Is It Legal To Hire Through an Employer of Record (EOR)?

Whether you’re expanding into a new country or simply want to lower your compliance obligations, Employer of Record (EOR) services can help. An EOR can help you comply with labor laws, reduce misclassification risk, and provide comprehensive employee benefits.

However, no two EOR providers are exactly the same. Before you hire an EOR company, it’s essential to carefully read through their provided services and cost structure. By finding the best EOR service, you can make sure that your business has an efficient, seamless experience.

An EOR is a third-party service provider who stands in for your business as the employer of record. In practice, this means that the EOR bears the legal responsibility for your employee-employer relationship. While each EOR contract is a little different, the EOR will generally be responsible for some or all of the following activities.

• Filling out employment forms, such as W-4s and I-9s
• Complying with minimum wage laws and other labor laws
• Processing payroll
• Withholding and submitting taxes
• Filing important tax forms
• Managing and administering benefits
• Providing guidance on local laws
• Onboarding new hires

An EOR is a completely legal method of employing workers. Basically, they handle all of your company’s legal legwork, such as filing taxes and processing payroll. Then, you get to manage the day-to-day management of your employees. 

While EORs are completely legal, it is important to note that EOR laws can vary from one place to another. Some countries, such as Singapore, Spain, and Germany, have special requirements about what an EOR can and can’t do. 

All of these special requirements are a major reason why hiring an EOR is important as your company expands. The EOR has the on-the-ground knowledge and experience you need to ensure your company is in full legal compliance. While the EOR navigates the nitty-gritty legwork of running a business, your organization can devote its time and resources to building revenue. 

Deciding to expand your company is an exciting decision that will impact your long-term market share, revenue, cost efficiency, and brand recognition. As you research the best EOR providers, you may discover common myths about permanent establishment risks or high costs. To make your research process a little easier, we’ll go through all of the most common myths associated with EORs and discuss the validity of each one.

Myth 1: EORs Are More Expensive Than Setting Up a Company

This is generally not true. If you decide to hire a single employee, the cost of setting up your company can be substantial. Besides registering your business and filing paperwork with your state, you also need to make sure you set up payroll processes, workers’ comp, state-mandated employee benefits, and HR processes. In many cases, these costs can easily add up to tens of thousands of dollars.

After you set up your company, the costs don’t stop. Depending on your location, you’ll likely have to conduct onboarding, provide training about key employment laws, and offer health and safety training. You’ll need to design an employee handbook to train the worker and to cover all of your legal bases regarding important employment laws. Additionally, you’ll need to either hire a payroll and HR company or hire staff to handle these tasks. For all of these reasons, hiring an EOR can often be much cheaper than setting up an entire company.

Myth 2: EORs Entail Permanent Establishment Risk

If the employee interacts with the local market, you may need to collect VAT for that service. When the employee is simply working for your organization and generating revenue that is sent to another country, you’re generally not going to have any permanent establishment risk.

Permanent establishment risk generally develops if your company has a fixed place of business, is generating revenue from local customers, or gives the EOR employees the power to negotiate contracts. In reality, an EOR is an effective way to avoid many of these potential pitfalls.

Myth 3: EORs Are Just Temporary

While some countries, like Germany, have specific laws about how long an employee can be employed by an EOR, the majority of countries do not have this requirement. You can employ workers through the EOR as long as you want.

In fact, there are very few countries that have any restrictions on how long you can employ someone through an EOR. Because of this, working with an EOR is an effective way to streamline your operations and lower your overhead as you move into new areas and grow.

Myth 4: Having an EOR Means You Don’t Need In-House HR

While an EOR can save you a significant amount on payroll and HR tasks, you can’t simply fire all of your HR employees and call it a day. The EOR may handle your administrative activities, but you’re in charge of managing your company’s day-to-day operations.

Besides handling all of your daily management activities, your HR staff will be responsible for managing conflicts, planning your future headcount, and recruiting top talent. Because of this, you’ll still need to have reliable, talented HR staff on your team.

Myth 5: EORs That Use Local Partners Are Better

Unfortunately, EORs that use local partners are often less effective than owned entities. It’s a lot like playing a childhood game of telephone. Rather than simply telling the EOR what you need and have it done, the EOR has to get in touch with a local partner and convey your wishes. If there is any miscommunication or delay, your request won’t be fulfilled right away.

Owned entities are often better managed, and they are much easier to work with. For the best results, find an EOR that provides you with a dedicated account manager. Then, you can easily reach out to the account manager whenever you need help and work with a single individual instead of an entire chain of local partners.

Myth 6: EORs Are Only Useful for Global Expansion

While EORs are extremely useful for global expansion plans, you can use them for domestic hiring as well. An EOR helps to simplify your labor law compliance, employee benefits, and taxes. Whether you’re expanding to another state or to another continent, EORs can walk you through your legal requirements and help your company succeed.

Myth  7: EORs Take Over Your Company’s Control

An EOR does not take over the control of your company. Instead, you retain full control of your business and its employees. On a day-to-day basis, you will be in charge of giving workers their assignments, creating performance reviews, and deciding on your company’s business strategy.

The EOR is simply in charge of the administrative legwork. By taking over the paperwork and legal side of running your business, the EOR frees your business up to focus on what it does best.

Myth 8: EORs Only Work for Large Corporations

This myth is completely untrue. Small and medium-sized businesses often struggle to hire full in-house payroll and HR teams. By taking on these tasks, the EOR allows you to have the same services as a large corporation at a fraction of the cost. Whether you are a small business or an enterprise client, EORs provide vital support.