EOR

The Pros and Cons of an Employer of Record (EOR) - Is It Worth It?

Mayank Bhutoria
5
min

Discover the ultimate guide to selecting the perfect Employer of Record (EOR) platform for your business. Equip yourself with the knowledge needed to make an informed decision and ensure smooth international hiring and workforce management.

Are you planning to hire people in different countries? Diving into the global talent pool to access the best talent for your team is a smart decision. But navigating through the unfamiliar legal landscape can seem daunting.

That's where an Employer of Record comes in. It can handle all your employment compliance and paperwork, leaving you to focus on core functionalities.

But before you explore this solution, weighing the pros and cons is essential. An EOR can be your trusted ally for global expansion by handling payroll, taxes, and compliance with local labor laws. However, it might introduce new challenges, such as limited control over HR processes or unexpected fees. 

Let's explore what an EOR is and learn whether it’s worth opting for its services by weighing the benefits and disadvantages of EOR.

What is an Employer of Record?

An Employer of Record (EOR) is a service provider that assumes legal responsibility for payroll, taxes, benefits, and compliance for a company's employees while the company retains operational control. 

EORs are commonly used in situations such as hiring remote workers, hiring international contractors, or expanding into new geographical locations where the client company may not have an established presence or legal entity.

Pros of Using an Employer of Record

Let’s take a look at the pros of EOR and analyze what makes it the most sought-after service for navigating the global talent pool.

1. Helps access low-cost talent markets worldwide

Every organization faces challenges in accessing talent in regions where labor costs may be lower or specific skills are in high demand.

Brazil, for example, offers a skilled workforce with competitive labor costs, but its complex labor laws and tax regulations pose big challenges for international employers. For instance, employees work a maximum of 44 hours per week, and overtime must be compensated at a rate of 150% of their regular pay.

Employer of Record (EOR) providers are well-versed in the local labor and employment laws of different countries, enabling companies to hire employees from various locations compliantly. This access enables organizations to build a diverse and skilled workforce, driving innovation and growth.

2. Provides flexibility in quickly onboarding employees from new locations

Onboarding an employee is often complicated due to various factors, including legal requirements and administrative tasks. From compliance with labor laws and tax regulations to conducting background checks, the process is complex and lengthy, especially when hiring globally.

For instance, Switzerland has strict limitations on what kind of information you can verify when conducting background checks. Credit checks, medical screenings, and criminal background checks are off-limits, except for specific industries. 

An EOR streamlines this process by handling legal and administrative requirements in compliance with local laws. They use various systems, including SaaS-based platforms, to efficiently collect employee information, perform background checks, complete necessary documentation, and generate compliant employment contracts promptly.  

With an EOR's streamlined process, you can onboard a new employee in another country within minutes, without the hassle of establishing a new entity. 

3. Mitigates employment compliance risks

Non-compliance with employment laws and regulations can result in serious legal consequences, including penalties, fines, or sanctions imposed by government agencies.

For example, India’s Payment of Bonus Act 2007  mandates annual bonuses for employees in establishments with more than 20 employees. This act applies to certain industries and types of organizations.

An EOR ensures compliance with local laws concerning worker classification, onboarding procedures, working hours, taxes and payroll, compensation and benefits, employment contracts, and the management of independent contractors.

This significantly minimizes the risk of non-compliance, allowing you to focus on your core business.

4. Prevents employee misclassification

Employee misclassification occurs when an employer wrongly categorizes a full-time employee as an independent contractor or another non-employee status, contrary to local employment laws and regulations. 

Misclassifying employees is a costly error with severe legal and financial consequences, ranging from fines, back pay and retroactive benefits, loss of business license, and even jail time The risks are real, as evident in the 2015 FedEx case, where the company paid a $228 million settlement for misclassifying drivers as independent contractors in California.  

EORs help mitigate these risks by ensuring that workers are classified correctly according to local employment laws and regulations

5. Improves your chances of attracting the best talent

Organizations often struggle to attract top talent, especially if they are limited to sourcing candidates only from a specific geographical area or if they lack access to the specialized skills required for certain roles. Additionally, they face compliance concerns, various administrative burdens and unclear employment arrangements.

An EOR knows how to connect your job to the desired candidates because they have access to a wide range of skilled professionals to choose from. By accessing talent pools from different regions or countries, organizations can attract candidates with diverse skill sets, experiences, and perspectives. Also they provide access to comprehensive benefits and competitive compensation packages, including health insurance, retirement plans, and wellness programs, for employees, which helps attract top candidates.

Example: If a technology startup based in the United States wants to hire software developers with expertise in artificial intelligence (AI), they can partner with an EOR with a global presence. Thus, the startup gains access to a talent pool of AI specialists from countries like India, China, and Eastern Europe, where AI talent is abundant.

6. Relieves administrative burden on HR and finance teams

Managing payroll, benefits, taxes, and other employment-related tasks across different regions can be challenging for in-house HR and finance teams. Navigating complex and evolving regulations increases the risk of errors, non-compliance, and potential legal issues. 

In Italy, for instance, failing to file a tax return can result in penalties ranging from 120% to 240% of the taxes due

EORs specialize in managing employment compliance across various jurisdictions, leveraging technology to streamline and automate HR and finance processes. By relieving HR and finance teams of administrative burdens, EORs enable these teams to focus on other core business activities.

7. Enhances efficiency and scalability through SaaS technology.

SaaS-based EORs offer a cloud-based solution, which you can access from anywhere with an internet connection. With SaaS-based EORs, you can streamline repetitive tasks such as onboarding, payroll processing, and benefits administration, thus increasing efficiency.

 You can also expand your workforce rapidly without significant infrastructure investments or changes in software. .

Gloroots, one of the best SaaS-based EORs, offers businesses greater flexibility, efficiency, and cost-effectiveness in managing employment processes, thus making them a valuable alternative to traditional EOR models or in-house management.

Cons of Using an Employer of Record

Some potential cons of EOR are listed below:

1. Limited control over HR processes and policies for employees hired through an EOR

Operating through an Employer of Record (EOR) can impose limitations on business operations, impacting project management, resource allocation, and employee communication. This can hinder your team's agility and flexibility.

2. Dissimilarity in goals and standards

The client company and the EOR may have different goals, standards, and approaches to employment. This misalignment can lead to friction or inefficiencies in areas such as employee engagement, workplace culture, and performance expectations.

3. Hidden costs and fees

Some EOR providers quote a price but then add hidden costs and fees over time, including one-time set-up fees, administrative fees for handling compliance or regulatory issues, fees for terminating the contract and additional fees for extra services beyond the standard offering, like specialized HR support or legal consultations, which may incur additional costs.

For example, an EOR is responsible for any penalties or fines incurred due to non-compliance with employment regulations. But in some cases, the client company may be held liable for any violations that occur. This could result in unexpected fines or legal fees for the client.

Before committing to an EOR partnership, thoroughly review the terms of the agreement to understand the full cost implications.

Best Practices for Mitigating Employer of Record Risks

Utilizing an Employer of Record (EOR) can offer numerous benefits, but it's crucial to implement best practices to mitigate potential risks and ensure a successful partnership. Here are some strategies to consider:

  • Look for transparency in pricing

To avoid surprises, understand your EOR's fee structure and how pricing may vary based on factors such as the number of employees, the scope of services and locations, and other potential costs that might add up in the future.

  • Conduct thorough due diligence

Before engaging an EOR, evaluate their reputation, track record, expertise, and financial stability. Also, ensure they have experience in your industry and location.

  • Establish clear contractual agreements

Negotiate a comprehensive contract with the EOR that clearly outlines roles, responsibilities, expectations, and service levels. 

  • Maintain regular communication and reporting

Regularly communicate with the EOR and request periodic reports and updates on employee status, compliance activities, and any relevant HR metrics. 

How To Determine if an Employer of Record Service Is Right for You

1. Evaluate your business objectives

Are you looking to expand into new markets without setting up a subsidiary? Do you need to quickly onboard remote workers? 

If you answered “yes” to any of these questions, an EOR service could be beneficial.

However, you need to evaluate whether the EOR has the necessary expertise or resources to support your hiring objectives.

2. Research provider expertise

Does the EOR have any experience or expertise in the country you plan to hire from? How's their track record with compliance and support?
Consider factors such as their understanding of local labor laws, efficiency in global payroll management, compliance requirements, and reputation for reliable service.

3. Assess your company's risk tolerance

Consider the level of risk you are willing to assume, especially when it comes to compliance and legal matters. 

Assess whether the EOR's global compliance measures align with your risk tolerance and whether they offer sufficient protection against legal liabilities.

4. Conduct a cost-benefit analysis

EORs typically use two pricing models: percentage of the employee's CTC or fixed pricing. To ensure transparency, request that your prospective EOR present their pricing upfront.

Next, outline all the costs and potential benefits of using an EOR and compare the two to determine if the benefits outweigh the costs. Consider non-financial factors and uncertainties as well. Use tools like the Gloroots Salary Calculator to estimate salaries for remote employees, so you can prepare your budget.

Conducting a cost-benefit analysis helps you make informed decisions that align with your business and financial objectives.

Navigate Global Talent Pool Easily with Gloroots

Are you ready to expand globally with ease? Partner with Gloroots, your trusted Employer of Record (EOR) service provider. Our rapid onboarding process, multi-currency payroll, and team of experts make it easier for you to hire, onboard, and pay talent in over 140 countries.  Book a demo to learn more about our Employer of Record services!

FAQs

Why should you use an Employer of Record (EOR)?

If you want to tap into international markets, hire employees, and expand your operation without setting up legal entities in each location, an Employer of Record can help. EORs can handle complex legal and regulatory requirements, ensuring that businesses remain compliant. Also, they streamline HR processes, including payroll, benefits administration, and employee onboarding.

How much does an Employer of Record cost?

On average, an Employer of Record (EOR) cost ranges from $200 to $500 per employee, monthly. 

The factors that influence the cost of an EOR are: 

  • EOR setup, 
  • Refundable security deposit 
  • Employee benefits
  • EOR service fee
  • Currency exchange fee
  • Employee's salary and additional liabilities.
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