What is an Employer of Record?

what is an employer of record

Dee Coakley is a three-time COO, having spent the last 10 years with scaling B2B SaaS businesses (Masabi, Bizimply & Axonista). In her COO roles she experienced first-hand the operational challenges of setting up employees in new countries, and so is now building Boundless.  Boundless is solving the difficulties for small and mid-size businesses of running multi-country payroll and HR compliance with a beautiful solution that removes the barriers to growing teams internationally.

In the current reality of COVID-19, many companies are finding themselves suddenly having to work and manage workforces remotely. The first time I had experience with a remote workforce, it too happened accidentally rather than planned. As I shared in a post, my focus was on figuring out how to keep legally employing our workers even as they moved across geographies. What I would realise in retrospect is that the solution to my conundrum was a  model called Employer of Record (EOR). EOR is a well-established model in the US, often referred to as a Professional Employer Organisation or PEO. 

As you try to navigate the reality of remote working by necessity, there are many aspects of teleworking you will have to figure out. We already shared some tips for remote newbies and ideas on how to succeed as a remote leader. While the legal and compliance side of things may not be high on your list of priorities right now, it will become as employees may decide to go back to their home countries, while future recruits will probably have to be remote and thus could come from anywhere in the world. Similarly to me, you will have to find a way to hire them legally as working with independent contractors long term is a bad idea.

In this post, we explain in detail what an EOR model is and what to expect from such a service provider. Firstly, however, it’s important to understand what employment itself means.

Employment vs. performance management

We often put employment and managing someone’s performance under the same umbrella. That, however, isn’t the case, as one is a legal relationship, while the other is a working one.

Giving someone the wrong assignment, versus assigning them the false statutory obligation, doesn’t carry the same weight of consequences. Employment is a legal status that comes with legal responsibility for ensuring that a person benefits from all of the employment rights in a particular territory, governed by local employment law. Performance management, on the other hand, is a working relationship around the nature of work itself. 

employment is a legal relationship

When both employer and employees are based within the same jurisdiction, the company typically takes care of both the legal responsibility and the performance management. Geographical separation changes that, as a new jurisdiction requires a separate employer registration. To solve this, a company can either take the arduous task of registering as an employer directly, which involves setting up international payroll, or it can employ the services of an EOR. 

The definition of an Employer of Record

EOR is a model (and legal status on an employment agreement) for the employment side of things. The model is applied through a third party Professional Employer Organisation (PEO). While EOR and PEO are often used interchangeably, it’s essential to understand the subtle difference between the two terms. 

The EOR model is nothing new, first originating in the US in the 1960s in an attempt to address the challenge of employing people across state lines. In the US, people are tax residents of the state they live in. Their employer is legally obliged to be registered for taxes in that same state and produce tax returns every year on their behalf. If a small business has multiple employees in multiple states, it can quickly find itself in a reporting and compliance nightmare. PEOs registered in other states acting as the employer of record have been coming to the rescue in these instances.

When using an EOR, a company enters into a three-sided, co-employment contract, signed by the company, the employee and the PEO:

  • The company maintains a direct relationship with the employee, allocating them work tasks, and managing their performance.
  • As the one responsible for the legal employment, the EOR takes care of the operational side of things such as payroll, taxes, benefits, etc., ensuring the employee and the client are compliant with all legal regulations when it comes to employment.
  • The third party to the agreement, the employee, fulfils all of their obligations as a worker for the company. 

Companies are now more frequently employing people in countries around the world, often in places where it takes far more than merely registering a tax number and filing annual returns to be legally compliant with all of that country’s tax regulations and employment legislation. 

EOR offers an effective solution to deal with compliance challenges and the stress and uncertainty of employing people in more complex/higher-risk jurisdictions. 

the employer of record model first originated in the US

What falls under the responsibility of an Employer of Record?

As the legal employer, regardless of the territory, an EOR handles a variety of compliance aspects such as: 

  • Producing the employment agreement
  • Processing payroll
  • Filing employer payroll taxes
  • Filing employee taxes 
  • Managing workers’ compensation or other similar insurances 
  • Providing health benefits (mandatory in many countries)
  • Offering retirement vehicles and pension schemes 
  • Assisting in regulatory compliance
  • Advising on local employment regulations and practices.

While these are the duties performed by the EOR for most countries, depending on the territory there may be other aspects to compliant employment. 

Beyond producing the employment agreements and making sure they include all of the obligatory legal terms for that territory, an EOR also makes sure that employees are provided with any required notices or materials. For example, in Ireland, employers have to provide detailed information on disciplinary policies within a specific time frame after the employee’s start date.

Once the employee is up and running, the EOR is the official keeper of records and is the point of contact for all employment regulations and HR compliance questions. 

The EOR will process the payroll every month, ensure that the appropriate taxes are filed, tax authorities notified, and payments made, and stay on top of all other statutory obligations. 

what an employer of record could do for you

How are employment agreements ended when using an EOR?

Your company handles the day-to-day working relationship with the employee, and your company is ultimately the party making decisions about your organisation’s strategy, and how that impacts your workforce. As one of the most complex and plain uncomfortable parts of employment relationships, the question of how to end employment agreements under the EOR model is one we are often asked. 

If this situation arises, an EOR can support the company with the local knowledge of how to comply with the relevant country’s employment regulations. In addition, a good EOR should work with the company to ensure that the employment contract is ended in a sensitive manner: advising on the due process that has to be followed in the jurisdiction, and guiding the company in making sure the employee is treated respectfully.

While many US companies operate from “fire at will” states, where an employer can tell an employee, “Don’t turn up tomorrow, you’re done,” in much of the world, employees have rights to be taken through a very clear and fair process, before a decision on ending their employment is made. 

An EOR should have the local knowledge and deep understanding of appropriate steps and will act as an essential advisor for the company throughout this process. I can’t emphasise strongly enough how important it is that a company consults its EOR and their local experts before going ahead with ending someone’s employment. As tempting as it may be to follow a checklist, it’s far too risky for a company to do this without appropriate support. Here are a few reasons:

  • Terminating a contract is an emotional ordeal, which is so taxing for both sides that mistakes can easily be made. 
  • It can be incredibly daunting to handle a termination in-person, while in the same country. Adding cultural differences and the fact that conversations may not be happening face to face, makes it even more challenging. 
  • Many managers have no formal training in handling terminations. Even if scripted, it can be easy to go off script and say something inappropriate. Managers need specialist coaching and support to handle these sensitive situations.
  • If the process isn’t followed strictly, depending on the country, there can be severe consequences. In Ireland, for example, employment tribunals are not uncommon, and if a company mishandles even one step of the process or does not comply with the strict timeframes, the employment tribunal may find in-favour of the employee, incurring financial penalties for the employer. 

Do I need an Employer of Record?

In the last year, I have had conversations with many HR advisory firms, and when I have described the Boundless Employer of Record model, many of them told me that companies have asked them in the past, “can you act as an employer on our behalf in your country”. You would probably not be surprised to hear that the answer was always no. 

In most countries, the responsibility is far too big, and the risk far too high, for anyone who is not a specialist in this area to take on the EOR responsibilities. 

When EOR expertise is not core to a business, that organisation will rarely be a suitable partner. So, yes, you really need an experienced Employer of Record that owns their infrastructure, to make sure everyone you work with is legally and compliantly employed, and you are safe as an employer. 

Acquiring the local knowledge and establishing that infrastructure takes time, and at Boundless, we only work with established local experts that have been focussed on the territory in question for many years, ensuring we can the best Employer of Record service possible. We’re currently focussed on establishing our worldwide employment infrastructure with an already established presence in Ireland, the UK, Denmark, Portugal, or Australia. Alongside that, we are developing the technology that will automate the repetitive administrative aspects of payroll and taxes. The combination of the two will ultimately allow us to solve the pain of multi-country payroll, and decrease international employment costs, for you. Learn how you can start employing anyone, anywhere today.

The making available of information to you on this site by Boundless shall not create a legal, confidential or other relationship between you and Boundless and does not constitute the provision of legal, tax, commercial or other professional advice by Boundless. You acknowledge and agree that any information on this site has not been prepared with your specific circumstances in mind, may not be suitable for use in your business, and does not constitute advice intended for reliance.  You assume all risk and liability that may result from any such reliance on the information and you should seek independent advice from a lawyer or tax professional in the relevant jurisdiction(s) before doing so.

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