Employers of Record: The Case For and Against

Employers of Record (EORs) have literally taken the world by storm in the last few years, driven by new ways of working both during and after Covid.  Of the main players, Deel has raised over $675m to date, is valued at $12bn and has been experiencing rocket ship growth.  Velocity Global and Remote have both raised circa $500m to date.  

There are many more companies to add to this list, but what are Employers of Record?  What do they do?  And when is the right (and conversely wrong) time to use them?  

In this article, we’re going to do a deep dive into the world of Employers of Record so that you know when and how to add an EOR to your global expansion plans and ‘hire from anywhere’ toolbox.

What is an Employer of Record?

Employers of Record typically perform two key services:

• Paying Independent Contractors: They manage and pay your contractors via an Employer of Record.  In this scenario, they are primarily a payment mechanism to centrally pay your contractors and the fees charged to your company are typically quite low.
• Employer of Record Hiring Your Employee:  Here the Employer of Record (EOR) is essentially a third-party organization that becomes the full legal employer of your employee and assumes some of the key employer-related responsibilities and tasks on behalf of your company. This avoids the need for you to set up a local legal entity, as your employee will be employed by the legal entity of the EOR.  The EOR takes on some of your company’s human resources responsibilities and onboards, pays, and manages those employees while you maintain and control the day-to-day operations. In this scenario, the pricing and fees for this service will typically be significantly more than the first option above, but against that, you’re essentially avoiding the cost, time and effort involved in setting up a legal entity.

In many cases, EORs are expanding beyond the two core services above, for example offering contractor misclassification products, payroll, relocation, benefits and even hiring services.  Some are even moving into global expansion.  For sure, the EOR market is hugely competitive so expect a continued evolution of the EOR product offering over the coming years.

How Much Does an Employer of Record Cost?

The pricing model for Employers of Record can vary depending on the services you engage them to provide.  For example, if you’re talking about just paying contractors, the cost will be between $20-$50 a month per contractor.  However, if you’re dealing with an EOR employee option, then the cost will typically be a fixed amount of between $500-$700 a month.  Some charge fees as a % of salary and this can be comparatively expensive if you’re dealing with employees who are earning above $50,000.

Why pay so much more for Employer of Record employees versus contractors?  Because they’re taking on much greater responsibility.  Managing a contractor is straightforward as the Employer of Record are  mainly acting as a payment gateway.  However, in the case of employment through an EOR, the EOR becomes the legal employer and therefore has a lot more paperwork and administration to manage, as well as legal liability in the event of a dispute.

How do Employers of Record Make Money?

Employers of Record have quite a high set up cost themselves when opening a new legal entity in each country, but they essentially make their money by having a high number of people employed via each legal entity.  

If they have a country offering, and only 3 or 4 customers are employing their employees via that Employer of Record legal entity, then it will be difficult for them to make money in that country, as running a legal entity alone could easily be more than $30,000 a year, and considerably higher depending on the country and the services required (e.g. legal entity incorporation and set up, employment law, accounting advice, tax advice, other regulatory costs, immigration law, etc.).

One of their differentiation points is that many of them have strong digital platforms that enables them to offer (a) more automation and (b) higher self-service capabilities to clients, which combined removes a lot of administrative costs.

Some Employers of Record manage their global expansion by partnering with other EORs and using that EOR’s services, but be careful to ensure that any Employer of Record you’re working with has a legal entity in the countries in which you’re looking to use their services in.  Some Employers of Record operate through third-party partners (i.e. they don’t actually own the legal entity in the country they’re operating in) and this can provide challenges from a service consistency perspective, and potentially some risks. This model would potentially also have your employees engaged with a variety of different EORs which would not be ideal from an employee experience perspective.

The Case for Using an Employer of Record

An Employer of Record is a really useful tool to have in the global mobility toolbox.  

There are many cases where an Employer of Record can be a powerful option to use, below are the top examples that come to mind:

1. Where the costs of using an Employer of Record are less than the costs of opening and running a local legal entity, then an EOR becomes an attractive option as you test the market .  Unfortunately there is no hard and fast rule for this, as the legal entity set up costs can vary quite significantly between countries, but a general rule of thumb is that if the number of employees is less than 5, then an Employer of Record makes sense to explore. 
2. If you’ve got low PE (Permanent Establishment) risk roles (e.g. entry level developer, junior administrator, etc.) then they are definitely a role that could be a great fit for an Employer of Record.
3. Where speed is of the essence, an Employer of Record makes a lot of sense.  Say you found a really talented engineer, and want to make them an offer asap, then engaging an Employer of Record can be a way for you to access the international talent pool wherever you need as soon as you need to.
4. If there is a M&A carve-out, an Employer of Record can be a very quick way to transfer an employee indirectly to the buyer without having to wait until a local legal entity is in place.  By using an Employer of Record, this can facilitate a smoother transition by giving the acquiring company the space to determine the right structure (e.g. branch, legal entity, etc.) while also giving stability for the acquired employees.
5. Using an Employer of Record gives your organization a great opportunity to be able scale your workforce and/or market entry up or down in a very agile manner.  We have already mentioned how EORs are a great option to scale up if you have low PE risk roles.  But turn it the other way around, the same applies.  Say you have legal entities in 60 countries, but discover that in 5 of those countries you only have one employee and it does not make sense to continue using a legal entity.  You may come to the conclusion that in those countries closing down the legal entity makes much greater sense.   
6. Another advantage of using an Employer of Record is if you’re worried about contractor misclassification risks.  In those cases, employing that contractor as an employee employed via an Employer of Record may mitigate this risk.
7. There may be country-specific scenarios where using an Employer of Record is an excellent option, for example:
   • In Indonesia, it can cost $0.7m+ to set up a local legal entity due to high minimum capital requirements.  If we took a $500 a month average Employer of Record fee, then over 2 years you would need to have 50+ employees to justify looking at setting up a local legal entity.
   • The Netherlands, by comparison, is much easier to set up a local legal entity.  However, one challenge is that if you need to sponsor a visa, becoming recognised as a sponsor can take a number of months or even longer.  In these scenarios, it might make sense to initially hire that person via an Employer of Record who will sponsor the visa, and then when your legal entity is set up and sponsorship approval is received, transfer the employee to your local legal entity.

Permanent Establishment Risks of Using Employers of Record

Below is an excerpt from an article we wrote on the different options to work or hire from anywhere.

What you’ll see here is that the Permanent Establishment (PE) risks are not mitigated by Employers of Record.  It is a risk that happens to be the number 1 risk for international remote work according to our own white paper (and many other surveys and research papers such as this one from Benivo).

When we spoke with a number of leading European and US VCc a number of months ago, they mentioned how PE risk is the number one risk they’re seeing in due diligence for Series A and beyond, mainly because start-ups are hiring high PE risk roles via Employers of Record (e.g. employing their CTO via an Employer of Record, or having a senior sales generating employee employed via an Employer of Record).  This can lead to literally millions of potential tax fines and penalties if these companies are not careful.

Regulatory Challenges of Using Employers of Record

Employers of Record existed well before the pandemic, but it’s also fair to say they have been experiencing explosive growth in recent years.  With that enormous growth, it’s fair to say that the regulatory framework around Employers of Record has been evolving and has a little bit of catching up to do.

Part of the conflict has to do with the evolution of the gig economy and the fact that governments want to avoid contractor misclassification risks, as this deprives them of much needed tax base for payroll tax and social security contributions.  We’ve all seen for example the growth in legal cases such as the $8.4m contractor misclassification settlement against Uber in California. 

Similarly, these contractor misclassification regulations also in many cases cover third party agencies or services providers, which brings them in many cases into the scope of Employers of Record.

To give some very tangible examples:

• An AUG licence is required in Germany and this has some duration limitations (i.e. you can only employee someone for max 18 months via an Employer of Record)
• A Portage Salarial is the model used in France which has it’s own nuances
• Mexico introduced illegal outsourcing laws which require close attention
• Some Employers of Record won’t operate in Spain as there is a risk of the model being deemed illegal there
• The Employer of Record model is not an attractive one in China where the local authorities strongly push for companies to establish a local presence first
• The UK, already known for its strict IR35 contractor misclassification rules, has also issued strict guidelines for umbrella companies (an Employer of Record is not an umbrella company but the risk is clear).
• New directives in Europe, if adopted, will challenge the Employer of Record model in Europe over the coming years.

To give some balance, just because some of these countries are difficult operating environments for Employers of Record, that does not mean Employers of Record don’t operate there.  For example, in Spain, some Employers of Record still offer their services there.  Employers of Record will in many cases find legal workarounds in jurisdictions that are not perfectly built for their model.

However it does mean that there is a higher level of risk in using that model in those jurisdictions where the labour law compatibility is not 100% clear.

Against this, there are countries that are embracing the Employer of Record model by engaging directly with Employers of Record, just look at the partnership between Deel and the UAE government.

The Arguments Against Using Employers of Record

Taking a helicopter view of Employers of Record, there are other reasons where using an Employer of Record may not be the best option to consider, such as:

1. When you’re looking to hire more than 5 people in a country.  The number may vary depending on the local cost of setting up a legal entity and the pricing structure of each Employer of Record, but as a rule of thumb hiring more than 5 people generally increases the legal entity business case.
2. When you’re confident you’ll eventually need a structural, long-term solution such as a branch or legal entity.  In those cases, then at best an Employer of Record is a temporary solution.
3. If you need a short-term hire for less than 6 months, some Employers of Record will not engage with you.  Typically, Employers of Record will only allow you to use their services if the contract will be for at least 3-6 months long, simply because their own costs of adding that employee to the local legal entity payroll, etc. will be outweighed by the revenue they would generate from their fees.
4. If you’re looking for a short-term project less than 6 months, then if the risk of contractor misclassification locally is low, then it may be better to simply hire that person as an independent contractor rather than through an Employer of Record
5. When you’re not in a hurry to hire, as speed is one of the key value propositions of Employers of Record.
6. When you would like to offer sophisticated or personalised employee benefits, such as company pension benefits and/or other company specific benefits.  Employers of Record are limited in the benefits they can offer the employee, as the employee is essentially employed by the Employer of Record, and not your company, so it is difficult to offer the same package of benefits if you have sophisticated employee benefits that are a core part of your employer value proposition.  Furthermore, Employers of Record want to avoid an excessive “à la carte” approach and will often be limited in the changes/tweaks they’ll allow to their standard employment contracts (as otherwise their own costs will go up significantly).  This is where the benefit of having your own in-house HR expert may be an advantage. However, bear in mind that for some employees, the most important benefit you can offer them is to be able to work in the country they want to work in, so ensure you ask your employees how they value the different parts of your employee benefits package.
7. Following on from the point on benefits, if you are issuing equity to your employees, this is one to watch out for not only from temporary remote work requests but also when hiring somebody via an Employer of Record.  Equity plans can pose challenges because tax and securities laws restrict the ability in many countries to issue equity to people who are not employees of the issuer, otherwise it may create compliance issues for the company or tax issues for the individual.  EORs do have ways to offer ghost equity but it’s got some drawbacks for the employees in particular how it might be treated from a local tax perspective.
8. If you have roles that are actively involved in generating very sensitive Intellectual Property (IP) then you need to be very careful that assignment of IP is built into the Employer of Record arrangement.
9. When you are hiring a high PE risk role (see Permanent Establishment section above).  Senior employees and/or sales-generating employees and/or employees who are actively involved in or sign legal contracts on behalf of the company are a poor option to hire via Employers of Record.
10. When there is low compatibility with the local labour law legislation (see Regulatory Challenges of Employers of Record above)
11. The last point, and possibly the most important, is the risk that being employed via an Employer of Record might create a sense of disconnection between the company and the Employer of Record employee.  This could be detrimental to the company culture in the long-term as that employee may not feel part of the team.

Comparing the Different Types of Employers of Record

One of the advantages of the growth of the Employer of Record market is that it offers companies a wide menu to choose from. 

 

Thankfully there are some useful reports available to get an idea of some of the main players such as the Everest Group report (above an extract).

At a high level, the market is broken into the established players (such as Velocity Global, Globalization Partners, Safeguard Global, Atlas, etc.) and the new kids on the block (such as Deel, Remote, Oyster, etc.).

The newer Employers of Record have typically been established in the last 5 years whereas the established players have been around for longer.  The newer Employers of Record tend to offer very strong user experience in their technology stack and promote the speed and user-friendliness of their solutions.  Whereas the established players tend to emphasise their deeper experience in the industry and wide range of country coverage (although companies like Deel and Remote are challenging this).

How to Choose the Right Employer of Record

It can be difficult to navigate how to choose the right Employer of Record for your needs.  A critical first step is to make sure that for any countries you’re looking to engage that Employer of Record in, that they have a direct legal entity there.  

Another aspect is to make sure that the Employer of Record you’re dealing with has a strong focus on compliance.  This can be quite tricky to assess, but the easiest is to speak to other colleagues in your industry who have used Employers of Record and ask their view.  You can also speak directly with the various Employers of Record and get their view on how they address permanent establishment risks and the labour law compatibility challenges of Employers of Record.

• For Employers of Record that have a low compliance focus and a low country presence, in general these should be avoided as they will likely have a high risk appetite and a low compliance capability. So you’re asking for trouble.
• For Employers of Record that have a low compliance focus and a high country presence, then these should be used selectively and require heavy due diligence to ensure that no high risk roles are accidently employed via them, for example.
• For Employers of Record that have a high compliance focus and a low country presence, these can be excellent additions to any Employer of Record programme so only a limited due diligence may be required.
• As for Employers of Record that have a high compliance focus and a high country presence, the old “trust but verify” adage applies.  For these kinds of players, price will potentially be an issue, as opposed to worrying about compliance risks.  

The most important step when approaching Employers of Record is to check the countries you’ll require their services in, understand your risk appetite and understand your budget.  It’s also a given that it’s vital to check their customer service record, which you can do by visiting websites like Trustpilot and G2.

Lastly, if you are dealing with a high-risk country, it may be helpful to check whether the EOR you’re dealing with and/or the staff within that local EOR have a long history of dealing with employment law, tax and similarly EOR related issues in that country.  The more employees and/or the longer experience those internal EORs employees have had in a country over a longer period of time, the more insights they will have on all the local challenges and nuances that can happen (e.g. You want to ensure they’ve regularly dealt with dealt with a termination or a labour dispute from an EOR perspective, etc.).

P.S. There are some good guides on the various Employer of Record websites such as this one, this one or this one, but the best starting point is often the Everest Group report mentioned above.

The Future of Employers of Record

The future of Employers of Record is an exciting one.  In Mercer’s Global Talent Trends study “96% of companies will redesign their HR function” and 54% will use “agile HR resources to flow to evolving HR project/enterprise needs”.It is vital that global mobility, talent mobility, corporate tax, talent acquisition and HR teams work closely together to analyse the opportunities Employers of Record offer when moving to an agile, globally distributed workforce.

It’s stating the obvious that companies have moved beyond a 30km hiring radius of their physical offices.  This has been further reinforced by surveys such as the recent Manpower survey that indicated that 77% of employers reported difficultly in filling roles which is a staggering 17-year high.  This is also reflected in the data in the graph above from the EY 2023 Mobility Reimagined Survey which shows that the number of unfulfilled job vacancies remains at elevated levels.  Interestingly, within that same survey “92% of respondents believe that aligning mobility strategy to organizational objectives helps in attracting and retaining top talent, but most respondents don’t strongly agree their organizations are equipped to handle risks”.

So the goal is clear.

What is less clear is the HOW.  

And that is where Employers of Record come in.  

They are a vital part of the toolbox for developing a true international hire from anywhere model.  They’re not the full solution, or the only tool, but they’re an important part of any hire from anywhere strategy.

At Work Form Anywhere, we see Employers of Record as being part of a holistic approach to both temporary and permanent remote work.  

In some scenarios a legal entity (legal entity or branch set-up, secondment between legal entities, registering as foreign employer, etc.) is the answer.  

In others, in particular for temporary remote work, a digital nomad visa might be attractive.  

With the fractionalisation of skills and work, an agile enterprise of the future will know when is the right (and wrong time) to deploy independent contractors, especially for short-term projects.  

Likewise, Employers of Record will have the moments to shine, especially for low PE risk roles where speed is of the essence.

Conclusion

“The global EoR service model is a true human potential and organizational agility enabler, specifically designed to help companies facilitate their strategic ambitions and accelerate improved outcomes.  But the marketplace is crowded, confusing, and mildly differentiated in terms of vendor capability.  I absolutely caution global EoR buyers to over-emphasize the due diligence here…go slow, to go fast.”

 Pete Tiliakos, Founder GxT Advisors 

Countries are not afraid to clamp down on some of the blind spots around Employers of Record, just take the $1.4bn permanent establishment fine issued to Gucci parent Kering a number of years ago.  In the last few weeks we’ve already seen Spain and Bali clamp down on digital nomads and remote workers, so it’s important that a balanced approach is taken to Employers of Record and to be aware of the risks of engaging them. 

The bottom line is to be fully aware of the risks of engaging Employers of Record and to make sure you’re going into the relationship eyes wide open.  

• Be clear on what roles are in or out of scope for Employers of Record.  
• Be clear on which countries are in or out of scope.  
• Be clear on the requirements you’ll need for any Employers of Record you’ll engage in, such as ensuring they have their own legal entities in the countries you engage them in.
• Be clear on having internal resources dedicated to co-ordinating the relationship with Employers of Record, and ensure they have the right resources in place (including external and internal advisors, as required).

We have mentioned it in previous articles about how the above example from Hopin’s hire from anywhere* policy points to where we see this evolving in future.  

It will be a future where global mobility and talent acquisition will be strongly connected and will work closely together to proactively access the international talent pool whilst managing the multitude of interdependent compliance risks.

It will be a future where employees, instead of going through 6 different rounds of interviews only to find out that your company doesn’t hire remotely where they work, will find out up front what’s possible or not, leading to a dramatically improved candidate experience.

The best piece of advice we can offer companies is to challenge the traditional mindset internally that you must start with a legal entity.  Doing so highly restricts the opportunities of your company to fully leverage access to the global talent pool.  

Instead, start with Employers of Record and rule them out as an option before considering setting up a legal entity.  

There may be perfectly good reasons for discounting them, but not considering them as part of the equation means your company is missing out on an opportunity to move to an agile, globally distributed workforce.

*P.S. Did you know that Imelda Keane, our Head of Global Mobility Strategy, helped put together Hopin’s hire from anywhere strategy? She is also happy to show you how our own platform works which automates the risks assessment and solutions for both temporary and structural remote work requests can be a great aid to build your Geo-Strategy.  She’ll be discussing these topics and more in a Fireside chat on 12th April 2023.  You can register here to attend or to access the recording.

If you’re curious to learn more, feel free to reach out to Mel directly or visit our website and she’d be happy to share her lessons learned.  See below for a screenshot of our platform which allows you to identify when the right (and wrong) moment is to use an Employer of Record.  You can also access a free 7 day trial of the platform here or check out our Global Footprint Health Check to discover whether you’ve already created any red flags while expanding your hiring into new regions.

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