The benefits and disadvantages of employer of records
Introduction
Using an employer of record (EOR) when your company is expanding internationally can be an effective way to start hiring local employees. However, working with the wrong partner can also lead to unexpected tax and legal consequences.
When businesses expand internationally and into new countries, they often make the strategic decision to use an employer of record to hire local staff. This way, the company is not required to establish its own local entity and presence for purposes of local employment law.
By using an EOR, companies can avoid dealing with HR obligations, utilise self-employed contractors, and incur no liability as an employer to the employee. It is, however, important to do some due diligence homework, as every country has its own tax and legal regulations, and there is no guarantee that EORs meet these requirements.
Asking the right EOR questions
Some countries require the employer of records (EOR) to be registered with the local authorities and can prohibit companies from providing staff to work under the control of another company. This could mean that the company that hires the EOR might, according to local law, be considered the actual employer, which could have tax and legal consequences. It is, therefore, important to determine whether the EOR holds the necessary licenses, if it has a legal presence in the country and if it operates according to the relevant local labor lending laws and other compliance requirements.
When businesses have no experience in utilizing EORs in a certain country, they should do research and ask the EOR partner detailed questions about the compliance practices and request an audit if necessary. This audit can include a variety of checks, such as whether the EOR is compliant with minimum wage and pension provisions and whether tax and social security obligations are met.
Protecting your own business interests
Business protection provisions are usually included in the employment contract when hiring employees directly, but it is important to ensure these are also included in the employment contracts with the EOR. This is especially important when staff employed by the EOR will work with sensitive information or create intellectual property. It is advisable to include clauses covering confidentiality, intellectual property assignment to the employer rather than the EOR, and, depending on the field, post-termination clauses.
It is important to get the basics right and conduct research before talking to potential EOR partners to understand the benefits and limitations; this way, you can ask your potential EOR partners targeted questions. In addition, it’s vital to review contracts thoroughly and establish liability allocations.
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