EOR

EOR vs contractor - Make an informed choice

Mayank Bhutoria
14
min

Employers comparing EORs vs. Contractors, are usually in the following situations:
1) They need to hire foreign talent or build a remote workforce but are unsure whether to hire contractors or engage with an EOR

2) They are already working with several contractors and want an efficient way to manage them

3) They want to change their foreign contractors into permanent employees but do not have the know-how or infrastructure to do so

4) Troubled by local requirements and compliance in foreign markets 

HR who seek international talent, they need to make the right decision between hiring full-time employees via an EOR and hiring an independent contractor. ,. With both offering many advantages, there may be no one winner in the comparison. However, by knowing which employment type would be beneficial over the other in certain contexts, employers can better plan hiring strategies, budgets, etc.

EOR VS Contractor: A head-to-head Comparison

Get a sneak peek of the advantages and disadvantages of using EORs and contractors and check which employment route is best for you. 

Pros of hiring a contractor Cons of hiring a contractor
No liabilities from the company's perspective Employers aren’t obliged to offer benefits to contractors
Contractors are a great fit for specific short-term jobs It is difficult for employers to inculcate the company’s

culture to contractors

Don’t need to manage taxes Long-term relationship with a contractor can result in less

ownership of IP and loss of competitive knowledge to an

external entity

Employers face the risk of misclassification
Pros of using an EOR Cons of using an EOR
Fully compliant onboarding and offboarding,

no Permanent Establishment risk

It might be expensive for startups and small businesses
Business owns all IP
Offer remote employees a great employment experience

without facing entity setup costs and times

Legal support provided. No need to work with multiple legal teams

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EOR Vs. Contractor: When Do Employers Hire Contractors?

Businesses mainly engage with independent contractors to reduce the costs of hiring a permanent employee. For example, say a business wants to hire a developer as a contractor. The only cost associated with this worker would be their hiring costs and wages. However, when hiring a developer as a permanent employee, the employer must provide benefits and social security contributions, if any.   

Besides the cost factor, here are three other reasons why a business can choose to work with independent contractors:

To test new markets for talent pool and product-market fit

Independent contractors also allow businesses to test new markets before setting up a subsidiary in the country. Contractors are a perfect fit for employers with temporary work requirements and prefer to keep overhead costs low.

You have changing work requirements

Not all projects for your business will require the commitment of a permanent employee. Especially for new businesses, work requirements fluctuate or may change seasonally. In such situations, the additional overhead costs of hiring permanent employees may not be justified. 

You lack the HR setup to manage taxes and compliance

Engaging independent contractors carries fewer legal responsibilities in terms of taxes, contract termination, and severance pay, making it a less risky option. Small businesses, especially startups,  face a lot of uncertainty, which makes the risk-free option of contractors appealing.  Independent contractors bring expert skill sets without the hassles of tax management, severance pay, and contractual termination conditions. Besides, if the business grows as planned, there is always the possibility of converting contractors into full-time employees.

5 Challenges in Working With Contractors

When you first consider hiring contractors, it could appear advantageous. However, a few frustrating aspects could cause difficulties in managing contractors. 

Over the long term, contractor services are not viable because a contractor or permanent employee hired via EOR brings several more benefits. These benefits include the following-

  1. Investor-related support- Potential investors like VCs and PEs use employee experience as one of several metrics when evaluating a startup business.  Offering the right benefits can go a long way in this regard. Investors also conduct compliance audits. EOR services that provide detailed reporting may be of great use in this regard. Therefore, EOR services are more advantageous than contractors if an investment round is forthcoming. 
  2. With great perks come great talent  - The best talent in any market usually expects the best benefits, perks, and high job stability. As per a survey from Gallup, around 64% of workers surveyed believed that perks and pay are highly important when considering employment options. Since contractors don’t receive such benefits, employers are likely to miss out on top talent. 
  3. Heightened data security- Since contractors use their own equipment to work, there could be data breaches and confidentiality leaks despite the employer drafting the best non-disclosure agreements.
  4. Ownership of intellectual property- Companies own all material their employees handle or create via intellectual property rights. However, the same is not the case with independent contractors.
  5. Contractor misclassification -  The initial cost-savings that contract services offer are dwarfed by potential misclassification penalties. Employee misclassification occurs when an employer inadvertently categorizes employees as independent contractors despite them doing the same work as an employee. Such misclassification denies them the rights, benefits, and protections typically offered to employees under labor laws and regulations. This can easily happen, as contractors get more involved with their employer companies. As involvement increases, they easily slip through the fine line separating them from employees. For instance, Deliveroo expected their drivers, who were contractors, to follow their work timings. This was a mistake since contractors should be free to work on their own timings. Forcing workers to be present at particular times like Deliveroo did allowed federal bodies to interpret these workers as employees.  Unfortunately for Deliveroo, this misclassification error costed them €375,000

Due to growing numbers of employee misclassification cases, governments are coming down hard on such cases and imposing fines on violators. 

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When Is An EOR the Right Solution?

An Employer of Record helps businesses hire and pay talent from countries where the businesses don’t have a registered presence. The EOR onboards the talent onto its local entity and adopts all legal responsibility and payroll duties. Through this partnership, the business offloads all compliance risks onto the EOR. This relieves the business from administrative tasks and lets them manage the employee's day-to-day activities.

An EOR helps companies hire both contractors and permanent employees. In each relationship, the EOR serves unique benefits to the employer. 

Articulating the advantages of hiring a permanent employee and a contractor is beyond the scope of this article. In this section, let us explain when an employer takes the EOR route to hire across borders. 

EORs are better for long-term expansion goals

EORs provide a seamless and compliant employment solution, allowing employers to hire employees for extended periods without establishing a legal entity. Moreover, if the business plans to establish an ongoing presence in the chosen foreign market, an EOR can help easily navigate compliance and benefits administration. 

Hiring independent contractors is suitable for shorter-term or project-based engagements. Although there is no hard limit on the duration, businesses are advised against employing contractors for long periods. This is because the more years a contractor is engaged with a company, the higher the risk of the contractor being classified as an employee. Although laws do not define a limit in the US, employers are advised not to engage with a contractor for more than a year.

EORs offer more leverage in protectionist markets

No two countries are similar in their labor law. While countries like the USA are more employer-friendly, countries like France, Japan, and Norway have strong policies to protect employees. Moreover, countries with strong labor unions (France, Japan, Spain) have collective bargaining agreements that protect employees from unjust workplace treatment.  In these conditions, hiring and managing an independent contractor can be challenging. In such cases, EORs provide employers great flexibility in managing their workforce in foreign markets.  By absorbing the employment risks, businesses can quickly scale the workforce up or down based on business needs without incurring significant administrative burdens. This agility is particularly beneficial for companies operating in dynamic markets or industries that require rapid adjustments to meet demand fluctuations.

EORs relieve businesses from the hassles of managing a large contractor workforce

Though the administrative burden in managing contractors is relatively less than managing employees, a large workforce comprising several hundred contractors might be difficult to handle. 

Why?

Because engaging independent contractors at this scale requires a business to manage administrative tasks, such as contract negotiation, invoicing, and tax reporting independently.

EORs can complete complex HR and administrative tasks and relieve companies from the burden of payroll management, benefits administration, and tax compliance. 

While EOR services come at a cost, they justify their costs through the savings they bring by eliminating the need to set up local HR infrastructure and expertise in foreign jurisdictions.

How to transition an independent contractor to an EOR?

Transitioning their contractors to employees can be hard due to the paperwork and administrative hurdles involved. The new employee must be registered for taxes, payroll, and benefits. This is more challenging when the contractor is based in a foreign country, so you’ll have to deal with more legalese. Engaging with an EOR can make the transition more seamless. The EOR will help you through the transition by absorbing all the employment activities. This frees employers to plan other activities for the employee-turned-contractor, such as onboarding, training, etc. 

Step 1: Communicating the transition

The first step in the transition is to offer the contractor a permanent position with your company. Now, this offer must be appealing to the contractors. Any offer should be worth more than their flexibility. Your offer can be spruced up through attractive employment benefits, location flexibility, bonuses, etc. You could also highlight how your employees are engaged at work. Talk them through the perks of working in full-time employment with you. 

Moreover, an independent contractor would have had multiple employers. When they become permanent employees, they lose these multiple income streams. Thus, plan a competitive salary package for your employee. You can consult with your EOR to understand salary benchmarks for the contractor’s location. Factor in other aspects, such as the designation and experience of the contractor as well.

Step 2: Handle the paperwork

Once your contractor agrees to the transition, they must sign an employment contract with the EOR. This is because the EOR will serve as the primary employer for the employee-turned-contractor. An EOR’s contract terms will comply with the labor laws of the contractor’s country of residence. The contract must be in a language the contractor understands. 

The EOR manages communications with self-employed contractors to initiate a change in their designations. At the same time, it will also educate contractors on their employee benefits. 

Setting up payroll

Once the employee agrees to and signs the employment contract terms, the EOR sets up payroll to process salaries and expenses. Before the transition, the contractor would send an invoice for you to process. However, now the employee is paid salary, all employer contributions, and appropriate taxes deducted. Clearly communicate these changes. Set clear expectations around salary dates, taxes, and contributions.   

Drive Your Global Talent Strategy With Gloroots

Our SaaS-based EOR and in-house experts make global hiring more seamless for you. Whether you want to expand into a country and hire permanent employees or build a large pool of contractors, we have your back. With our powerful platform and thorough knowledge of local regulations, we confidently hire foreign talent without any hassles.  

From onboarding a new hire to ensuring their settling into the company's work culture, Gloroots has the experience to handle it all. Learn more about us here.

FAQs

1. Does a global EOR provider help only large businesses?

EOR providers can help all sizes of businesses – large, small, or even medium – onboard, manage, and pay employees internationally. Some EORs may specialize in enterprise hiring, while others specialize in hiring startups. 

2. Will an EOR service help with contract termination??

Any EOR provider is equipped to legally handle employee termination and comply with the termination clauses of a country's labor code.

3. Is there a minimum requirement for the number of employees a company needs to hire to avail of EOR services?

No. There is no current requirement for a minimum number of employees in hiring EOR services.

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