Employer of Record Benefits and Challenges: What Every Leader Should Know

What is an Employer of Record (EOR)?

Before employers of record, companies need to consider local entities before tapping into the workforce there. A representative office or a branch office are both intermediaries between your parent company and the local market, which is now a core function of an EOR.

An Employer of Record is a third-party company that legally employs talents on behalf of your company in countries where you don't have a legal entity.

The rise of globalization and the embrace of remote work have grown the demand for EOR services, which specializes in managing employment-related risks and compliance issues in local areas.

In the other guide on EOR meaning, I explored this solution in detail, why it matters, and when it makes sense for your company to partner with an EOR.

As you consider leveraging EOR services for your international expansion, it is crucial to weigh the employer of record benefits and its downside to make informed decisions.

Here is everything I believe that every HR leader should know before finalizing an EOR partner for your global hiring:

Key Benefits of an Employer of Record

An EOR Navigates Employment Laws for You

Navigating the complex web of employment laws across different countries can be a daunting task for any company. 

Each jurisdiction has its own set of labor regulations, tax requirements, and employment standards that you must adhere to. Failing to comply with these laws can result in hefty fines, legal disputes, and damage to your reputation.

An EOR specializes in legal compliance, ensuring that all employment-related legalities are handled according to local laws. 

They take on the responsibility of managing employee contracts, benefits, payroll, and termination procedures, reducing the potential legal burdens on your company.

For example, let's say you want to hire a team of software developers in Brazil, a country with a complex labor law system that includes over 900 articles in its Consolidation of Labor Laws. You don't know the common practices, and you may not have an expert to advise you on what to do.

An EOR with expertise in Brazilian employment law can ensure that your employment practices are compliant with local regulations, saving you from potential legal headaches.

An EOR Saves You Time and Money

Setting up a legal entity in a new country can be a time-consuming and expensive process.

You have to deal with registration fees, legal costs, and ongoing compliance expenditures. 

An EOR eliminates the need for these investments by allowing you to use their established infrastructure and expertise.

Moreover, an EOR handles payroll, taxes, employee insurance, and other benefits, which can be costly and complex for you to administer across different tax regimes and social security systems.

By centralizing these functions, an EOR achieves economies of scale, potentially passing on the cost benefits to you.

You also don't have to worry about the ongoing and post-employment financial obligations that come with direct employment, such as severance pay, pension plans, and unemployment insurance.

An EOR Enables Rapid Scaling and Flexibility

The ability to scale your workforce quickly in response to market demands or project needs will give you a competitive edge in the fast-paced global economy and business world.

EOR services give you a gateway to hire and manage talents in other countries, from contractors to full-time employees.

With an EOR, you can officially recruit people in new markets even without your own legal entity.

This flexibility extends beyond just hiring. An EOR allows you to scale down operations without the typical complications of layoffs and legal compliance in foreign jurisdictions. 

You can adjust your workforce size based on current business needs without the legal ramifications of direct employment.

For instance, if you're a gaming company looking to launch a new mobile app in Southeast Asia, an EOR can help you quickly assemble a team of developers, marketers, and customer support representatives in the local region.

If the app doesn't meet expectations despite the team's best efforts, an EOR allows you to make necessary changes to your workforce in compliance with local laws.

An EOR Gets Your International Hires Work-Ready in Record Time

Onboarding international employees can be a time-consuming process, especially if you're not familiar with local hiring practices. 

But an EOR can help you speed up the process of getting your new hires work-ready. 

With their expertise in local labor laws and regulations, an EOR ensures a swift and compliant onboarding process.

Leading EOR providers like Globalization Partners can onboard employees in as little as 12 hours, compared to the weeks or even months it might take to set up a local entity and hire directly. 

They handle all the necessary paperwork, from preparing legally compliant contracts to setting up payroll and benefits and more, so your new hires can hit the ground running.

Some EORs, like Deel, even offer built-in global background check capabilities and visa support for international hires. This aids in your recruitment process and helps your employees settle into their new country ASAP if they're relocating.

An EOR Lets You Focus on Your Core Business

Managing a global workforce can be a distraction from your core business functions. 

By outsourcing employment responsibilities to an EOR, you can focus on innovation and strategic growth without worrying about the complexities of international employment laws and payroll systems.

This approach is particularly beneficial for startups and small to medium-sized enterprises that may not have the resources to manage a global workforce. 

With an EOR handling the administrative burdens of employment, you can maintain a lean operational structure while still leveraging international talent.

Challenges of Using EOR That You Shouldn't Overlook

While an EOR can significantly simplify your global hiring process and help you navigate complex legal landscapes, it's essential for leaders to understand the potential risks that may still occur when choosing an EOR as your global hiring partner.

Let's explore them in detail:

Permanent Establishment (PE) Risks

PE refers to a situation where a company is deemed to have a taxable presence in a foreign country, triggering tax liabilities and other legal obligations. 

Even when using an EOR, certain activities performed by your employees can still trigger PE risks.

For example, if your employees are concluding contracts or generating revenue on behalf of your company while working under an EOR arrangement, tax authorities may argue that your company has a PE in that country. 

This is because the employees' activities are seen as creating a fixed place of business or a dependent agent for your company, regardless of the EOR's involvement.

To mitigate PE risks when using an EOR, you might need to carefully structure the EOR relationship and clearly define the roles and responsibilities of your employees. 

This may involve limiting your senior employees' authority to conclude contracts or generate revenue, and ensuring that the EOR is the one officially conducting business in the country.

By proactively addressing PE concerns and working closely with your EOR partner, you can minimize the risk of unexpected tax liabilities and maintain compliance in your global operations.

Changes in Regulations and Laws

The regulatory landscape for EORs is constantly changing, with new laws and regulations being introduced all the time.

Keeping up with these changes can be a full-time job in itself; that's why you need a reliable EOR partner.

For example, some countries may introduce new regulations around the use of EORs, such as requiring them to obtain specific licenses or registrations to operate legally. Others may tighten their laws around employment classification and worker's compensation laws.

A good EOR will have a deep understanding of the regulatory landscape in each country where they operate and will stay on top of any changes or updates to local regulations to keep you on the right side of the law.

Look for EORs that have a proven track record of compliance and can provide guidance on navigating country-specific legal requirements.

It's also essential to regularly review and audit your EOR partnership to ensure ongoing compliance. This may involve reviewing contractor agreements, verifying worker classifications, and maintaining detailed records of employment relationships.

Working closely with your EOR partner to proactively address compliance challenges can help minimize legal and operational risks while leveraging the benefits of EOR services for your global hiring needs.

Intellectual Property (IP) Risks 

Protecting your company's IP is critical when hiring internationally, as IP laws and assignment regulations vary by country. 

Industries such as technology, pharmaceuticals, and creative services are particularly vulnerable to IP risks due to the nature of their work and the value of their proprietary information.

In some jurisdictions, IP rights may automatically vest with the creator (employee) rather than the company, making it difficult to secure ownership of work products and can lead to disputes over control of valuable assets.

If this is your concern, look for an EOR that takes a proactive approach to IP protection, offering tailored solutions to safeguard your IP.

A knowledgeable EOR partner can help you draft robust employment agreements that clearly outline IP ownership and assignment provisions, ensuring that your company retains full control over the intellectual property created by your international team.

This may include implementing strict confidentiality and non-disclosure agreements, conducting regular IP audits, and providing ongoing guidance on best practices for managing intellectual property in each jurisdiction.

People and Culture Considerations

When partnering with an EOR to build your global team, it's essential to prioritize creating a cohesive company culture that ensures all employees, whether hired directly or through the EOR, feel equally valued and connected.

Failure to do so can lead to a sense of disconnection and a perceived hierarchy among your workforce.

One of the main challenges when using an EOR is the potential for your international hires to feel like they are not truly part of your organization, as they are technically employed by the EOR. 

This can lead to a sense of an "us vs. them" mentality, where EOR hires may feel like second-class employees compared to their directly hired colleagues.

Leverage your strategies of managing remote teams to the fullest, regardless of their hiring arrangement!

Make sure your EOR hires are included in all company communications, events, and initiatives, and they have access to the same resources and support as your direct hires.

Regularly communicate your company's mission, values, and goals to all employees, and make sure your EOR partner is aligned with your company culture.

Consider implementing strategies to foster social connections and team bonding, such as virtual coffee chats, team-building activities, and employee resource groups.

When team members do well and move up, they also deserve competitive benefits and compensation alike.

While EORs can be valuable partners in designing benefit packages that comply with local regulations, not all of them have the expertise to handle complex benefit schemes like equity compensation.

If offering equity is part of your strategy to reward loyal and high-performing team members, look for EOR partners that provide global equity plan support or at least experts well-versed in navigating country-specific tax and compliance requirements to advise your move.

What to Consider When Choosing an EOR Partner? 

Key drivers for EOR adoption include navigating local employment laws, entering new markets rapidly without establishing local entities, and managing foreign talent recruitment and retention.

EOR providers must be able to help you handle compliant hiring paperwork, provide statutory benefits, and run timely payroll for international employees. 

But what makes them a reliable partner for long-term success requires more than that.

Here are key considerations when choosing an employer of record service:

Geographical Coverage

Country coverage is key. Think about where your business is headed and ensure your EOR partner has a strong presence there. 

The more countries they cover, the more flexibility you'll have as you grow.

Keep in mind that not all EORs are created equal when it comes to geographic reach. 

Some may claim global coverage but rely heavily on third-party partners in certain regions. That can lead to inconsistency in service quality and compliance.

Look for an EOR with deep knowledge and rich hands-on experience in your target markets, whether through owned entities or well-established partnerships.

Don't be afraid to get specific—ask your EOR vendors about their local team, cultural knowledge, and track record in navigating each country's unique challenges.

Ownership of Legal Entities

The legal structure of an employer of record matters more than you might think.

This can have a big impact on the level of control, compliance, and service quality you can expect from the EOR providers.

EORs that own their entities have direct oversight of the employment relationship, from contracts to payroll to benefits, which means if any problem arise, you and your team doesn’t have to go through many layers of communication to get solutions.

Plus, owning entities show a level of commitment and investment in each market.

To figure out the legal structure of a potential EOR partner, just ask! 

Let’s remember that the ability to provide payroll services in a country does not translate into having the legal authority to employ people there. 

Inquire about their entity ownership and how they manage compliance and service delivery in each country. 

You can also ask for references from other clients to get a sense of their experience with the EOR's legal setup.

Compliance and Legal Expertise

Compliance is the foundation of any successful global hiring strategy. 

When navigating different legal systems and labor regulations you’re unfamiliar with, you need an EOR partner who knows their stuff.

The consequences of non-compliance can be steep, from financial penalties to reputation damage. 

That's why choosing an EOR with deep expertise in local labor laws, tax requirements, and other legal nuances is so important. 

They should be able to guide you through the complexities of each market and keep you compliant every step of the way.

Some EORs offer additional perks like global mobility support, visa and immigration assistance, and IP protection solutions—that might be needed as your remote team grows.

To assess an EOR's compliance chops, ask about their legal team and their experience in your target markets. 

Look for certifications and accreditations that demonstrate their commitment to compliance. 

Also, inquire about their process and protocol for staying up-to-date with changing regulations and how they handle any compliance issues that arise.

Technology and Automation

Having a centralized platform is essential for streamlining global employment processes, keeping every stakeholder on the same page, and ensuring a smooth experience for both you and your global team.

A tech-enabled EOR will equip you with a user-friendly platform that gives you real-time visibility into your global workforce.

Look for features like dedicated employee portals, self-service onboarding, digital document management, and automated workflows for tasks like time tracking and expense reporting.

Automation can reduce manual errors, ensure consistent compliance, and free up time for more strategic HR activities.

Data Security and Privacy

You're entrusting sensitive employee information to an employer of record, from personal details to financial data. Hence, data security and privacy are non-negotiable.

It's crucial to choose an EOR partner that takes data protection seriously and has robust measures in place to safeguard your information.

Data breaches and privacy violations can have serious consequences, from financial penalties to damage to your brand reputation. 

So, ask your EOR about their security infrastructure and protocols. 

Inquire about their data encryption methods, cross-border data protection, access controls, data retention policies, and incident response plans.

Do they comply with global privacy regulations like GDPR or have internationally recognized certifications like ISO 27001 and SOC 2? 

Don't be afraid to ask tough questions and get specific about how they will protect your employee data.

Pricing and Contract Terms

Of course, pricing and contract terms are key factors in choosing an EOR service.

You probably get this: The lowest-cost provider is not always the best, but rather those who give you the best value for your investment!

When evaluating EOR pricing, look beyond the headline fees and dig into the details. Are there any hidden costs or markups? How do they handle currency exchange rates and international transaction fees? Are there volume discounts or tiered pricing based on the number of employees or countries?

It's important to understand what's included in the base pricing and what services may incur additional fees. 

Some EORs may charge extra for things like onboarding support, benefits administration, or ad hoc reporting.

You might need to hire just a few employees or build a large global team. Do the EORs you’re engaging offer flexibility in contract options to fit your needs? Ask about minimum commitments, termination clauses, and any restrictions on employee transfers or intellectual property.

Check out my detailed review of the Best Employer of Record Services in 2024

The Bottom Line

As we move forward in an increasingly globalized business landscape, the strategic use of EOR services will play a pivotal role in helping companies stay competitive, agile, and compliant in their international hiring practices.

EOR services offer significant benefits for companies seeking to expand globally, including navigating complex employment laws, saving time and money, enabling rapid scaling and flexibility, and allowing businesses to focus on their core competencies.

However, leaders must understand its potential challenges, too, such as permanent establishment risks, changes in regulations and laws, intellectual property concerns, and the need to maintain a cohesive company culture.

That way, you can weigh the pros and cons and navigate the choice on your own, with no bias.

If you have further considerations about EOR, share them with us here.