Employer of record – what it is and how it works

Employer of record – what it is and how it works

An employer of record is an organization that serves as the employer for payroll and tax purposes while the employee performs work at a different company. The employer of record is liable for employment issues along with payroll compliance and tax laws.
Employer of record solutions can be helpful when dealing with payroll tasks and employment laws for employees in different countries. The employer of record keeps updated on the local laws so you don’t have to worry about complying with laws in multiple places.
In this article, we explain what an Employer of Record is and how it can benefit businesses.

The story behind the Employer of Record

Businesses have been outsourcing work to third parties for centuries. Arguably, the concept first came to public attention in the late 1960s with the rise of ‘labour leasing’. In staff leasing, employees of a third party managed services company where ‘leased’ to client firms, either temporarily or for long periods of time.

The Definition of EOR

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 employees work for.
When operating internationally, these companies are commonly referred to as ‘Global Employment Organizations‘.

What Does an EOR Do?

While the client company retains day-to-day supervision of employees, the EOR, in consultation with client companies carries out the following actions:

  • Payroll

The EOR processes the payroll of all employees in line with the legal requirements applying in that jurisdiction.
Payment method and cycle will follow legal obligations, local customs and the wishes of the client company.

  • Tax registration

The EOR is registered with the tax authorities as the employer of staff. This means they are required to withhold certain taxes from employee payments (namely income tax and payroll tax contributions).

  • Employment contracts

The EOR will employ staff under jurisdiction-complaint employment contracts.

  • Termination

The EOR will terminate employees, on advice from client companies and when permitted under the law. Similarly, they can renew contracts on expiration.

What is the relation between Employer of Record and a PEO?

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, HR strategy and corporation services.

What the Benefits of EOR Solutions?

An EOR solution, either locally or globally, has a plenty of benefits:

  • International expansion

If seeking to employ professionals in multiple countries or locations, it is usually a requirement to have a local entity in place to formally employ staff.
An International Employer of Record solution can employ professionals in multiple countries, without the need to incorporate locally. This saves on the cost of establishing multiple international subsidiaries. Moreover it allows new employees to be onboarded within days.

  • Payroll and social contributions compliance

Payroll obligations, health insurance and pension contribution requirements are complex, and the law that governs them changes frequently.
An EOR, as a compliance expert, understands all applicable legal requirements and is liable for non-compliance.

  • Suitable working environment

EOR will provide a more conducive working environment, more appropriate to the local people they recruit. They will definitely implement your wishes and needs when hiring. However they will also make the process easier on the employees. Each EOR deals with potential candidates in their area. They know more about both the working culture of the people they hire, as well as how to properly manage the integration on the local level.

Takeaways

An Employer of Record (EOR) solutions means that a third party company takes over as the legal employer for your workforce.

An Employer of Record is generally responsible for payroll, ensuring that all necessary withholding and deductions, and meeting other compliance obligations of employers.

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.

Using an Employer of Record solution ensures that payroll and employment is in full compliance with withholding and tax rules. Тhe future of the EOR solution is certain, as more and more countries are changing local regulations on employment to prevent abuses and loss of tax revenue. Companies should have a way to overcome this challenge of doing business overseas, the EOR is becoming a core strategy for employing both local citizens and expats.

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