Employer of Record (EOR) services can be some of the most beneficial talent solutions available to businesses. But they can also be the most misunderstood.
When they’re used correctly and provided by the right partner, EOR services can help companies uncover significant time and cost savings, and even mitigate legal risks.
If you’re unfamiliar with what an EOR is or how it works, you’ve come to the right place. In this comprehensive guide, we’ll define what exactly an EOR is and what services are included. We’ll also highlight the main benefits of EORs and share tips on how to figure out whether this is the right solution for you.
In this guide, we cover:
An Employer of Record (EOR) is a third-party organization that is accountable for employing a worker on behalf of a client. The EOR takes responsibility for handling all taxes, benefits, insurance, and other statutory and administrative costs associated with that worker’s employment.
An EOR handles all personnel functions for the workers it employs, including:
Outsourcing these tasks eliminates the burdens that come with managing temporary or other indirect employees. The workers will provide services for your organization, but you will not legally serve as their employer.
By handling administrative tasks and employment responsibilities, an EOR frees up a company’s internal resources while providing access to talent without the commitment of direct hiring. Let’s take a more in-depth look at some of the benefits of using an EOR.
Better Compliance Management
EOR providers specialize in employment law compliance and help customers avoid the need to make risky worker classification decisions. This expertise is particularly valuable when you need temporary or contract workers but want to avoid the complexities of managing independent contractor classifications or temporary staffing arrangements yourself.
Worker classification is one of the most complex areas of employment law. Misclassifying a worker as an independent contractor when he/she should be classified as an employee can result in significant penalties, back taxes, and liability for benefits and overtime pay. EOR providers allow you to establish an indirect relationship with crucial talent and resources without asking on any risk that you have classified a worker who should have been an employee as an independent contractor.
The EOR becomes the legal employer for payroll and tax purposes, handling W-2 reporting, tax withholdings, and statutory compliance.
Time Savings
Organizations often need temporary or project-based employees to supplement their workforce. While these workers provide valuable flexibility, they also require significant administrative work for onboarding, payroll processing, and benefits administration.
Partnering with an EOR allows you to outsource these time-consuming tasks, freeing up internal resources to focus on core business activities. The EOR handles administrative work like onboarding, payroll services, and benefits administration, creating a more streamlined process.
Cost Savings
EORs can help organizations achieve cost savings in multiple ways. Internal teams no longer tied up with administrative tasks can focus on revenue-generating activities. EOR providers also offer competitive payroll processing rates and can be more cost-effective than building internal capacity for temporary or contract worker management.
Greater Flexibility
Partnering with an EOR gives companies the opportunity to take advantage of a “try-before-you-buy” model for workers. If you’re not sure how an employee is going to perform or fit in with your organization, bringing them on as a part-time or temporary worker through an EOR lets you assess their abilities and their work.
If the worker proves to be a good fit, most EOR providers offer conversion services to help transition them to your direct payroll, often at no additional cost.
Scalability
EOR services are particularly valuable when expanding into new geographic markets. Each state has different employment laws, tax requirements, and regulatory obligations. An experienced EOR provider understands these variations and can help ensure compliance regardless of where your workers are located, without requiring you to establish legal entities or payroll systems in each new location.
One of Broadleaf’s Managed Service Provider (MSP) clients had an Employer of Record that was taking up to 15 days to payroll candidates. We took on those payrolling responsibilities and had candidates payrolled within six days. By significantly reducing the timeframe, we saved the client valuable time and resources, allowing new hires to start working faster.
A manufacturing and distribution client in the building construction market came to Broadleaf looking for workforce management support. Our team worked to identify inefficiencies with the client’s contingent workforce management and found ways to correct them. We achieved cost savings at both the corporate and local levels within the first six months by centralizing contingent labor management and identifying rogue spend.
EORs are frequently confused with other HR or talent solutions that may involve similar services. So now that we’ve defined an EOR and the benefits associated with it, we can clear up some of the common misconceptions surrounding this solution.
An EOR is NOT a Staffing Agency
An EOR is often confused with a staffing agency because both are in the same realm of talent solutions.
But while a staffing agency is responsible for sourcing employees, an EOR focuses on what happens toward the end of the hiring process, after candidates have been sourced and identified.
A staffing agency handles things like job postings, interviews, and offer negotiations. An EOR is responsible for the work that comes next, including background checks, onboarding, and paperwork.
Learn more about the difference between these two talent solutions by reading our staffing agency vs. EOR blog.
An EOR is NOT a PEO
An EOR is also frequently compared to or confused with a Professional Employer Organization, or PEO. The two solutions offer similar services and benefits, but EORs are typically more robust in coverage.
The main difference between the two is their role in employment. A PEO acts as a co-employer, while an EOR serves as an official and legal employer.
When a company hires a PEO, they can outsource certain administrative tasks and responsibilities to that third-party. However, the company itself remains an official employer of its workers, meaning the company retains some of the risks and liabilities for its workforce.
Unlike a PEO, an EOR serves as the official and legal employer of workers. So in addition to handling those time-consuming HR tasks related to a contingent workforce, that third-party provider takes on full responsibility and liability for the employees on its payroll.
An EOR is NOT a Payroll Processing Service
A common misconception is that an EOR is just a payroll processing service. And while an EOR does provide payroll services for the workers it legally employs, it’s important to note that they cover more than just that.
A payroll processing service doesn’t serve as an official employer – it’s just a third-party company that offers services to organizations to manage employee paychecks, withholdings, and tax filings. They don’t take any legal responsibility for workers.
An EOR will oversee paychecks and benefits administration as a legal employer of your temporary workforce, but will also onboard those workers and provide ongoing administrative support and employee contact to ensure job satisfaction.
An EOR is NOT a Common-Law Employer
One of the biggest benefits of an EOR is that you get to retain full control over business operations and day-to-day work while offloading the more tedious administrative tasks. An EOR doesn’t delegate work or monitor operations.
Common-law employers, on the other hand, do have more control over the work an employee is doing. Instead of taking on administrative tasks like background checks and onboarding, they typically focus more on coordinating when, where, and how work is done.
An EOR Provider is NOT an EOR Platform
In addition to EOR services, there are also EOR platforms on the market that companies can use. These are two completely different solutions, and it’s important to make sure you find the solution that works best for you and your organization.
An EOR provider is a third-party company that you can really think of as a partner. A provider will assign a team of experts to work with you, learning the ins and outs of how your business operates and the goals you’re trying to reach. They’ll serve as the legal employer of your indirect employees, putting them on their own payroll, and work closely to onboard and train them.
An EOR platform is a tool or software that your internal HR team can use to manage payroll, benefits, and compliance tasks. Instead of outsourcing those functions, your team will be required to handle that more tedious work – with some assistance from the software. So instead of completely taking the administrative tasks off your plate, you’re just streamlining that work.
Like any talent solution, EORs do come with some risks. It’s important to be fully aware of what’s involved with the solution you choose and to properly vet any providers. The right EOR partner will help put your mind at ease about any potential risks.
An EOR should not take over your internal HR team. The purpose of an EOR is to help alleviate your internal teams by providing support and handling some of the more time-consuming administrative work associated with hiring temporary staff.
With an EOR, your company will still be sourcing its own talent and identifying the candidates you want to hire. You’re just outsourcing the personnel functions, like onboarding and training.
But if your organization prefers having full control over every aspect of the hiring process, this may not be the right solution for you.
It can be nerve-racking to trust an external organization with any kind of information related to your business. If your EOR provider doesn’t have the right security in place, you could be opening yourself up to a data breach.
To avoid this, you’ll want to make sure you properly screen any potential EOR partners. Talking to them about what security measures they take will ensure you’re protecting yourself as much as possible.
An EOR does assume liability for the workers on its payroll. But you still won’t be completely off the hook for legal responsibilities.
If your EOR misclassifies workers, your organization could still technically face penalties. It’s crucial that you vet your EOR and check that they’re familiar with all classification laws – especially if you use freelancers.
You should also keep in mind that while using an EOR typically lowers your risk for co-employment issues, you’re still responsible for other legal aspects of the job, like workplace safety and compliance.
Remember, an EOR won’t replace your HR team. They aren’t responsible for things like providing protective equipment, assessing safety, or following OSHA regulations.
With so many talent solutions available, it can often be hard to figure out which one is right for you and your organization.
Here are some of the scenarios where you may find it most beneficial to use an EOR:
There are also some scenarios where this is likely not the ideal talent solution for you. Here are some of those times when you should skip using an EOR:
Remember, you want the talent or HR solution you choose to work for you. That means finding the right solution that offers the services you need which will help you reach your goals and overcome the unique challenges you face.
If you’ve decided that an EOR is the right solution for you and your organization, the next step is to thoroughly research different providers so you can find the right partner. Remember, the right EOR provider will alleviate your internal teams of labor-intensive administrative work, providing both time and cost savings. Here’s what you should research or ask about when considering potential EOR providers:
You’ll want to make sure your EOR services fall within your budget. The goal is to save money by outsourcing these tasks, not cost yourself more.
First, you should ask about the pricing structure. Different providers will use different models – whether it’s a flat rate based on the number of employees or a percentage of each employee’s salary.
In addition to the base pricing structure, you should also ask about any other fees you may incur while using their services. Some providers will charge an onboarding or setup fee to get you started or upcharge for services they consider specialized.
Request a transparent pricing breakdown from each provider so you’re not caught off guard by any hidden fees or unexpected costs.
The length of an EOR contract will typically fluctuate depending on your needs, the model your provider uses, and where the employees are located.
Aside from contract length, you’ll want to carefully read the scope to make sure all the services you need are included. The contract should also outline what exactly the EOR provider is responsible for and what your organization will have to handle.
You should also check the contract for any potential red flags, like vague language about pricing, contract termination, compliance and liability, security and data protection, and service failures.
If you’re looking for a provider that offers EOR services outside your region, it’s critical that you properly assess their presence. Your provider should have a thorough understanding of the regions in which you’ll have employees so they can ensure compliance with all local laws, regulations, and pay rates.
When evaluating different providers, you should check where they have locations, and which states they operate in. Having that physical presence gives credibility to their knowledge of the region and how employees should be treated.
You should also specifically ask any potential provider about their knowledge of local laws and regulations, how they stay updated on changes, and what they do to ensure compliance. You may also want to ask for proven experience in the form of case studies or references from other clients.
Entering into an EOR partnership means your provider will have access to your organization’s sensitive data. When vetting providers, you should ask them what kind of security features they have in place to protect that data – and ultimately, your company.
At minimum, your EOR provider should have data encryption and masking in place to keep sensitive information protected, as well as multi-factor authentication and role-based access control measures that prevent unauthorized access.
Workforce needs and product demands can change quickly, and it’s important to ensure your EOR provider can adapt to meet your needs as they evolve.
The right EOR provider will be able to flex with you and have the resources needed to ramp up services and take on more responsibility. When you’re evaluating different providers, be sure to ask about their scalability and what support is available if your needs change down the line.
Again, one of the benefits of an EOR is employing workers on a trial basis. But if you find a temporary employee who would be a great permanent fit for your company, do you know what it could cost you to bring them on full-time?
You should ask any potential EOR provider about payroll employee conversions and how they’re handled. Most providers offer free conversions, so it won’t cost anything to transfer an employee from their payroll to yours. But it’s still important to ask if there’s any conversion fee – and to check that your contract reflects that.
EOR services can be a great solution for companies looking to take full advantage of indirect hires without the risks and burden of time-consuming administrative work.
Whether you’re looking to expand into new regions, onboard contingent workers, or just alleviate an overworked HR team, an EOR can help.
If you feel like partnering with an Employer of Record is the right move for you, or still have questions about these services, contact our Broadleaf experts to learn more.
