the practice was largely unregulated until the 1980s, so few records were kept.
Arguably, the concept first came to public attention in the late 1960s with the rise of ‘labor leasing’. In labor leasing, employees of a third party managed services company where ‘leased’ to client firms, either temporarily or for extended periods of time.
Client companies, by asserting that they were not the legal employer of staff avoided the pension plan obligations of regular employers. Initially, this was simply asserted by client companies (and rarely, it appears, tested in court). However, federal laws in 1982 and 1986 formalized this arrangement, and provided a ‘safe harbor’ for client firms to avoid the pension obligations thay woudl otherwise apply to an employer (as long as leased employees represented no more than 20 percent of the workforce within a client company).³
In the US at least, this is arguably the point at which the ‘Employer of Record’ was born.
What is the Definition of Employer of Record?
Put most simply, the Employer of Record is simply the legal, official, employer of a workforce. In traditional employment, the Employer of Record is simply the legal entity that workers work for.
In more sophisticated HR arrangements, such as a Professional Employer Organization’s (PEO’s) EOR solution, co-employment, or umbrella companies, the Employer of Record is a third party company. In these arrangements, the day-to-day work of the employee is supervised by a client company who is not the Employer of Record.
What exactly EOR means, depends on the country and industry in question. For example, in the US, this means that state tax authorities will have the Employe of Record registered as the employer (usually with an Employer Identification Number), and liable for withholding payroll taxes. An EOR 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.
What Does an Employer of Record Do?
The Employer of Record is defined by their legal obligations in the country or jurisdiction in question.
While the client company retains day-to-day supervision of workers, the EOR, in consultation with client companies carries out the following actions:
Is an Employer of Record and a PEO the Same Thing?
No. It would be more accurate to say that an Employer of Record is a specific solution commonly offered by a PEO.
In addition to EOR solutions, a PEO also often offers recruitment, payroll outsourcing, global mobility, HR strategy and company incorporation services.
Employer of Record solutions can also be distinguished from:
What Are the Benefits of EOR Solutions?
An EOR solution, whether applied locally, or internationally, has a range of potential benefits:
What Are the Disadvantages of Employer of Record Solutions?
Like any approach to HR or employment, EOR solutions, if implemented incorrectly, can be to the disadvantage of client companies. Some potential disadvantages include:
Frequently Asked Questions
Employer of Record services are usually charged either as a percentage of the total cost of the employee to the enterprise, or on a set per month basis.
International EOR services usually start from USD$ 249 per month.
In general, yes. In some countries, such as Germany, there are restrictions on how long an employee may be engaged by an EOR before they have to move onto the payroll of the client company (see discussion above).
Note also that there is a 'co-employment' or 'joint employment' risk, where both an EOR and a client company may be found to be the employer for certain purposes. See discussion of this risk, and how to mitigate it, above.
An Employer of Record is the legal employer of a workforce. By contrast, an Agent of Record is an individual or entity that represents an insured person or entity with the insurer.
Any industry could potentially benefit from the use of EOR solutions.
Originally, EOR services were popular in the US for administrative, temporary and janitorial and cleaning staff, but they are now popular across all industries.
ConclusionUsing an Employer of Record solution ensures that payroll and employment is in full compliance with withholding and tax rules. A global EOR solution is usually more cost-effective, and allows for a quicker expansion, than setting up a local entity or subsidiary. For more information about international Employer of Record solutions get in contact with New Horizons Global Partners.
¹ Brown, N.J., & Swain, A., (2012). The professional recruiter’s handbook: Delivering excellence in recruitment practice. 2nd edn, Kogan Page Limited, Walnut Street, Philadelphia, USA.
² Metters, R. and Verma, R. (2008). “History of offshoring knowledge services”. Journal of Operations Management, 26: 141-147. https://doi.org/10.1016/j.jom.2007.02.012
³ Day, J.S., (1988). “Employee Leasing”. Flexible Workstyles: A Look at Contingent Labor. Conference Summary. Women’s Bureau (DOL), Washington, DC. https://files.eric.ed.gov/fulltext/ED305471.pdf.
⁴ Submission of Marvin R Selter. Certain pension access and simplification issues: hearings before the Subcommittee on Select Revenue Measures of the Committee on Ways and Means, House of Representatives, One Hundred Second Congress, first session, July 25 and September 16, 1991.
Washington : U.S. G.P.O. : 1992. Volume 4, p345.
⁵ Nerney, T., & Shumway, D. L. (1996). Beyond managed care: Self-determination for people with disabilities. Durham, NH: Institute on Disability, University of New Hampshire. https://mn.gov/mnddc/past/pdf/90s/96/96-BMC-TND.pdf
⁶Juravich, T., and Ormiston, R. (2021). “The Social and Economic Costs of Illegal Misclassification, Wage Theft and Tax Fraud in Residential Construction in Massachusetts”. Institute for Construction Economic Research. UMass Amherst Labor Center. https://www.umass.edu/lrrc/sites/default/files/juravich%20NASRCC%203%20%28002%29.pdf