Employer of Record Benefits and Risks

As a business owner, you may have come across the term Employer of Record (EOR) being thrown around. Employer of Record (EOR) services offer an efficient way to hire employees internationally without the need to establish a legal entity. 

While EORs provide clear advantages, they also come with inherent risks that every business must understand before proceeding.

In this article, we will walk you through the benefits and risks of using an Employer of Record and how you can avoid these risks when hiring internationally.

What is an EOR?

An Employer of Record is a third-party organization that takes on the legal responsibilities of employing workers on behalf of your company. This includes managing payroll, taxes, compliance with local laws, and employee benefits. By using an EOR, you can hire employees in foreign countries without the need to establish a local legal entity.

For instance, Apple’s impressive growth from $274.5 billion in revenue in 2020 to $394.3 billion in 2022 was attributed to the company’s rapid global expansion. A key factor in this success is the company’s ability to efficiently manage international hiring processes, particularly through initiatives like the Marcom Talent Network, supported by Employer of Record (EOR) solutions and similar frameworks.

4 Key Benefits of Employer of Record

An EOR is a powerful option for businesses if you want to expand or test out new products in new markets or seek out new talents rapidly. As remote work becomes more common, EORs can handle HR functions for remote workers such as performance reviews or employee disputes. Here are the benefits of having an EOR:

1. Quick Market Entry: EORs allow you to establish a presence in new markets rapidly without the need to set up a legal entity. This can be beneficial for businesses testing new locations, or recruiting skilled professionals for specific projects.
2. Compliance Management: EORs handle various compliance aspects, including labor laws, payroll, and benefits administration. This alleviates the burden on businesses, ensuring they meet local regulations and avoid legal pitfalls.
3. Reduced Administrative Load: By outsourcing employment-related tasks to an EOR, you can focus on your core business activities rather than getting bogged down by HR duties.
4. Access to Local Expertise: EORs often have local teams familiar with the intricacies of employment laws and practices in their respective countries, providing valuable insights and support.

Risks of Employer of Records

While EORs simplify international hiring, they also come with potential risks that could impact your operations. Here are some of the risks you should consider:

1. Regulatory Scrutiny

As the use of EORs has grown, so has regulatory scrutiny. Countries like Singapore and the UK are imposing stricter regulations on how EORs operate, which can lead to compliance challenges for businesses using these services in the country.

However, this risk can be mitigated by hiring employees in countries with EOR-friendly regulations such as the Philippines, Indonesia, etc.

2. Permanent Establishment (PE)

When it comes to the risks of hiring international remote teams, Permanent Establishment is on top of that list. While EORs generally mitigate this risk, it might still depend on whether you are hiring for a low PE risk role or a high PE risk role, and the country you are hiring in. 

Low PE risk roles include supporting roles such as developer, customer support, data entry specialists, virtual assistants, etc. In comparison, high PE risk roles often include key positions such as Chief Technology Officer or Head of Sales, etc that handle the company’s core operations.

3. Higher Costs for Larger Teams

EORs are cost-effective for small teams but may become expensive as your workforce grows. For instance, hiring 20+ employees in a single country through an EOR could cost more than setting up and managing a local entity.

4. Varying Compliance Focus Among EORs

EOR providers vary in their compliance focus and local expertise.

• Low compliance focus, low presence: These providers may cut corners, leading to legal risks.
• High compliance focus, low presence: Excellent for smaller operations but may lack flexibility.
• High compliance focus, high presence: Reliable but often costly. The service fee often starts from $400 per employee and costs more than setting up a local entity in the country if you have more than 5 employees.

Therefore, It is advisable to conduct thorough due diligence to assess whether an EOR can handle country-specific risks effectively.

The good news is that most of these risks are avoidable as long as you choose the right EOR service provider. Below, we will provide you with details on how you do just that.

How to Assess an EOR Service Provider

Based on insights from RecruitGo’s local experts, evaluating an Employer of Record (EOR) provider requires a strategic approach to mitigate risks and maximize the benefits of international hiring. 

Drawing from our extensive experience supporting businesses across Southeast Asian markets like the Philippines, Indonesia, and Vietnam, here are the key factors to consider when selecting the right EOR partner:

1. Compliance Focus

An EOR’s ability to handle compliance is one of the most critical aspects to evaluate. Our experts emphasize that a strong compliance track record ensures adherence to local labor laws, tax regulations, and statutory obligations.

For instance, does the EOR fully understand mandatory severance payments in Indonesia or the compliance deadlines for employer contributions in the Philippines?

2. Local Expertise

One of the common problems that many employers face when working with Global EORs is that those companies are focused on global presence while lacking market-specific knowledge.

The EOR should have a strong local presence and an in-depth understanding of country-specific employment laws. For instance, if you are hiring employees in the Philippines, the EOR should know how to manage statutory benefits like PhilHealth contributions, 13th-month pay, and even the termination procedure in the Philippines. Non-compliance with any of those can result in fines and legal issues.

3. Cost Transparency

Hidden fees are a common pitfall with EORs. RecruitGo’s advisors emphasize the need for a transparent pricing model. Ensure you receive a detailed cost breakdown covering service fees, payroll processing, statutory contributions, and benefits administration to avoid surprises down the road.

4. Scalability

When assessing an EOR, another important factor to consider is whether the service provider would be able to grow with your business. For instance, if you plan to increase the number of employees from 5 to 15, would they be able to manage that? 

Or what if you decide to set up a company down the road because you need a larger workforce and the cost of EOR outweighs the benefits of a local entity? Would the EOR be able to transition your employees to your new entity?

In addition to these key factors, it is also recommended to consider aspects such as tech stack (app/platform) that would allow you to manage employees, client support and responsiveness or EOR, ability to offer additional benefits for your remote team.

Partner with RecruitGo to Hire Talent Internationally

RecruitGo’s strength lies in our local focus—with teams on the ground, we understand the nuances of labor laws, mandatory benefits, and compliance requirements of Southeast Asian countries like the Philippines, Indonesia, Malaysia, Vietnam, etc.

Our local presence ensures that businesses hiring in these countries navigate regulations smoothly and avoid compliance risks. Furthermore, we have a transparent pricing model that supports the growth of small businesses and bigger companies alike without costing an arm and leg.

Fill out the form below and discuss your hiring needs with one of our experts.

FAQs About Using an EOR Service

EORs are ideal for testing markets or managing small teams. For long-term expansion, setting up a legal entity may be more cost-effective. RecruitGo can help with the transition when needed.

Yes, an EOR can provide employee benefits to attract and retain top talent. These benefits may include health insurance, retirement plans, paid time off, and other perks tailored to comply with local laws and regulations. 

Onboarding an employee through an EOR takes a few weeks, depending on the provider, the complexity of the role, and the required documentation for the new hire. Generally, the process often involves several key steps: 

1. Initial Consultation and Document Collection: The onboarding process begins with an initial consultation to gather documents such as employment contracts and tax forms. 
2. Administrative Setup: this includes payroll setup, benefits enrollment, and other administrative tasks to ensure a smooth transition for new employees.
3. Training and Orientation: Once the administrative processes are in place, the EOR can facilitate training and orientation to help new hires acclimate to their roles and understand company policies.

Ongoing Support: EORs often provide ongoing support during the first few weeks of employment to address any questions or concerns from new hires.

Since the EOR will act as the legal employer for foreign workers, they can process visa sponsorship and immigration services for foreigners. This often happens when the foreign employee is not a local in the country you want to expand into. For instance, if you expanding your business into Indonesia and want to relocate some of your employees there, your partner EOR in Indonesia would most likely be able to help with that as well.