Employer of Record: Guide for Small Businesses

When a business hires a new employee, they have to take full responsibility for the work the new employee performs. This leads to responsibilities and liabilities for the employer.

An employer of record can help alleviate some of this burden, giving small businesses more freedom and flexibility. The employer of record becomes the legal employer for the new employee.

What is an employer of record?

An Employer of Record (EOR) is a separate organization that is designated as the employer for a new hire. The EOR is listed on official legal forms, including tax documentation. The EOR also assumes the responsibility and associated liabilities for certain tasks like managing payroll.

An EOR’s responsibilities can extend to different states and countries, making it easier for businesses to expand. If you’ve looked at the global market and what international employment could mean for your business, an EOR can make managing this legal responsibility easier.

The EOR takes on a variety of tasks associated with managing the Human Resources (HR) side of the business, which we’ll cover in more depth below.

What does an employer of record do?

An employer of record manages various tasks for the businesses that hire them. Some of their most significant responsibilities include:

• Financial tasks. This includes managing payroll and employee compensation. They also manage taxes related to the employee and any stock options to distribute, even when crossing state or national borders.
• Legal tasks. This category includes responsibilities related to unemployment, managing employment contracts, and handling onboarding and termination processes.
• Insurance tasks. The EOR also maintains the certificate of insurance for the employee and conducts any background checks or drug tests.
• Regulatory tasks. Hiring an EOR means they’ll handle employee regulations, including tracking labor laws and regulations for the country and state where the employees live. They’ll ensure employment contracts, benefits, and compensation abide by these regulations.
• Form-related tasks. The EOR manages important forms, such as I-9s and W-2s, to ensure the business remains compliant.

If you engage an EOR, their management of these tasks gives you greater freedom and flexibility to focus on your business. You can put aside many of the concerns and considerations that would otherwise come with hiring a team member.

The EOR oversees employee operations but won’t manage day-to-day assignments, leaving you free to assign responsibilities as you would for a traditional employee.

What is the difference between a PEO and an EOR?

A Professional Employer Organization (PEO) is another way to outsource human resources at your organization. It has some similarities with an EOR. For example, both can help you manage your payroll and HR responsibilities. However, some key differences exist.

With an EOR, your employees are legally the employees of the EOR. However, with a PEO, you have a co-employment setup. You must own a legal entity in the foreign country or region where you want to hire employees.

You are also responsible for full compliance with employment laws specific to employees’ locations. The PEO arrangement often works best for those with a local entity needing HR services.

Learn more about these two types of organizational arrangements.

Benefits of an employer of record

An EOR can offer various benefits to help you grow and manage your business. We cover some of the central benefits that companies experience.

Save time and money

One benefit that small businesses notice when transitioning to an EOR is the time and resources they save. Outsourcing payroll and related HR responsibilities gives owners more energy and money to direct toward building their businesses.

Businesses with an EOR don’t have to worry about building and funding an HR department large enough to manage all the responsibilities associated with managing employees.

The time and energy needed to remain updated on the latest regulations, answer employee questions, and track the different components and liabilities associated with employees can be extensive.

An EOR eliminates this need, creating a cost-effective solution for hiring new employees and managing the HR side of a business.

Maintain labor law compliance for out-of-state or international workers

As your business grows, you can take advantage of opportunities that remote employees and new markets present. With remote workers, you can hire the best candidates from a global talent pool.

But while remote work can help you find the best candidates, it can make employee management a challenge. Staying updated on the regulations that can vary from state to state—or even between countries—can be time-consuming.

Fortunately, an EOR can relieve this burden. The organization will remain updated on regulations, keeping everything straight regarding contracts and employee benefits.

Having an EOR helps prevent accidental noncompliance as you work to build your business. You don’t need a local business entity if your EOR operates legally in that area.

Provide competitive benefits packages

Offering a competitive compensation plan is important for retaining full-time employees. However, expected benefits—such as health insurance, workers’ compensation, retirement funds, and life insurance—can get expensive.

Some small businesses may need help to remain competitive in their benefits packages when competing with larger businesses. Since the EOR manages employee benefits, they may be able to help you offer plans and benefits packages that draw in top performers.

Risks of using an employer of record

An EOR offers several benefits to businesses, but it’s important to note the potential risks and drawbacks. This can help you decide whether to use an employer of record for your business.

Compliance

When you hire an EOR, you’re counting on them to help you comply with local employment laws, tax laws, and related regulations. However, if they don’t comply with the laws in your area, the relationship could disrupt your business. For example, if the EOR poorly constructs employee contracts that do not abide by local regulations, it could lead to trouble with your employees and local regulators. Even if the liability lies with the EOR, it can make it difficult for you to run your business.

Quality

An EOR officially hires the talent that serves your company. However, for this to work successfully, make sure you clearly articulate to  the EOR your standards and expectations of your employees. Make sure the people hired through the EOR fill the need you have at your company.

Control

When you work with an EOR, you’ll have some loss of control in the employment relationship. For example, you won’t have as much input when considering employee pay and benefits.

Some businesses find this shift in control can lead to ineffective management processes or miscommunication between the client company that needs the employee and the EOR.

For example, since the EOR manages most of the employee onboarding process, some businesses may lose that personal touch when hiring a new employee, impacting their working relationship.

You also want to consider that if you have some employees you hire directly and some hired through the EOR, there might be differences in benefit packages. This can lead to dissatisfaction among your employees.

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How to choose an employer of record service provider

To find an employer of record service, carefully evaluate your options. This can help you identify the organization that fits best with your business needs. We explain a few areas to research before making your selection.

Consider their compliance expertise

The EOR service provider should help you remain compliant with important labor laws and regulations. However, these regulations can differ from state to state, country to country, and within different sectors and industries.

For example, a restaurant may have different considerations than a retail store regarding wages and hours.

Given the importance of compliance risks when hiring an EOR, search and verify their areas of compliance expertise. Hire an organization that has previously worked with your sector and jurisdiction.

This can help you move forward confidently, trusting the EOR to handle payroll taxes, insurance obligations, and payroll processing responsibilities.

Research their pricing model

Examine how the employer of record manages their payments and pricing structure. This can help you find the payment model that best suits your business.

For example, some EOR services set up payments based on a flat fee. On the other hand, some businesses base their fees on a percentage of the employee wages or the business profits.

Check out any additional services they offer

Different service providers may offer additional services, such as help with employment visas and work permits, benefits management services, or solutions to help you work in new countries by either moving your business or opening a new branch.

Consider the services the EOR offers and which ones will benefit your business. For example, suppose your long-term plan includes global expansion and hiring international employees. In that case, you may prefer a global employer of record provider that offers services to help guide you through the transition.

Look at reviews online

Finally, look at the EOR’s success with other businesses like yours. Reading online reviews and relevant blogs can help you see what experiences other businesses have had with them.

See if you can find common complaints, what other businesses like and dislike about their EOR service provider, and how the setup benefited them and their company.

‍This type of feedback can provide you with better information about real-world experiences. This can help you make a more informed decision.

Work with Upwork Compliance Service

If you work with a team of freelancers, you can also manage the payment responsibilities through Upwork Any Hire. This service makes it easy to keep everyone paid on time without extra work, even when you employ a global workforce.

Learn more about how Upwork services can help you tap into a global employment pool while hiring talent and managing your business operations.

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This article is intended for educational purposes and should not be viewed as legal or tax advice. Please consult a professional to find the solution that best fits your situation.