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How does employer of record work?

An employer of record can help you manage your workforce in a new country, but what is it and how does it work?

Hiring employees overseas can be a great way to optimize labor costs, broaden your talent pool, or expand into a new market. However, when employing people overseas, you’ll encounter a host of legal and administrative challenges. An employer of record (EOR) company can help you overcome these, by assuming legal responsibility for your locally based employees, and ensuring every aspect of the employment is managed according to the labor laws of the host country.

So, how does an employer of record work?

What is an Employer of Record (EOR)?

An employer of record is a company that helps foreign businesses hire and manage the employment of their workforce. It serves as the legal employer for all locally based employees and will handle all the details of their employment including paying taxes, paying wages, and ensuring they receive their full work entitlements.

In the most basic sense, they can serve as your HR department in that country. For example, if you’re a UK-based company looking to hire a few dozen employees in South Africa you can manage their employment through an EOR. You will pay a regular fee to the EOR based on how many people you have employed, and they will pay your employees. Aside from that the working relationship runs as normal.

The key benefit when using an EOR is that for all tax and legal requirements, they will be the legal employer. That means you will not have to establish a legal entity in the country. It’s a great light-touch way to work in a country.

What does an Employer of Record (EOR) do?

Put simply an EOR will handle all the admin details of an employee that would normally be managed by an HR department such as

1. Onboarding and contracts: They will run the full onboarding process with new staff such as any inductions and drawing up contracts. Using their local knowledge some EORs may be able to help you source talent in the country helping you to find the right people for the right roles, even when working in a foreign country.

2. Payroll, tax, and benefits: They will process payroll and ensure employees receive all benefits. These will at least meet the minimum requirements under labor laws, but if you want to make yourself a more attractive employer, there’s nothing to stop you from offering a little bit more. They will also withhold any taxes from employees making sure everything is paid on time.

3. Compliance: The local knowledge of an EOR will be essential in helping you

ensure compliance at all times. When working in a new country you’ll have to abide by unfamiliar labor rules, which can change at any one time. Foreign companies can easily make compliance mistakes, especially when new rules come into force. An EOR will help you avoid invoking the wrath of the authorities.

Importantly, an EOR will be the legal employer as far as the authorities are concerned. As well as handling all the admin requirements, they will take on legal liabilities. If there are any contraventions, it will be the EOR rather than your company that will be held accountable.

EOR vs other forms of hiring

Using an EOR is not the only possible approach. Depending on the type of people you’re employing you may choose several others such as:

1. EOR vs Independent contractors

Hiring freelancers directly can seem quick and simple. There are many international job boards connecting people and companies from all over the world. The good thing about hiring contractors is that they are flexible and handle their taxes. However, on a job-by-job basis, they can be more expensive than full-time employees, so if you work with them regularly you might find it’s cheaper to adopt the full employment route.

Equally, authorities are increasingly keen to stamp out any incidents of disguised employment, in which companies class workers as contractors to avoid tax requirements.

2. EOR vs PEO

A Professional Employer Organization (PEO) works similarly to an EOR and is often grouped. However, the key difference is that employer obligations will be shared between you and the PEO which means you’ll have to set up a legal entity in the country.

A PEO can provide a range of HR services including insurance, payroll admin, tax filing, worker compensation and other duties that might be undertaken by your insurance company. They will effectively be your HR department on the ground.

An EOR will also provide compliance management which helps you keep up with all legal requirements.

3. EOR vs Local entity

The standard approach has been to establish a legal entity in that country by setting up a subsidiary. However, this is expensive and involves taking control of setting up the company, staffing it and handling all payroll requirements. This will normally involve hiring dedicated staff who will handle all the admin regarding your

employees.

This can be time-consuming and involves a significant financial and logistical commitment. While it gives you complete control and oversight, it will take up your time. An EOR on the other hand only needs a contract with the EOR who will then handle every aspect of the employment freeing you up to concentrate on your key strategic objectives.

When to use an EOR?

The value of an EOR is its speed, affordability and convenience. It’s a safe and low-cost way to hire staff with the help of dedicated local experts. Common use cases include:

Trying out a new market: Expanding to any new market is fraught with difficulties. Even the biggest corporations have found successful models from one country floundering in another. Using an EOR avoids the expense of setting up a local entity which means you can test the ground of a new market without committing huge investment. If things go wrong, you can quickly step back.

Avoid compliance risks: Staying in line with the law is one of the biggest challenges when hiring foreign staff. A local entity that takes on legal liability removes much of the compliance risk associated with working with an unfamiliar regulatory regime.

Sourcing specific remote talent: Moving into a new market can be a good way to hire talent that you might not be able to access at home. In this case, you’ll only need a small number of employees making EOR a much more cost-effective alternative to establishing a subsidiary.

Moving freelancers full-time: If you only need ad-hoc work from a few professionals, it often makes sense to hire contractors. However, as time goes by you may find the working relationship develops into something more regular. If so, it may be time to take them on full-time. In that case, moving them into an EOR can be the best way to manage the evolving working relationship.

Why start hiring in South Africa

The number of EORs in South Africa has risen considerably in the last few years to cope with rising demand from foreign companies. They come for several reasons:

A diverse and educated workforce: South Africa’s workforce is highly educated across a wide range of disciplines. They can offer high-quality services on much more than just the usual low-cost professions but can offer highly skilled professionals across all industries, including finance, marketing, and software development.

Low labor costs: Although wages have been rising in South Africa, as the economy has picked up, South African labor is still much cheaper than in the West. It’s a great opportunity for businesses to access talented people at a substantial discount.

No language barrier: English is widely spoken, with a neutral accent which breaks down the barriers other outsourcing locations can face.

Convenient time zone: South Africa is only a few hours different from Europe making it a convenient place to collaborate with foreign-based staff.

Favorable regulations: The South African government has welcomed foreign investment with open arms. Any company generating employment in South Africa can benefit from a range of incentives. Once these are taken into account the financial argument for hiring in South Africa becomes second to none.

Whatever your reasons for hiring staff in South Africa an Employer of Record can offer a low-cost way to manage all your staffing requirements. Whether you’re looking to hire just a few employees or work towards a growing and thriving South African operation, Future Teams can help you meet your strategic goals. To find out more, download our handy guide today.





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