Hiring talent abroad through an Employer of Record (EOR) is a popular method for businesses that are looking to expand into new markets quickly. The EOR model promises short hiring and onboarding times, cost savings, and a high level of flexibility should things in the new market not go as planned.
Let’s take a closer look at the pros and cons of hiring through an Employer of Record.
An Employer of Record (EOR) is an employment outsourcing solution that enables businesses to hire talent abroad without opening a legal entity. This becomes possible through the fact that the EOR acts as the employee’s de jure employer and hence takes over all the administrative and legal responsibilities that arise from the employment relationship.
Which services the EOR provides depends on the country and the provider’s individual terms of service. Services typically include anything from drafting a compliant employment contract to registering the employee with the necessary statutory authorities to managing employee benefits.
Additional services might include payroll and payment processing and compliance support. The business that contracts the EOR services meanwhile has full control over the employee’s day-to-day projects and tasks.
The reason why the EOR model is growing in popularity is that it holds several advantages for both the client business and the employee who is hired through the EOR. Here is an overview of the most important benefits of hiring through an Employer of Record.
It’s no secret that an Employer of Record simplifies global expansion. But let’s take a closer look at the different ways businesses can benefit from an EOR solution. Here are some advantages of using an Employer of Record:
Avoids employee misclassification: Especially when they first start testing a new market, businesses often hire independent contractors to carry out some market research and start building a local presence for their brand. While hiring contractors is quick and easy, it can also lead to employee misclassification issues, since the rules regarding employee classification vary from one country to the next. With an Employer of Record, businesses can hire full-time employees in very little time and without opening themselves up to any potential risks.
Improves your chances of attracting the best talent: Many organizations want to hire international employees because this gives them a chance to access talent that is not available in their home market. In order to attract this talent, businesses not only need to be quick, but they also need to be able to offer competitive benefits and compensation packages. An Employer of Record can help with both.
Saves time and money: The main point of hiring employees abroad through an Employer of Record is to not have to go through the lengthy and costly process of setting up a foreign legal entity. Using an EOR means both saving time and money that would otherwise be spent on incorporation and registration fees.
Provides flexibility: Setting up a branch office or subsidiary not only requires a big upfront investment, but also ties the organization to the new market. Exiting the market then becomes a lot more difficult, since the legal entity first has to be deregistered. With an Employer of Record, organizations remain flexible and keep the door open for quick and easy market exit.
Reduces the workload of the payroll and HR teams: Hiring employees in different jurisdictions requires being familiar with all the local laws and regulations regarding mandatory benefits, tax liabilities, and employment obligations. This usually involves a lot of research work for the payroll and HR department in the beginning. With an Employer of Record, no internal resources have to be wasted on researching local employment and payroll rules.
Reduces compliance risks: Even thorough research doesn’t always guarantee full compliance with local employment law. Since EOR providers are experts in all things employment and compliance, working with an Employer of Record significantly reduces compliance risks in the new market—especially since EORs always keep up to date with changing labor laws.
Using an Employer of Record not only provides advantages for the hiring organization, but it also comes with a range of benefits for the employee. These benefits include:
Location flexibility: EOR is the perfect solution for responding to employee requirements regarding global mobility and location independence. With an EOR, it’s easy to handle employee relocation between different countries without having to worry about setting up a legal entity.
Localized benefits packages: Getting hired through an Employer of Record means receiving all the employee benefits that are mandatory in the country where the employee is hired. This not only includes statutory insurance coverage, but also traditionally offered benefits, such as transport allowances or meal vouchers.
Smooth onboarding: The onboarding process marks the first phase in the employee lifecycle and is therefore crucial for laying the foundations of a positive employee experience. If the onboarding is carried out by experts, the employee is more likely to settle into the role quickly and feel good about their employer choice.
While hiring international talent through an Employer of Record has many benefits, there are also some perceived drawbacks and possible limitations. They include:
Perceived loss of control: For some businesses, hiring through an Employer of Record might feel like not being in full control. Businesses that prefer managing everything in-house typically struggle to outsource important workforce management tasks.
No complete protection from permanent establishment risks: Using an Employer of Record doesn’t protect businesses from permanent establishment. If local EOR hires engage in business activities that generate revenue or involve high-level decision making, this could be enough for the local tax authorities to classify the foreign business as having an ongoing presence in the country and also being liable for paying local taxes. In this sense, hiring through an EOR might limit the business’s operations in some countries.
Limited number of employees: This goes together with potential permanent establishment risks. Using an EOR to hire employees in a foreign market is only recommended up to a certain number of employees.
Limitation regarding length of employment: In some countries, the maximum duration of an EOR agreement is limited. One example here is Germany. Under certain circumstances, an EOR arrangement might trigger the need to get an AUG license, which is the local labor leasing license. When combined with an AUG license, the employment duration via an EOR arrangement is automatically limited to 18 months (24 months in some cases).
With an Employer of Record, businesses can quickly and compliantly hire employees in different countries where they don’t have a legal entity. Using a network of EOR partners allows businesses to tap into a global talent pool and build an international team of talented employees without the legal headaches of setting up a branch office or foreign subsidiary.
Hiring through an EOR offers businesses several advantages. The main benefits of an Employer of Record include cost savings, increased flexibility, enhanced compliance, and risk mitigation. Not to forget the advantages an EOR arrangement provides for the hired employees.
However, the EOR model has its limitations. For instance, there might be limitations regarding the number of employees that can be hired through the EOR or the duration for which the EOR agreement can be concluded.
The Lano Academy is for informational purposes only and should not be construed as legal advice. Lano Software GmbH disclaims any liability for any actions you take or refrain from taking based on the content contained in this article.
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