How Employer of Record Works

For businesses seeking to set hire across borders, registering a new entity and establishing a working framework can take months. An Employer of Record is a third-party organization that undertakes the employment and management of all workforce related aspects in the foreign country.

According to the United Nations Conference on Trade and Development, 80% of the total world trade takes place due to multinational corporations. Setting up a legal entity or global subsidiary in a foreign country is no mean feat; it requires a deep understanding of local labor laws, the local taxation framework and other legal and regulatory compliance. In terms of the timelines, this can take anywhere between 3-9 months.

For businesses seeking to accelerate this process and avoid overheads, an Employer of Record (EOR) service provider is often a simpler alternative to get started.

An Employer of Record is a third-party organization that serves as the legal employer for a company’s foreign employees. The EOR service undertakes the management of all workforce-related aspects – from hiring & payrolls to taxation, employee benefits, and legal compliances.

Why Employer of Record (EOR) – The complexities of setting up in a new country

In an ideal world, hiring international employees would be as easy as setting up interviews via video conferencing and wiring their salaries to them at the end of the month. In reality, there are multiple hurdles in this employment process:

Upfront Investment

Setting up a legal entity in a foreign country requires a sizable investment in terms of capital, as well as time. In many cases, small and medium enterprises are not able to allocate the resources necessary for international expansion. An EOR partner solves this problem by charging companies a predetermined fee for undertaking all these responsibilities, consequently enabling them to hire from a global pool of talent.

Compliance with local & international laws

Every country has its own laws of global employment which require strict compliance. This applies equally to taxation and foreign direct investment. EORs have legal teams that are well versed with the local laws, having years of experience in these areas.

Speed of operations

Registering a new entity and establishing a working framework can take months. Whereas employing an EOR partner allows companies to begin their operations within weeks, as they already have a framework in place for each step of the process.

In effect, a company is able to outsource all its duties with respect to the hiring, management of benefits & payrolls, and administration for its global workforce to the EOR provider. The EOR manages all taxation and regulatory related compliance for the company, making the entire process highly efficient and cost- effective.

Who do the employees work for?

The EOR enters into two contracts – the first is a service agreement with their client, for providing them all employment related services in the foreign country. The second is an employment agreement with the employees, where it agrees to pay them the agreed compensation and manage their perks and benefits.

• Ensuring compliance with all employment and labor laws: Every country has its own set of laws governing employment and outsourcing. Well versed with the legal regime of the country, the EOR ensures due compliance with all employment laws.
• Management of payrolls: The EOR undertakes the process of negotiating compensation, and pays the employees through its local bank account. It is the responsibility of the EOR partner to ensure the application of the correct taxation framework in accordance with the country’s laws.
• Management of perks and benefits: Being in the same geographical location, the EOR has a much better grasp of the perks and benefits, and ensures that your workforce has access to the benefits that are most valuable to them.
• Connect with the local ecosystem: An EOR gives you direct access to the right resources within a specific geography – the right recruiting partners, legal and financial consultants, or even the workspace.

In short, while employees are legally contracted by the EOR in their local region, in effect, they still work for the client and the client can retain all IP, creation processes and operational control

Things to keep in mind while choosing an EOR service provider

An Employer of Record (EOR) plays a huge role in the trajectory of a company’s expansion into a new territory, which is why it is imperative that businesses take an informed and reasoned decision when choosing one. The right EOR service provider fits in line with the company’s vision, and has the requisite resources to bring it to fruition.

Here are some points that companies should consider in this process:

Established operations in the desired country

The biggest reason for employing an EOR is their grasp of the local laws and experience in operating in a particular country. Every country has its own set of employment legislations, tax regimes, and local operational guidelines. For example, while data privacy laws are not strictly applicable in most South-Asian countries, Europe’s data protection law, GDPR, demands a high level of compliance from all companies operating within the European Union. An EOR that is not locally present in the desired country will be unaware of these requirements, and hence, of little assistance to its clients.

Protection of your IP, data and information security

One of the biggest challenges that companies face when expanding into new territories is the protection of their intellectual property, data and proprietary information. Before choosing an EOR service, it is essential to check their policies with respect to data collection, security protocols and mechanisms.

Data privacy & regulation

Before signing up, companies must enquire about the information the EOR is retaining, and how this information is being processed. Companies must insist on utmost information security via ironclad contracts.

Protection of Intellectual Property

A company’s trademark, logo, proprietary technology and all other IPR is highly valuable, and must be protected when venturing into new markets. Before selecting an EOR service, it is crucial to verify that it has the requisite legal framework to be able to protect its client against potential IPR breaches.

Confidential Information

During the course of operations, a company has to share its sensitive information such as customer lists, pricing information & market strategy with its EOR services, as well as the subsequent workforce. It falls upon the EOR to ensure that this confidential information is protected at all times. This is usually achieved through a dual method – the enforcement of airtight Non Disclosure Agreements with all employees, and the implementation of a robust security mechanism, complete with firewalls and multiple encryptions.

By removing the restrictions of hiring within a 30-mile radius, an Employer of Record (EOR) service enables companies to work with geographically diverse teams, giving them access to a limitless pool of talent. For companies that plan on firmly establishing their base through setting up a subsidiary, availing the services of an EOR is the best way to test the waters in a completely new market with minimal investment. The right EOR partner provides access to the best talent, while simultaneously remaining prudent about the investment of capital and effort.

For in-depth analysis and expert insights on Employer of Record services, visit our Employer of Record Insights page.