EOR Security Deposit

Thinking about working with an Employer of Record (EOR) but feeling unsure about putting down some cash up front to pay a security deposit? We’ve got you covered. In today’s article, we’ll be taking a closer look at how EORs use security deposits to minimize risk and why you shouldn’t be afraid of paying one if you’re looking at working with an EOR.

We’ll keep this section short and sweet, as we’ve already defined EORs a number of times in our other posts.

Put simply, an Employer of Record is a third-party company that you hire and which acts as the legal employer of your employees. This means that they’ll be officially responsible for payroll, human resources and regulatory compliance, allowing you to bring on a large number of new employees without having to worry too much about the details.

EORs are useful for a number of reasons, perhaps most notably that they allow their clients to launch in new countries and regions without having to officially register a local subsidiary onsite. That way, they can avoid the (significant) additional costs that come along with that, and they’ll also be less liable for tax in those regions. However, finding the best EOR for your specific use case might be more of a challenge that you could think.

When you first start working with an EOR, they may ask you to pay a security deposit. This works similarly to other kinds of deposit, essentially acting as a safeguard for the EOR so that they don’t risk ending up out of pocket.

Most commonly, the deposit is supposed to protect EORs when they’re hiring employees internationally across a number of different jurisdictions. If the EOR faces unexpected costs or charges when hiring on your behalf, they’ll be able to take money from your deposit to cover those costs.

This makes it similar to when a landlord requires a deposit from a renter so that they can claim money back if the renter damages the property. Deposits are also common for companies that allow you to hire equipment, ranging from cars to golf clubs.

EORs ask their clients for a security deposit because it gives them a sort of cushion to fall back on in those rare instances where something goes wrong. For example, if an employee hired via an EOR in Germany needs to be terminated, just for the company to find out at German employment laws are much stricter than in the United States, the company could just reject the large severance payment bill and inform the EOR that they won’t be paying for it. As such, the EOR would still be fully liable to arrange a compliant offboarding of the employee and would require to bear all costs related to the termination.

EORs still remain liable as the legal employer even if their client goes out of business or is unable to pay them for the payroll of the staff hired. If the client goes bankrupt, the EOR will still need to pay salaries, taxes and other costs as outlined by the employees’ contracts, not mentioning all offboarding costs including severance payments.

Fortunately for the EOR, the security deposit would ensure that they could still pay those employees without having to dip into their own pockets.

Yes, you should. After all, we’ve just shared a number of examples of why an EOR might withdraw funds from the security deposit, such as if the client is unable to pay them.

Otherwise, if we assume that all’s gone well and there’s been no cause for the EOR to make a withdrawal from the security deposit, you can expect it to be returned to you at the end of the contract.

With that said, it may take some time for all of the contractual obligations to be fulfilled, and the EOR won’t be able to return the deposit until the employee has been fully offboarded and all statutory payments have been cleared. This includes ensuring that all salaries, taxes, bonuses and other expenses have been paid out to contracted employees during the final payroll.

Once all that’s done, you’ll get the security deposit back. If the EOR has made a withdrawal from it, you’ll receive the remainder of the funds; if they haven’t, you’ll receive the full sum. From our experience, EORs typically reimburse the deposit within 15-30 days upon offboarding of the employee.

Now that we know a little more about EOR security deposits and how they work, it’s time for us to take a look at the factors that EORs use to determine how large those deposits should be. As a general rule, it’s all about mitigating risk, and so any factor that increases risk will inherently increase the cost of the security deposit.

The key factors influencing the cost of EOR deposits include:

• The Regions and Countries in Question: Each jurisdiction has a different set of laws, regulations and taxation practices, and that means that depending on offboarding and termination practices, in practice, an EOR would be setting their security deposit accordingly. For example, an EOR might take two months’ of payroll as a deposit when hiring in Germany compared to only one month when hiring in India.
• The Number of Employees: More employees means greater potential costs for wages, bonuses, taxation and more in case a client goes bankrupt. In practice, we’ve seen EORs agree to cap deposit amounts (e.g. $100,000) for a company that’s hiring a large amount of workers.
• The Types of Worker: Not all employees are created equal. More senior employees tend to have higher salaries with bigger benefits packages, and they often require longer contracts than temporary manual workers. All of these factors come into play to mean that if your EOR is hiring more senior workers, you can expect to pay a larger deposit.
• Notice Periods: Speaking of notice periods, the longer the notice, the greater the deposit would need to be. That’s because the EOR will be legally required to arrange for a PILON (Payment In Lieu of Notice), and if the client backs out or changes their mind, the EOR will need to tap into the security deposit to make sure that people get paid.

The next big question that a lot of people ask is whether it’s possible for them to negotiate their security deposit. 

The answer to this one is that it really depends. In business, most things are negotiable, and while security deposits are standard for most EORs, there’s usually some wiggle room.

If you’ve worked with your EOR before or you’re simply extending the remit of the services that they provide you with, they may be more willing to reduce the size of the deposit they charge you. Likewise, if your company has a solid reputation and years of stable financial reports, the EOR may be more likely to take a chance by negotiating the size of the security deposit.

Of course, there are also plenty of EORs that refuse to negotiate no matter who the client is, and so it all comes down to your specific circumstances and the EORs that you’re looking to work with. Your best bet when looking to negotiate a reduced EOR security deposit is to reach out to the EOR as early as possible to start having that discussion.

Here’s an overview of what different EORs are charging:

• No EOR deposit required: Remote, Borderless AI.
• Deposit amount depending on credit check outcome: Pebl, G-P, WorkMotion.
• One month of total payroll costs: Teamed, RemoFirst, Playroll.

One final thing for us to mention is that there are three main types of EOR security deposits for you to consider. Not all EORs will offer all three of these options, with a fixed sum being the simplest and therefore the most common.

Here are the three different types of EOR security deposits to consider:

• One to Three Months of Employment Costs (standard): The EOR will simply require you to pay a between one to three months of the total employment costs of the employee up front.
• Notice Period Deposits: These deposits are calculated based upon employees’ notice periods. If the employees have a six-week notice period, the EOR will require a deposit that’s equivalent to six weeks’ salary.
• Percentage Deposits (less uncommon): For percentage deposits, the EOR requests a certain percentage of expected monthly or annual costs. If they expect to bill you $50,000 per year, they may ask for a 10% deposit at $5,000.

Now that you know more about EOR security deposits, including the purpose they serve and why you might need to pay one, you’re in a much better place to work with an EOR.

Knowledge is power, and the more you know about EORs before you get started, the better placed you’ll be to make sure that you’re hiring the right EOR and getting the best possible value for your money.

Still need help wrapping your head around EORs? We’ve got your back. Use our free and independent EOR comparison tool to check what any given provider charges for security deposits.