Employer Of Record: What Is It? How Does It Work?

Don’t worry – it’s not as complex as it sounds. If you run a business that’s growing overseas, or if you’re an employee working in a different country to your employer, you may have heard about Employer of Record services, or you may be in need of it!

In this article, we’ll explain everything you need to know about Employer of Record services, whether you’re a business looking to hire overseas, an employee working for a foreign company, or an expat moving abroad but continuing to work for a company back home.

What is an Employer Of Record and what does it mean for expats?

Employer of Record (or EOR for short) is a service that helps companies hire employees and contractors overseas, without becoming their official employer. It makes it easier for those businesses to employ employees in overseas territories and manage their HR processes, especially payroll. Employer of Record is a service often used when a business is expanding internationally or when hiring digital nomads.

The Employer of Record industry is a rapidly growing sector. In 2021, global EOR services were valued at over US$617 million, and are expected to grow at a rate of 12% annually to reach $1.2 billion by 2027. The growth of Employer of Record services is fueled by many factors, including the growing rate of globalisation and the rapid boom in remote working, which has allowed companies to access global talent pools.

If you are an expat, or if you’re thinking of becoming one, you may be offered a job working for a company based in a different country. In these cases, don’t be surprised if you end up being employed by an Employer of Record, who will be responsible for managing your HR administration and payroll. For you as the employee, it will be no different to working for the ‘real’ company – you’ll still take your instructions from the business and be a part of the team. The only difference is that you may notice your paychecks coming from a different entity.

This is because the Employer of Record handles all payroll administration for the client company, including paying employees’ personal income taxes. This allows a growing business to sidestep having to become regulated and compliant with local employment and tax laws, making it easier to work across multiple geographies.

The Employer of Record will take a fee from the client company in return for their services, either as a flat monthly subscription fee or a percentage of the revenue processed.

How does an Employer of Record (EOR) work?

Let’s say that Company X is a real company based in the UK. Company X wants to grow into new markets, in order to acquire more customers, establish new revenue streams and access a global talent pool. There may also be an opportunity to take advantage of government incentives, which offer favourable terms to businesses growing into those countries.

The first thing Company X needs is to hire employees in its target countries, who can manage business operations in those regions.

However, Company X has no experience in the regions it wants to grow into. If Company X were to hire all of its employees directly, it would find the ordeal time-consuming and costly. This is because Company X would need to understand, and become compliant with the local employment, payroll and tax laws in all of the countries it was hiring new employees. It would then need to administer paychecks every month to these employees, while also paying these employees’ shares of personal income tax.

But Company X needn’t hire and manage its employees directly. Instead, Company X can employ the services of an Employer of Record (EOR).

The Employer of Record is a company based in the same country as the employee. The EOR recruits and onboards the employee, then takes on responsibility for their employment administration, payroll, benefits and other HR responsibilities.

This frees up considerable time, effort and expense for Company X. Meanwhile, Company X can manage the employee freely and set them to work. The whole process is streamlined and easy for everyone involved.

Of course, Company X will have to pay for the services of using an EOR – but it will be a small price compared to the cost of becoming compliant across multiple geographies!

What are the benefits of using an Employer of Record?

In short, an EOR helps companies to hire and manage employees in multiple territories without having to grapple with local compliance.

This saves the company significant time and expenses, while also minimising the risk of legal and regulatory breaches. Meanwhile, the employee benefits by having a subsidiary employer who offers them the same service they would expect (fast payroll, easy taxes, employment security) as they would expect from a local employer.

Hiring the services of an Employer of Record can help a business to grow quickly in overseas markets. The Employer of Record may even be able to take on responsibility for local recruitment, sourcing the best talent in overseas areas. This means a growing business can access pools of international talent with ease.

This is good news for employees too, as it creates the opportunity to work for a foreign company (often at a higher salary than can be offered locally) without having to move abroad.

Better still, if you are an expat or digital nomad, you may be able to move freely to another country while continuing to work for your employer back home if they use an Employer of Record in another country.

What are the risks of using an Employer of Record?

The good news is there are typically few risks involved in hiring the services of an Employer of Record.

Having said this, it is important to note that many Employer of Record services exist around the world, which offer various levels of comprehensiveness. If you are looking to hire the services of an EOR, or if you are an employee hired by an EOR, you may want to understand the level of support and services your Employer of Record offers.

For starters, you should make sure your Employer of Record is an established, registered and legal entity in the country you are looking to expand into, and not simply subcontracting your business to another supplier.

Next, you should vet your Employer of Record carefully. Make sure they adhere to the highest levels of legal compliance. Understand their range of services, particularly if you are looking for something specific, such as employee stock and options. If possible, seek reviews and testimonials of the EOR, and reach out to current clients to see if they would recommend that Employer of Record.

Finally, you should read your contract with an Employer of Record very carefully to ensure you retain full control of intellectual property rights. This helps to avoid a potentially toxic situation in which the Employer of Record may claim ownership of products, inventions or patents devised by your foreign employees.

Employer of Record vs. Foreign Entity: What’s the difference?

Hiring an EOR is a fast and (usually) cost-effective way for a business to expand quickly into a foreign market.

However, for companies who want to build a solid footprint in other countries, hiring an Employer of Record may represent only a short-term solution. These companies might instead consider setting up a foreign entity – a permanent subsidiary or branch in another country.

This is a longer and more complex process that may also come with higher up-front costs. Building a foreign entity will require that business to operate within the legal and regulatory frameworks of a new country. This will usually involve acquiring any licences or permits, getting acquainted with local tax systems, and building a legal and compliance model that works within that country’s systems.

This can be a complicated process, but once it’s done, the business can operate freely within the new territory and won’t have to pay a subscription fee to an Employer of Record.

If your business is thinking of establishing a footprint in a foreign country, it’s good to know there are multiple options available. These include:

Virtual Office

Like an Employer of Record, this is another short-term option – but a good first step for businesses looking to grow their operations in a foreign country. It involves hiring a managed office facility, which includes an address, phone number and possibly even a receptionist. Once these have been established, the business is free to register as a legitimate company within that territory.

Local Representative Office

This is a simple, but restricted way to open an office overseas. It involves setting up a small office, which can be staffed with employees and registered with the government. However, this office will be limited in terms of how much profit it can generate.

Branch Office

A branch is a legitimate business headquarters overseas, which is able to conduct business freely. However, since it is not a separate legal entity, its overseas parent company remains liable for its activities. This is one of the most popular long-term ways to grow a business into new territories.

Subsidiary

A subsidiary company is a wholly separate legal entity to its parent company. For this reason, it can operate independently, allowing it to become fully compliant with the local laws, tax and employment framework of a foreign country. The parent company usually retains major shareholder ownership. In cases where the parent or holding company retains 100% ownership, the company is known as a Wholly Owned Subsidiary.

Acquisition

Another way a company may think about expanding overseas is to purchase a business already established in that territory. This is known as an acquisition. This can be costly, but the result is that the acquiring business also buys the company’s workforce and ongoing business operations, giving them a much easier route into global expansion.

What are the tax implications of using an Employer of Record?

As with all things, the tax implications of setting up an Employer of Record (EOR) will depend on multiple factors, including:

• The nature of the business
• The territory in which the business is establishing an EOR
• Local and national tax laws, which may be subject to change

An Employer of Record will typically handle the client’s tax accounting, especially when it comes to the personal income tax of employees.

The EOR will withhold the portion of an employee’s paycheck intended for income tax, then pay this on the employee’s behalf. This frees the business from handling tax responsibilities in a foreign country, and allows the employee to get on with their work without having to worry about filing their own income tax.

In situations where the business has employed contractors, freelancers or digital nomads, these employees may be responsible for handling their own taxes. In these cases, the employees will need to understand the local tax laws of the country they are living in (including whether a double taxation law agreement exists between that country and their home country), and file their tax returns themselves.

There may also be complications around the handling of extraordinary remuneration, and the tax laws around these, such as in the case of granting options to foreign employees. It’s best to speak to your Employer of Record to understand what choices are available if you intend to offer shares or other benefits to overseas employees.

How can an Employer of Record help me expand my business globally?

There are many key benefits to using an Employer of Record for both employers and employees. These include:

1/ Launch quickly

An Employer of Record will already be established in the country it operates in, and ready to start administering HR responsibilities right away. This means a foreign business can hire the services of an Employer of Record quickly and easily, then begin hiring and paying employees right away. This is useful for businesses that need to expand quickly. It’s also useful if you have employees who intend to become expats or digital nomads.

2/ Local expertise

An Employer of Record knows and understands local tax and employment laws, making them a good consultant for a growing business. Hiring an Employer of Record gives you access to local knowledge and expertise, which can help you to grow your business overseas. For employees, the Employer of Record can help you to understand your legal rights.

3/ Remove bureaucracy

Expanding into some foreign markets can be notoriously tricky owing to complicated tax and employment laws. Many countries will not allow a business to conduct business operations unless they have a representative business in that territory. An Employer of Record offers exactly that – meaning a business can start conducting operations without first having to struggle through lengthy paperwork.

4/ Flexible terms

Since an Employer of Record is a third-party business service, the client can use their services as and when they need. This makes it easy to both employ, and cease operations with an Employer of Record. If your business needs to gain a temporary foothold in a foreign country, or employ staff on a short-term basis, an Employer of Record offers a cost-effective way to do this.

5/ Benefits employees

Ultimately, an Employer of Record is there to help your employees. The Employer of Record makes sure your staff get paid accurately and on time, and many EORs pride themselves on delivering with 100% accuracy. The Employer of Record can also fulfil other HR responsibilities, such as writing employment contracts, delivering benefits, paying taxes, handling shares and options, and more. This means an employee can get on with their work, safe in the knowledge that their employment status and payroll administration are managed by professionals with local expertise.

Thinking about growing your business overseas?

Whether you’re growing your business overseas with an Employer of Record, or moving abroad to work for a foreign business, we wish you the best of luck in your journey.

One thing you may want to consider as part of that journey is protecting the people you work with. That’s where international health insurance comes in. Our international employee benefits package includes group international health insurance and group international life insurance, to ensure your employees stay protected, wherever they are. And for individuals, we offer international health insurance with flexible plans to suit your and your family’s needs.

Speak to William Russell today to find out how international health insurance can help you and your employees get the most out of life overseas.