Why and when to use an Employer of Record?
An Employer of Record is often used by organizations that are expanding internationally. With an EOR, businesses can hire and onboard foreign employees in a fast and compliant way, without having to go through the trouble of creating a local legal entity.
But what exactly are the benefits of EOR? Why should organizations hire through an Employer of Record when building their global teams? And when is the use of an EOR service the best option?
What are the benefits of EOR?
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.
Improved 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.
Less work for 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.
When to use an Employer of Record?
There are several cases where hiring employees with an Employer of Record is the best option for expanding businesses. This notably includes cases where the business is not familiar with the employment laws in the country where the new hire resides.
On a more general level, hiring via an Employer of Record is a great option for businesses that have never hired someone outside the borders of their home country. But even multinationals with an extensive track record in international hiring and global employment can benefit from an EOR arrangement.
Common scenarios for using an EOR include:
Testing a new market: Not every foreign market turns out to be suitable to a business’s product offering. Hiring local employees through an Employer of Record gives expanding businesses time to get to know the local customer base and validate their market expectations before fully committing to it.
Hiring specific remote talent: Skill shortages often push organizations to look for talented candidates abroad. Since hiring one or two employees in a country doesn’t warrant the expenses and effort of setting up a local legal entity, an Employer of Record is often the only viable option in these cases.
Converting freelancers to full-time employees: Very often businesses decide to convert their freelancers to full-time employees after having worked with them for long periods of time. While this is an easy move if both the business and the freelancer are based in the same jurisdictions, making the transition with an international freelancer usually requires the help of an EOR.
Providing employees with greater flexibility: Remote work has opened up vast opportunities for employees to work from anywhere they want. Working with an Employer of Record enables team members to relocate to different countries, which can be a game changer for retaining talented workers.
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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