Employer Of Record risks

An employer of record (EOR) makes it easier to hire and manage employees from the global workforce, attracting talent without the barrier of borders. The EOR acts as the employer on your behalf, handling everything in your chosen country, such as contracts, payroll and compliance with local tax and employment laws. 

They can be an attractive option for businesses looking to expand overseas, but this route also comes with its own particular considerations. If you’re considering your options for international recruitment, this guide will explore the potential risks of EORs and how to mitigate them.

EOR model overview (Employer of Record)

An employer of record provides a host of services to allow companies to hire and manage employees in new territories, without the need to set up a new entity to employ them. An EOR can provide HR services like payroll, recruitment, compliance, benefits administration and more. Crucially, they become the legal employer in their local territory, handling all the legal responsibilities and compliance, while the client company can direct the employees’ daily tasks and operations. 

EORs can sometimes be confused with professional employer organisations (PEOs), particularly in the context of hiring and managing staff overseas, but there are differences between them. A PEO is designed to provide employment-as-a-service to customers with their own legal entity within the same country, delivering better value than they could achieve themselves.

An agent of record (AOR) is a provider that helps companies engage independent contractors on behalf of their clients, often in overseas territories. This allows businesses to avoid the legal and administrative tasks of managing global contractors, including avoiding misclassification mistakes that can lead to fines and other problems. If your international plans only include freelancers and contractors, an AOR would be the better choice over an EOR.  

Compare EOR vs PEO

Employment agreements

An EOR will take care of drafting agreements that meet local employment laws and regulations, ensuring legal compliance for your new workforce. However, the client company can still incorporate specific clauses to meet the needs of their business. 

This could include special accommodations for confidentiality or intellectual property rights, adding extra protection for the client business. 

Always thoroughly review the agreements your EOR creates before approving them for use, ensuring they cover everything you need for your organisation.  

Employment law and employment status

A big advantage of using an EOR is their knowledge and familiarity with local employment laws and regulations. This can cover everything from minimum wage requirements to leave allowance and discrimination protection, as well as rules around the classification of employees. 

Any local employment regulations will be accounted for in the contracts your EOR issues, so you don’t have to worry about tailoring your usual contracts to your chosen territory. 

Tax, payroll liability and permanent establishment

An EOR can often be a stopgap before a business decides to fully establish its own legal entity in a new territory. Of course, this means taking on the permanent risks of tax compliance and employment laws, requiring a high level of knowledge and familiarity with local regulations. While this is a natural end goal when establishing a presence in a new country, it can take quite some time and investment to get there. 

A good EOR will help with consultation on permanent establishment, providing guidance along the way to highlight the risks and requirements of becoming an employer in a foreign country. 

Day-to-day work and operational controls

While the employer of record takes on the administrative tasks of employment, it’s up to you what those employees do day to day. The EOR manages a host of HR tasks, including employee onboarding, conducting payroll, calculating tax deductions and other contributions, enrolling employees in relevant superannuation plans, medical insurance and other benefits. 

They’ll also manage things like holiday requests and sick leave, as well as everyday employee HR issues and questions. They can also support employee training and performance as directed by your specific business needs. 

Hire employees: Hiring workflow using an EOR

Hiring global talent through an EOR should be a straightforward and seamless process, with the logistics and administrative side of things taken care of. 

Step 1 – Selecting roles – You provide your EOR with the roles and job descriptions required 

Step 2 – EOR recruitment – Your EOR sources candidates for your roles, using their local expertise to secure the best pool of talent. 

Step 3 – Select candidates – You choose the right candidate for the job.

Step 4 – Contracts and onboarding – The EOR takes care of signing contracts and the onboarding process, including setting up payroll and gathering the required documentation.   

Step 5 – Ready for work – The employee is ready for their day-to-day tasks and responsibilities as directed by you. 

Global hiring and global expansion strategy

Expanding into new territories can unlock so many advantages, from new suppliers and customers to new talent and opportunities. Those first steps are the best time to rely on an EOR, using their expertise to understand the local labour market and the rules that govern it. Committing to setting up a local entity in the early days is also risking a lot of investment, as is setting up new systems and processes within your business. 

At their best, EORs provide the path to global expansion, allowing you to employ locally in the early days and rely on tried and trusted knowledge. Create a roadmap to your expansion goals, and make use of your EOR partner to help you get there. 

Cost savings, pricing and financial risks

As we’ve mentioned, setting up a new entity in a new market can come with a great deal of financial risk. Make sure you’re doing a cost comparison of the different routes to your goals, both in setting up locally and making use of an EOR. 

Explore the costs of an EOR fully, including how they might change over the course of the agreement. Your entity set-up costs should also factor in an element of risk, as the likelihood of fines or other compliance issues is high when setting out on your own. 

Employment rights and employee experience

An EOR’s onboarding process can help to smooth out the employee experience, as well as their ongoing HR management. The systems the EOR uses to manage employees can make all the difference, from booking leave to reporting sickness. If things are hard to access or employees feel too remote from your organisation, employee satisfaction and retention are likely to suffer. 

The EOR is responsible for providing and managing the workforce’s employment rights, including access to parental leave, working hours, notice periods and much more. It’s vital that everything is communicated clearly and help is always available. The human element is just as important as efficient systems when it comes to picking an EOR to manage your overseas employees.

Intellectual property, confidentiality and data protection

Make sure your intellectual property is protected under your EOR agreement through both employee contracts and company policies. NDAs can provide extra protection for particularly sensitive information or services, so build these into your contracts.

Data protection is also a major responsibility for the EOR, protecting the personal information of your employees as well as your business. Thoroughly review their data protection policies and systems and ensure they meet your needs, as well as comply with local data protection laws.  

Termination, severance and dispute exposure

Contract terminations are governed by local employment laws, as are claim processes and other disputes. Your EOR partner will be able to cover these less-than-desirable situations as part of their service, and they’ll be able to advise on dispute resolutions if they come up. Severance and settlement clauses should be built into contracts, taking care of any eventuality. 

Choosing an employer of record partner

There are a host of things to think about when choosing your EOR partner, from their technology and expertise to specific priorities for your business. Focus on what’s most important to your needs in your checklist. 

Define your specific needs – Including the types of employees, HR systems, contract clauses and your long-term plans. 

Technology and reporting – Explore their systems for delivering HR management and payroll, and how seamlessly this operates alongside their existing employees in other regions. 

Legal compliance – Review their approach to updating contracts and policies as employment regulations change, ensuring they’re on top of compliance. 

Intellectual property policies – Confirm how ownership of intellectual property is handled, ensuring it’s correctly assigned to your business rather than the EOR.

Employee support – Explore their approach to supporting employees, both through HR dashboards and documentation. 

Pricing – Take a look at their pricing structures, including how things may evolve over time as you transition to setting up your own local entity. 

Insurance and indemnity – Check insurance and indemnity limits and ensure they cover what you need. 

Exit planning and transition to local entity

For most EOR business relationships, there will come an endpoint as you plan to set up a permanent local entity. Make sure this is planned for with trigger events and a transition timeline. Your EOR should be able to support and facilitate this process, providing a smooth evolution for your international expansion. 

The ultimate goal is to make a success of entering a new market, setting up a thriving new part of your business that will go from strength to strength. 

Tap into global talent with HeroForce

We can provide end-to-end employment in over 180 countries with HeroForce, your partner for international expansion. Find new talent without setting up local entities, and scale your workforce as you need. 

As an employer of record, HeroForce takes on the legal responsibilities of overseas employment, leaving you to focus on building your company culture, managing day-to-day tasks and ultimately reaching your global expansion goals.

Get in touch with us today to see how we can help your business.