EOR Contract

Whether you’re expanding abroad or simply want to lower your payroll costs, signing an Employer of Record (EOR) contract is a viable option. These contracts are designed to shift legal responsibilities away from the employer, reducing your risks and liabilities. However, there are important factors to consider before getting into an EOR contract.

Read on to learn more about EOR contract terms, requirements, and benefits.

So, what is an Employer of Record? More importantly, how can it help your business?

Working with an EOR is useful when you expand into new states or countries. An international EOR can navigate all of the HR, payroll, tax, and compliance expectations of a new jurisdiction, effectively reducing your risk exposure and liabilities. While you retain full control over your employee’s day-to-day operations, the EOR takes on the employment risks on your behalf so that you don’t have to.

An EOR contract is a legally binding document that defines the relationship between you and the Employer of Record. It will cover the services fees (e.g. onboarding fee, monthly EOR fee, expenses/variable processing fees, foreign exchange rate fees, late payment fees and others), deposit amount, payroll cut-off dates and payment terms, as well as other obligations for both the company and the EOR.

Your EOR contract can look different based on what country you’re looking to hire in, the services you want from the EOR, and the legal framework the EOR is operating in (e.g. Germany is different due to the AUG requirements.)

To make sure you understand the costs, responsibilities, and obligations of both parties involved, it’s important to carefully read through the EOR contract before signing it and ideally to review our independent provider reviews prior signing off the contract.

Depending on the company, there are a few common EOR contract types that may be used.

EOR Employee Contracts 

 
This type of EOR contract specifically details the obligations and rights of the EOR and the employee. In an EOR employee contract, the EOR takes on many of the legal and administrative responsibilities that would normally be held by the business. Meanwhile, the business simply has to handle the operational obligations of having the employee. 

EOR Service Agreement 

 
In an EOR service agreement, the EOR enters into an agreement with the business about which services will be covered. For example, it will often detail the legal, payroll, and HR services provided to the business and the EOR costs connected to those services.

Tripartite Agreement

 
Sometimes, there are rare cases where the employer, employee, and the EOR enter into a single contract together. This agreement would detail all of the rights and responsibilities of everyone involved. 
 
While a tripartite agreement is possible, it’s generally easier to just involve two parties in each EOR agreement. As a result, most EORs will have an EOR employee contract and an EOR service contract instead of using a single tripartite agreement.

In all of the previous types of contracts, the biggest difference is who is a party in the contract. An EOR employee contract is for employees, and an EOR service agreement is for the business. Meanwhile, a tripartite agreement can be made for all three parties at once.

Besides differences between EOR contracts, there are important variations between EOR and standard employer-employee contracts. First, an EOR contract shifts responsibility for payroll, HR, and legal obligations onto the EOR. For example, the EOR will be responsible for withholding payroll taxes once the EOR agreement is signed.

When you switch from a standard employee contract to an EOR, it can also change the processes you use for dispute resolution. For example, most companies use the dispute resolution processes that are required in their home countries. With an EOR, dispute resolution is handled in the employee’s home country because that is where the EOR must follow compliance rules.

The top Employer of Record companies can handle a variety of different services. It really depends on what your company needs. At its heart, the employer of record is responsible for another company’s employees. They typically manage payroll, HR services, tax withholdings, and similar legal obligations for the employee.

The following are the most common tasks performed by an employer of record. 

• Administering employee benefits
• Manage and resolve disputes
• Handle payroll processing
• Withholding payroll taxes
• Dealing with a worker’s termination
• Ensuring all of the EOR’s services are in compliance with local labor laws

While each company is different, there are a few common services that an EOR will offer. Because the EOR provider legally serves as the employer of record, they must be prepared to handle many different payroll, taxes, and HR tasks. They are responsible for your legal compliance in these areas, so they need to be up to date on the latest regulatory changes.
 
When you get your EOR contract, it’s important to carefully read through the fine print to see which EOR services you’ll be receiving and what the EOR’s obligations are.

• Payroll Management: 24% of small businesses process payroll internally, which represents a huge cost and time sink for the business. Considering that the typical accountant earns $81,680 per year, it is often less expensive for firms to outsource their payroll management to an EOR.
• HR Support: Some EORs will also provide HR services, such as performance management support or paid leave tracking.
• Benefits Administration: Unlike a professional employment organization (PEO), an EOR generally doesn’t let you choose which benefits you offer. As the employer of record, the provider is responsible for offering these benefits. They’ll also ensure that all of the legally required benefits are offered, so your company is protected.
• Global Expansion: In China, employers must pay 15% to 16% of the employee’s wages for social insurance contributions. Meanwhile, employers pay just 7.65% for Social Security and Medicare taxes combined. Each country has drastically different rules about work hours, payroll taxes, paid leave, and other employment regulations, which is why businesses need professional support as they expand into new areas.
• Risk Mitigation: In a single year, the Internal Revenue Service (IRS) assessed more than $25 billion in employment tax penalties. Because EORs understand payroll taxes and legal regulations in each region, they can help mitigate risks.

There are a few key differences between an Employer of Record vs. PEO. The biggest one is that the PEO serves as a co-employer and shares legal risks with you. In comparison, an EOR takes on all of the legal risks and serves as the employee’s sole legal employer. With an EOR, you’re only responsible for managing the day-to-day operations, which is why this is a popular option for companies that are expanding into new countries.

By partnering with the top employer of record companies, you can enjoy a few distinct benefits. However, it’s also important to look at the entire picture to decide if this decision makes the most sense for your business.

The Advantages of an EOR Contract

With an employer of record, risks for employees and employers can be mitigated. The EOR understands local regulations, so they can ensure you’re in legal compliance. An EOR contract provides an added level of protection because it clearly defines the expectations and responsibilities for every party. Ideally, you want a contract that defines all of the legal obligations as clearly as possible so that there is no question about each side’s duties.

An EOR contract also helps with dispute resolution. First, it clarifies everyone’s responsibilities and benefits, so disputes are less likely. It also ensures speedy dispute resolution by stating a mechanism for resolving any disputes that do occur.

In the EOR contract, it should specifically say that the EOR is responsible for any fines or legal costs that happen because of compliance violations. If the contract doesn’t clearly state that the EOR is responsible, the responsibility and penalties could end up falling on your shoulders.

The Disadvantages of an EOR Contract

There are a few important EOR disadvantages you should be aware of. Fortunately, many of these challenges can be mitigated by being proactive and reading through your contract. 

One major issue for employers and EORs is agreeing on expectations. Your company and the EOR must be aligned in how you want services, liability, and responsibilities divided. Otherwise, this can lead to potential disputes.

At the same time, you’ll likely want some degree of flexibility in the EOR contract. New employees will be added. Over time, you may also need other adjustments or new services. Because of this, there needs to be a balance between clarifying responsibilities and allowing flexibility. 

Finally, the Employer of Record cost is often a sticking point for employers. You should get a detailed list of all of the fees and services involved in your contract, so you’re not surprised by hidden fees. If a service isn’t currently covered, you may have to pay an additional cost in the future if you want to add it.

Within the contract, the EOR should break down all of the costs, services, and terms. Everything should be explained clearly so that there is no confusion in the future. If you’re unsure what your contract says or what to look for, talk to our EOR experts today to get professional support.

• Costs, including currency exchange fees, onboarding fees, and cancellation fees
• Whether you are paying a flat EOR fee or a percentage of your payroll
• EOR security deposits
• Bulk discounts
• Data security and confidentiality
• Dispute reconciliation processes
• Responsibilities and duties of each party
• Process involved in contract termination
• Liabilities and warranties

When you choose an EOR company, it is crucial to choose a provider that offers the optimal contractual terms for your situation. Check out our comparison guides, or get in touch with one of our EOR experts to find make sure you are signing up to an EOR on only the best terms.”