Working with employers of record

Employers of record carry a lot of risks that aren't obvious, but also give organizations a lot of flexibility. How do you make the decision to work with one?

Nothing in this document is intended as legal advice. We are not attorneys, and you should always seek legal counsel on compliance decisions. This post is meant as a starting point for thinking about using EORs, not a comprehensive or exhaustive guide to working with or evaluating them.

What are employers of record?

Employing via an employer of record (EOR) is an arrangement where your company, based in Country A, contracts the EOR to hire staff in Country B, who are seconded to work on your projects. Functionally, you’re contracting the EOR to provide you with staff to support your projects, and you pick those staff, how much they are paid, and within certain boundaries, their benefits.

This model allows companies in one country to hire in another country without establishing a local entity, doing compliance registrations or filings, etc. It makes it relatively easy to have staff globally.

Employers of record are sometimes called PEOs (professional employment organizations), but it is worth noting that in the US, the phrase “PEO” refers to a separate model of co-employment where some compliance and administrative functions are outsourced, including the named employer on W-2s. This US PEO is very different, and the benefits and downsides outlined in this document do not apply to US PEOs — I am specifically using EOR to not cause this confusion. EORs are not a co-employment model — the EOR is the sole employer, and the company contracts the EOR for services.

Many employers of records also offer international contractor support. These services are usually less useful, but they might provide some functionality for dealing with foreign bank accounts (e.g. US nonprofits often have trouble sending funds to many Indian banks, but the EOR is typically a for-profit, so won’t have this issue), even if they are just passing through. This guide specifically looks at using EORs for employees, not independent contractors.

Why use an employer of record?

Using an EOR has a lot of advantages for an organization with a limited footprint in another country. By paying a relatively premium fee, you get several benefits.

• You don’t have to do local employment registrations

  • The employer of record handles all local employment registrations and filings on behalf of your staff. You don’t have to know anything about these, and don’t have to deal with them.

• You (theoretically) don’t have to deal with local employment compliance

  • EORs will often tout themselves as handling local compliance. This is true when things are going well, but because EORs pass all employment costs on to you, if the EOR makes a compliance mistake you’ll likely have to pay for it. See more in Risks below.

  • EORs can also handle visas in some countries, which can be a significant benefit when hiring.

  • Some countries make it pretty difficult for residents to be contractors. In these countries, often the only way to hire someone is via an EOR.

• You don’t have to shop for benefits in the new country

  • Since EORs usually offer relatively normal benefits in each country they support, you can give people a typical benefit package for the country they are in.

• You can give foreign staff a relatively “normal” employment experience

  • Since staff will have normal paychecks, tax withholding, and benefits, their employment experience under an EOR will often feel “normal” relative to being an independent contractor, where they’ll have to deal with their own tax withholding, etc.

• You get access to global talent

  • The biggest upside of EORs, especially because you can offer a normal employment experience, is that they let you hire people in more countries, which makes your talent pool wider.

What are the risks of using an employer of record?

Relative to hiring normally in the US, EORs seem to pose a ton of risk. They are expensive, and don’t actually protect your business that much from compliance risk in the countries they hire in.

• Country-specific risks

  • When you hire staff in a new country, the EOR will handle compliance filings and ensure there is a legal contract in place. But, it won’t protect you from employment compliance issues.

  • If you try to, for example, fire the staff member for reasons that the EOR perceives as illegal, it might stop you (and you’ll be on the hook for continuing to pay their salary).

  • The EOR usually won’t tell you much about local employment compliance, so you’ll still have to learn about it yourself to protect your business.

  • The employer tax rate might vary widely in other countries (e.g. in some it is as low as 5% of salary, in others as high as 40%). You’ll pay this rate.

  • You’ll be subject to other local risks, like permanent establishment risk, collective bargaining agreements, or risks when terminating staff. The EOR usually won’t inform you much about risk from these.

  • Different countries might have different benefit requirements than you’re used to. The EOR might not make you aware that a specific country requires offering a certain amount of parental leave, etc.

  • How easy it is to terminate employees varies widely by country. This is especially surprising to US employers, who might be used to at-will employment. In some European countries, for example, employers need to go through a court process to terminate a contract for performance-related reasons. In some countries, termination is often handled through negotiating with the employee a payment to quit. The EOR usually doesn’t discuss this risk with your company.

• Asymmetry in handling disputes

  • Despite saying that they handle compliance, typically EORs pass all employment costs on to you. If the EOR is fined for inappropriately terminating one of your staff, you’ll pay the fine. If the EOR fails to file something for the staff, you’ll pay the fine. If an employee sues the EOR, you’ll pay any costs.

  • Because the EOR does not pay these fines, it isn’t incentivized to minimize them. The EOR wants to end any disputes as quickly as possible, and pass the cost on to you. This means they’d usually rather pay more to exit the dispute quickly, rather than pay less.

  • The EOR’s lawyers are minimizing the EOR’s risk, not yours.

    • Because of this, if you ever have an employment dispute for an employee under an EOR, you’ll either have to accept paying a massive premium to work with the EOR, or hire your own local employment lawyer to assist and navigate the situation, and provide feedback to the EOR on how to proceed.

      • The EORs will usually listen to your outside counsel, but they don’t have to, and could choose to handle the situation in a different way. You’re exposed to the risk from their decision-making, and again, they don’t want to minimize costs but want to exit the dispute quickly.

  • EORs do not protect you from local employment risk – they make it more severe by putting a negotiation partner between you and the risk that isn’t incentivized to minimize your costs. They might facilitate you hiring in another country, but they aren’t meaningfully reducing risk usually because of this.

• Currencies

  • If you hire staff who are paid in a different currency, the EOR will usually want to charge you in your local currency (e.g. you hire staff in Europe, but are based in the US – you pay USD and they are paid EUR).

    • This means that without complex financial maneuvers, like regular rebalancing of currencies you hold, you can’t hedge against currency risk easily while using them.

    • EORs often give worse-than-market rates for currency conversions, so you may pay an extra premium beyond their fee to use them.

• Collective bargaining agreements

  • In many countries, most employees are under sectoral collective bargaining agreements. This is especially unusual for companies used to employment in the US/UK to encounter, so it bears worth mentioning.

  • The union the employee is part of might negotiate additional benefits or raises throughout the year that you will be subject to. For example, if the union negotiates a raise for all its staff, your costs might randomly increase, or you might have to break a pay system you established. Or, you might have to offer benefits in certain countries that you wouldn’t or can’t offer elsewhere.

    • You will never be party to these negotiations, so have no agency over how they go and the outcomes from them.

• Legal risk

  • EORs are legally grey in many countries! Pre-COVID, this was a relatively small industry. During the pandemic, especially via a few startups exploding in popularity, they’ve become much more widely used. But, many countries have not really worked out how they want to regulate EORs in the long run. This means that the regulatory frameworks governing EORs might change over the next decade, and you may lose the ability to hire someone through one in some countries.

  • Some EORs seem to take unusual risks with employment law — for example, they might offer visas or other benefits that it is ambiguous they are legally able to. Often, these companies are startups who are pushing the boundaries of compliance to make their products better. But, the nature of their business model is a lot of the downside risk (at least in terms of fines) is passed on to you!

• Permanent establishment risk

  • While EORs might help you handle employment filings, they don’t necessarily mean you escape the risk of a country’s government deciding you are “doing business” in that country.

  • You might face the risk of being seen as having an establishment in a foreign country (and thus being required to incorporate there and register with tax agencies).

  • This risk might be higher if you’re using the EOR to hire senior staff, if you generate a lot of revenue in the foreign country, or if you have offices or other indicators that you don’t just have a few remote employees there.

• Reliance on subcontractors

  • To offer employment in many countries, EORs either need a lot of subsidiaries and legal entities, or will use subcontractors in each country who then serve as an EOR for the EOR.

    • In countries where they are using a subcontractor, all of the risks here are magnified – there are multiple legal entities between you and your employees who do not have aligned incentives with you or each other when there is a dispute.

  • It seems like a consistent issue is that when EORs subcontract their contracts, the subcontractor provides worse service.

  • You can ask your EOR directly when you start working with them if they use subcontractors, or if your employees will be employed by an entity they control.

• Reliability

  • EORs are trying to run payroll in many countries (sometimes over 100). Many of the most popular ones are startups. This is not an easy task — some have to operate under over a hundred employment law frameworks, etc. Even the best ones make a lot of mistakes — far more than the average US payroll provider, for example. Expect that over time, employees might occasionally not be paid on time or have paperwork filed incorrectly, even if you’re working with the best-reviewed ones.

What should you look at when evaluating hiring in a new country?

EORs offer the ability to hire staff in most countries, but this doesn’t mean you should hire staff in all those countries. The more countries you are operating in, the more risk your organization is taking on. You’re working under more legal frameworks, potential employment issues, etc.

In general, it seems good to limit the number of countries you hire in to the countries where most of your talent pool is. If there are lots of talented people for a role in the US, you probably don’t need to hire in the UK. Often, it might be better from a risk perspective to identify the 2-3 countries that will give you access to 80% of the best people in a field, rather than hiring in 10 countries to get to 90%.

But, if you are planning on hiring staff in a new country, here are some things to consider:

• Can you afford the employer tax rate?

  • Employer tax rates vary wildly by country – some are as high as 40%. Before choosing to hire in a specific country, make sure you can afford this tax burden.

• Do termination laws align with your needs?

  • The ease with which staff can be terminated or laid off varies to a significant degree by country. Even with the EOR, you’ll be subjected to these rules. Some countries require layoffs for financial reasons to be done in order of seniority. Some require courts to be involved in routine terminations. Some require a high degree of transparency when terminating staff.

  • If you’re based in the US, you should generally assume the ease of firing people in the US is the exception, not the rule. In every other country, your employees will have contracts that govern their employment, with statutory notice periods for terminations, and usually much stronger employment protections.

  • Before hiring in any country, make sure you know what you’re getting into, and consider mitigation measures like probationary periods that provide you with more options early on during an employee’s tenure.

• Are you okay with a collective bargaining agreement (CBA)?

  • In some countries, all employees within an EOR might be under a collective bargaining agreement. Make sure you understand the terms of that CBA if you are subject to one, and understand historically how the CBA has changed costs for employers.

  • In some countries, CBAs will have negotiated specific benefits (e.g. more leave, workplace perks, etc.). Going into the employment engagement, you should know what these are, and feel able to pay them.

• Can you afford the statutory benefits?

  • The US has minimal required statutory benefits — some states require minor amounts of paid family leave or sick leave, but overall these benefits are slim. Other countries have significantly more.

  • In particular, many countries have mandatory vacation leave, parental leave, and other types of leave.

    • Some of this leave in many countries, such as parental leave, is covered by social insurance programs. But often, the employer is required to cover part or all of it.

    • This means that employing outside the US has hidden costs that need to be accounted for, and which won’t be realized until someone takes a leave.

• Can you hire someone just as good in a country you’re already working in?

  • Generally, the compliance uncertainty and risk of hiring outside your own country probably means that unless the hiring pool is significantly improved, it might be prudent to not hire internationally.

How to use an employer of record

If you are proceeding with using an employer of record, I suggest taking the following steps:

• Identify the countries that are most important to hire in for your roles, and make sure their employment framework is going to work for you.

  • I think it is highly risky or a major mistake to significantly increase the number of countries you’re open to hiring in — instead, a better approach might be to identify the short-list of countries that the majority of people you want to hire are located in, and evaluate each of them individually on criteria like:

    • Employer tax burden

    • Ease of terminations

    • CBAs that staff will be under within an EOR

  • Generally, you should make sure that you feel at least somewhat comfortable with the employment framework you’re entering into.

    • Do you understand how employment disputes and terminations are typically resolved? Do you feel comfortable navigating that if such a dispute arises for you?

    • Do you have a sense of customary norms for employment that might not be obvious and are easy to accidentally break (e.g. 13th/14th month salaries in Europe and South America, meal cards in Brazil, anti-humiliation laws in New Zealand)?

• For each country you’re considering hiring in, verify that your EOR is not using subcontractors.

  • It’s probably worth getting referrals from another organization that has used that EOR in that country, to see if there have been major issues.

• Prior to signing up with the EOR, see if your Master Services Agreement has an exclusivity clause, and make sure that you understand it.

  • Some EORs require your company to work exclusively with them, or might have clauses that prevent you from exiting the EOR relationship and hiring the staff directly. This is inherently limiting for your organization, especially if you later choose to open a local entity due to determining you have a permanent establishment. It might be worth verifying that your MSA does not have this clause.

• Make sure that the employee understands the EOR arrangement.

  • The employee is going to get a contract that doesn’t say “your company name” and instead says “EOR name.” They are also going to have to provide documents to the EOR, talk with the EOR’s HR staff, etc.

    • Make sure that they fully understand the arrangement as well, so none of this is surprising.