What are employers of record (EORs) and why should your business care?

Employers of Record (EORs), also known as Professional Employment Organisations (PEOs), are gaining traction in the global mobility space. Some EORs claim to operate in over 150 countries, providing businesses with an efficient way to employ staff where they don’t have a local presence. 

So, what exactly is an EOR, why are they growing so quickly, and when are they the right solution for your business?

What is an Employer of Record (EOR)?

An EOR employs individuals directly on behalf of a company, allowing businesses to pay employees working in countries where they don’t have corporate entities. The EOR manages the employment relationship, including payroll, immigration, benefits, and compliance with local laws. This frees companies from the administrative burden of managing payroll and legal obligations in unfamiliar territories, while still maintaining control over the employee’s daily responsibilities.

Why are EORs growing so quickly?

The growing demand for remote work, with employees wanting to work from various countries, is one of the main drivers of EOR adoption. Employers are increasingly trying to accommodate these requests but need a legal foothold in the countries where their employees are based to remain compliant. Without an EOR, companies might need to set up a local entity, which can be expensive and unviable for a single employee.

EORs offer a cost-effective alternative to setting up a local entity, helping businesses meet employee requests without the financial burden. Moreover, businesses are broadening their talent search globally, and EORs make it easier to hire the right person regardless of geography. EORs also speed up the deployment of talent in new markets, allowing businesses to respond quickly to emerging opportunities.

Can EORs help small teams?

For businesses with small teams in a foreign country, typically five employees or fewer, EORs can offer significant advantages. Tapping into an EOR’s pension and benefits programmes often allows small teams to access better offerings than a company could provide on its own, thanks to the EOR’s larger buying power. This not only helps businesses stay competitive but also improves employee satisfaction and retention in remote locations.

When is an EOR the right solution for your business?

Before using an EOR, it's essential to confirm that they are legally recognised in the country where you wish to operate. While EORs can solve many international employment challenges, some countries' legal frameworks are still evolving, and additional conditions, like labour licenses or time limits on the arrangements, may apply. Always seek local legal advice to ensure the EOR model is effective in the country you’re targeting, avoiding future compliance risks.

Additionally, consider whether the role you are filling could create a permanent establishment (PE) risk for your company. Even though the EOR is the legal employer, the employee remains under the management and control of your business. If their duties would trigger a PE if employed directly by your company, the same risk applies when using an EOR. Understanding PE risk is crucial to avoid unforeseen tax liabilities.

Should you set up a local entity instead?

If your business plans to expand operations in a particular country, it may be more cost-effective in the long run to set up a local entity rather than relying on an EOR. As the number of employees using an EOR in a given country grows, so does the need to reassess whether continuing with an EOR is the best option. Typically, if the number of employees exceeds five, it’s worth re-evaluating the cost of maintaining an EOR versus setting up a local entity.

Why EORs are here to stay

EORs will continue to grow in popularity as businesses adapt to the global workforce’s changing demands. With proper use and ongoing monitoring, EORs provide a cost-effective and compliant solution for managing international employees. However, businesses should always evaluate legal considerations, PE risks, and long-term goals when deciding if an EOR is the right fit.