How to choose your Employer of Record with 11 questions
Posted onOctober 7, 2020byIrina Dzhambazova
Internationally remote employment is hard. It takes enormous effort to employ a remote worker in a legal and compliant way. In order to be compliant, you should avoid misclassifying workers as independent contractors and you must abide by all local employment laws, run local payroll, and fulfil a host of employer obligations. In other words, you need to behave as an actual employer. It’s a difficult process, but it’s the right thing to do for you, your company, and your employees.
To go about it the right way, there are only two viable options - to be set up as an employer (“Do-It-Yourself” style or with the help of many intermediaries) or work with an Employer of Record. How do you decide which way to go and how do you choose an Employer of Record? Keep reading.
DIY local employer setup
This will see you do everything necessary to set up as an employer in the country where the worker resides. Setting up can take anywhere between ten weeks and 18 months, which you will have to go through each time you have an employee in a new country. In the current state of the pandemic, these time scales have increased even further and have become very unpredictable. For starters, you will have to:
Find and work with in-country accountants to register with local tax authorities, labour departments/ministries and, if necessary, set up an entity.
Find and work with local lawyers to produce an initial employment agreement.
Work with translation services to then create a locally compliant employment agreement.
Figure out which taxes you and the employee are liable for (and what tax breaks and credits those come with), sort out all relevant benefits, and make sure that these are all included in the payslip which your employee receives.
Find local payroll processors to then run the monthly payroll.
Work with your local legal counsel to understand local employment legislation, the terms and rights which employees in the country are entitled to, and the employer obligations tied to that, which you will have to comply with.
Invest time, money and energy in all ongoing payroll overheads, such as monthly and annual employer and employee tax filings (and in some countries, sales tax as well).
Stay on top of ever-changing employment legislation and taxation updates.
You will have to do this for every country in which you have a worker. The more countries there are, the more fragmented and inefficient all of this process will become and therefore harder to manage and scale in a cost-effective way.
Costs vary hugely and depend on the specific country. Regardless of what they are, you will also have to calculate the cost of having someone from your HR department devoted to researching, executing, and maintaining this on an ongoing basis.
Obviously, many companies still take this path and establish international subsidiaries. But they typically do it when they are at an enterprise level and have made a strategic decision to establish operations in a specific market. Many companies that have adopted remote work at scale will often choose to continue to work with an Employer of Record as concentrating on core business is considered as a priority over running an admin heavy process.
Employing internationally through an Employer of Record
If the above sounds time-consuming and cumbersome, you have an alternative option: employ people with the help of an Employer of Record. We go into detail on what an Employer of Record is here but the important part to understand is that this is a model (and legal status in an employment agreement) that takes care of the employment and legal relationship with an employee locally. By utilising the corporate and employment infrastructure that is in place, you do not need to do any of the heavy-lifting yourself. The model is applied through a Professional Employer Organisation that either has its own company, which employs your worker or relies on a partner to do that.
This route spares you the headaches and overheads without putting you in a legally dubious situation. While a lot of the complexity that comes with global employment is taken care of for you, different Employers of Record will give a different flavour of this service, have a varying fee structure, will take up a mixed set of responsibilities and will operate in their own specific way. It’s important to find the best fit for your needs, so we have put together 11 questions to ask a prospective Employer of Record whom you are evaluating to help you determine if they are right for you.
Will the organisation legally employ your worker?
This may seem obvious, but before you ask anything else, you need to investigate whether the provider handles local employment. There is a lot of confusion surrounding what international employment entails and the sort of service it requires. As you have ventured into finding out more, you may have been told about varying services along the way which offer things like cross border payments, streamlined international payments, or processing global payroll.
While these are part of the things that international employment require, they do not offer the essential element - having a local employer for the worker. The reason you are working with an Employer of Record is that your worker needs a local legal employer that carries all obligations in front of the government, tax authorities, social security offices, etc. Being that legal employer of your worker means they will be doing a host of activities starting with:
Maintaining a corporate entity appropriate to employ people locally
Being registered as an employer with the local tax authorities
Producing a local employment agreement
Processing and running local payroll
Filing employer payroll taxes
Filing employee taxes
Offering all statutory benefits
Processing payments to employees, local tax authorities and benefits providers
Assisting in HR compliance
Advising on local employment regulations and practices
Alongside that, they will also have to be running a tight ship in terms of corporate governance for all of their companies. If they do not do that, then the ongoing employment of their customers’ workers may be in question. Tools or services that facilitate international payments, handle contractor invoices or process payroll alone, do not provide the full suite of services which legal employment requires, starting with actually being the employer.
If 👆 is yes, are they the direct employer, or do they work through partners?
This is an important piece to understand because the legal employer is the one who carries most of the responsibility for the employee. The fact that legal employment is offered in a specific country doesn’t automatically mean that the provider that you are engaging with is the direct legal employer. They could be working with a partner organisation that they will either put you in touch with or communicate with on your behalf. While the partner/s may be perfectly capable of legally employing your worker, adding additional layers to the international employment relationship mathematically increases the chances of something going wrong, blurs the lines of responsibility, and potentially diminishes the quality of service. Ultimately what you need to know is, if something goes wrong, who is responsible for your employee in the eyes of the local authorities.
The reason why some Employer of Record services may opt to work with partners instead of setting up their entities is that the latter takes a lot of time and commitment. Often, these entities will need to have very specific licensing, which further complicates and lengthens the process. An ability to handle and navigate through a lot of administrative red tape with panache is one of many requirements.
While a difficult process, owning their group of companies is the only way they can ensure a quality experience for customers. It's simply too difficult to control quality from a distance with a third-party, and it's impossible to give you any guarantees when they are not in control of the end-to-end experience. By the Employer of Record being in control of everything that happens to your employee, you too will be in better control.
Yet, not every provider will opt for that. If the Employer of Record works with partners instead of having their own entities, you need to understand whether you will have direct contact with them. Beyond that ask questions such as:
What happens with performance-related issues or termination (adding layers between the customer and the direct legal employer introduces friction into any process around disciplinary action or termination that needs to be done in a compliant way)?
How they make sure that all of the data changes from your end have been received in time for running payroll by the partner?
How they make sure you are aware of the latest legislation surrounding employment and tax legislation?
How they move money between the organisations?
Have they done their due diligence in selecting that partner?
How are they making sure the partner will do things right?
How are employer obligations split between you and EoR?
As you saw in the previous question, there are a lot of responsibilities that fall under an Employer of Record, and you have to make sure that the service you are engaging with will be able to take care of them. While they take over the specific obligations that go with local compliance, all of the facets of the ‘actual work’ will still be yours: setting goals, having 1:1’s, learning and development, etc. So when an organisation is saying that they will assist you with HR compliance or help you navigate local regulations, you will need to investigate what that means.
In some jurisdictions, appearing in front of an employment tribunal if the employee has made a claim would be one thing which the Employer of Record may be required to do on your behalf. There are, however, other obligations that, instead of doing for you, they will inform you of and expect you to fulfil. Here are a few examples:
If an employee is sick, who do they have to call?
If the country has a time tracking obligation, who does it fall on?
Will they provide non-statutory benefits locally, and if so - who will administer them?
All EU nationals can ask to review how their data is used, so there needs to be a privacy statement and procedure for handling data requests under GDPR. How would your potential Employer of Record handle this?
There are many other country-specific obligations that an employer in these or other countries may have, and depending on the country, a different division of responsibilities may be necessary between you and the Employer of Record. Be sure to get all the fine print clarified!
Do they have extensive payroll and HR knowledge?
To be able to help you with multi-country HR and Payroll, the Employer of Record should have extensive experience and knowledge of international payroll, operations and in-house HR to help you. On top of that, they should have a good grasp on local employment and tax legislation and how it evolves. They should have the ability of making sense of that information and packaging it in a way that makes it easy for you to digest. (Boundless has a library of comprehensive Country guides publicly available to everyone).
Investigate if, as part of the sales or onboarding process, you can speak with people who are in these roles and whose primary responsibility is employment compliance. Ask as many questions about the local employment law where your worker is and whether you as the client have any responsibilities you need to fulfil. Observe how they are answering those for you - does it feel like you're talking with a salesperson, whose goal is to entice you to buy a product, or does it feel like you're talking with someone with deep experience in HR/payroll operations who really understands your questions and the challenges that you're dealing with?
Enquire if they can provide written guides as well, which you can read at your convenience. Making sense of this very specialised information takes time and effort, and developing an extensive knowledge base for customers about local regulations should be an activity they have invested time and resources in.
Beyond accessing this information, either through directly speaking to them or reading their content, try to gauge how much of it they have managed to automate and streamline into how they work, and their product.
It's worth bearing in mind that, when engaging an Employer of Record, you are not simply purchasing software or a widget and there is a service element to what they do, which should be easy to access and understand, both for you and your employees. After all, the whole reason that you are working with an Employer of Record is so you can get on with what matters most to you - running your business.
How does the employment contract work?
One of the key points to your work with an Employer of Record is how the employment relationship is handled contractually. There are three sides to the agreement - you, the worker, and the Employer of Record, and you all need to be involved. Having in mind that the provider is the legal employer of your worker, they need to have a contractual relationship with them. While it needs to be fully compliant with the law, it also needs to be consistent with the way your company operates. You should be able to harmonise your strategy for performance management, frequency of compensation reviews, structure to work days, retreats and all other company rituals in all geographies where the Employer of Record is helping you.
Contracts in different territories vary greatly. In some geographies, you will see employment agreements that show with great detail the tripartite working relationship we’re describing above. You’ll have three signatories to the contract, and clauses that express exactly which party is responsible for what. Typically, you should expect the EoR to be indicated as responsible for payment, taxes and anything which is specifically local - while everything concerning policies (from time off and working from home, through travel and expenses, all the way to performance and everything else) should remain with you. You should ask in detail about the benefits that you offer to your employees and whether you can continue to extend them, or does the EoR need to take over some of these. Will they provide all of the benefits that are statutory in the country you want to hire in?
In other territories, having three signatories to the employment agreement is simply not possible. Some will require parallel contracts, to be signed between you and the EoR on one side, and the EoR and your employee on the other. Some will have a tripartite agreement going hand in hand with a separate agreement between employee and EoR. While you’re evaluating an Employer of Record provider, it’s important that you ask to see the template agreements they have in place for each jurisdiction you’re thinking of using their services for. You need to understand how your employees' employment conditions will look, and if the EoR is able to support you creating consistency across the board, while complying with local employment practices.
How will the EoR help you if you need to end an employment agreement?
In most countries, there are quite strict regulations to prevent unlawful terminations. Regardless of the location of your worker, or the specifics of the situation, the Employer of Record should step in to offer you tailored advice. They should provide the necessary support to ensure the situation is handled positively and legally. This requires availability, willingness to help when the going gets tough, and local knowledge. In fact, it’s such a vital part of your partnership with them that ending an employment relationship should be addressed in the commercial agreement you sign with the Employer of Record.
Ask if they have an established procedure for compliantly ending employment agreements. A good practice would be that they should require their customers to alert them at the first sign of an employment agreement potentially coming to an end. Doing that would allow for following the right procedure from the start and avoiding any employment tribunal or labour court cases.
How responsive would they be once you become a customer?
While a lot of the work that an Employer of Record will do for you is set at the start of the relationship with them, some things will come up further down the line. Employment is not a straightforward process, and the Employer of Record should ensure a smooth experience for all.
Even the most modern Professional Employer Organisations, built using software development best practices, and streamlined / automated workflows should have some human support offering. Start by understanding how their support works. Can they demonstrate payroll and HR expertise from the first interaction? Understanding the support workflow can help set expectations about whether they will be able to solve issues on the first contact and save you time. It shouldn’t feel as if customer service is transferring you from one person to the next.
How do they handle emergency situations, or “out of hours” contact? Would it be over phone, email or online chat? How do they manage your expectations about their availability, and is the costing for this transparent?
How is payroll data managed and do you have an overview?
Ask anyone running payroll, and they will tell you that what keeps them awake at night is how data is managed, and adjustments are applied, while taking into consideration tax bands, credits, allowances, benefits-in-kind, supplements, reimbursements, updates to the tax code, and many more.
The management of the employee data, keeping it safe at all times, and maintaining an efficient and zero-mistakes workflow for applying changes can result in added complexity when you are working with an Employer of Record. While your payroll department may have an auditing process when they pay out salaries, when you are working with an Employer of Record, you are subjecting yourself to their operations.
You will need to understand the data change workflow and your visibility over it. Is there a product solution in place that both you and the worker can access or is the solution a mix of tools such as email/google sheets/cloud storage? An interface would allow you to more easily review the final payroll costs before you pay the Employer of Record each month and will decrease the chances of mistakes.
When you have multiple workers in multiple countries, managing all of this can become a big overhead if there is no way to have a bird’s eye view on how things are looking.
How do they store and keep that data safe?
Managing changes and making sure payroll is correct is one thing; making sure your worker’s data is safe and secure is a whole other thing for which the Employer of Record is also responsible. As some of this data is highly sensitive, and multiple parties have access to it, the Employer of Record needs to apply the highest possible measures in keeping it safe. It's important to examine an Employer of Record’s security and privacy policies to assess exactly how they comply with local and international data protection regulations, including GDPR and Schrems II, among others.
On top of that, it's important to establish which measures are being taken to keep your data secure. Ask questions such as where the servers which store the data are physically located; what is the disaster management and data recovery plan; do they have any threat detection systems in place; are they ISO27001 certified or are they aiming to achieve certification soon?
How much will it cost you to employ someone through them?
Typically, an Employer of Record would either charge a flat fee for their service (regardless of the salary they are handling) or a set percentage of the compensation. The fee may be harmonised for all countries or differ slightly. These fees would be charged either every month or billed once annually. The price that they quote may depend on a certain commitment from your part (timeframe, number of workers, etc.).
Inquire in detail how the fee structure works and ask them to help with gross-to-net calculations, employer taxes and also their fee so that you can see exactly how much it will cost you to employ someone through them both monthly and annually.
Find out whether they cover everything that the Employer of Record will do for you or whether additional charges may come up. Ask if there are additional charges for particular circumstances, such as employment termination? How does their fee structure impact employment in multiple countries? If you decide to break the contract, are you liable for any fees?
What are the terms in their commercial agreement and can you easily end it?
While we have already mentioned that handling employee terminations should be explicitly mentioned in the commercial agreement with the Employer of Record, what other important terms might be there that you should understand? Here are a few:
Minimum term of engagement
Deposits you will need to pay upfront
Minimum team size you need to have at sign up
Any expectations on adding more workers
Cancellation clauses and fees in excess of any employee termination fees
How easy or difficult it is to extract employer or employee data from their systems and interface
Clear division of responsibilities and ownership of the compliant employment
Clearly expressed IP ownership and confidentiality
Payment transfer fees
Foreign exchange fees
Any fees for customisation of employment agreements, or later addendums
As with everything else in life, if you are not happy with your Employer of Record, you should be able to get out of the relationship with them reasonably easily. Ask what the terms on that are and if you are bound to work with them for a certain period. (You can see the Boundless commercial terms here). No Employer of Record will be justified in making it hard to leave them and migrate to a different provider, or to move to employing people through your own entities.
We hope these 11 questions and the reasons why they are important have helped you to understand how to evaluate the merits of an Employer of Record. Many of them stem from our own experience in trying to rethink global employment and create the best possible solution for it, augmenting the model that was first created back in the ‘60s. If you want to employ anyone in Australia, Denmark, Germany, Ireland, the Netherlands, New Zealand, Portugal, Singapore, the UK, and several other countries, get in touch. We will be happy to answer these and any other questions you may have for what we know is the most precious side of your business - employing your valued people.
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.
Written by Irina Dzhambazova
Irina Dzhambazova is the editor of this publication and leads many of the marketing efforts behind Boundless. Previously she crafted stories at SaaStock and Dublin Globe and travelled the world capturing case studies of companies using the Kanban Method. Throughout this experience, she was almost always "the remote worker" and knows a thing or two about the potential and challenges of this way of working.
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