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June 21, 2024 - by Devico Team

When should you use an employer of record model?

COVID-19 and a general shift toward remote work have reshaped the global workforce market. In the United States alone, 51% of knowledge workers keep a hybrid cooperation model, and another 20% work entirely remotely. In the United Kingdom, these numbers are even more significant, with 67% of the workforce engaging in some form of remote work.

However, there is a spoonful of tar in a barrel of honey — below are just the top three challenges of managing a geographically dispersed team.

  1. Communication barriers: Different time zones and lack of face-to-face interaction can lead to miscommunications.

  2. Cultural differences: Diverse work practices and legal standards can complicate team dynamics and compliance.

  3. Productivity monitoring: Ensuring consistent productivity across remote teams is challenging without the right tools and strategies.

In this context, employer of record (EOR) services play a significant role. Their simplification of the complex remote hiring and workforce management aspects allows companies to integrate remote workers from anywhere in the world. They ensure compliance and operational coherence by handling employer of record payroll, tax compliance, and benefits administration.

Employer of record as a growth catalyst

Just a common situation: you've identified several old-hand software developers in Eastern Europe who perfectly complement your team. What luck! With some snag, though. Setting up a legal entity in their country seems like a bureaucratic maze.

Yet, when there is a will, there is a way — the best employer of record steps in and turns into your growth engine. Let's explore how EORs lift the HR burden, freeing up your resources to focus on what truly matters — scaling your business and achieving strategic goals.

Which HR headaches you can ditch with employer of record contract

  1. Payroll & taxes: International payroll, taxes, and social security contributions can be tricky since, in the US standalone, they differ from state to state. This is not to mention another country. Your EOR will handle it all: your remote team gets paid correctly, and you stay compliant with local regulations. This frees up your HR team from chasing paperwork and allows them to focus on more strategic initiatives.

  2. Benefits administration: When expanding to other countries it’s important to take into account local culture and their perception of benefits. For example, in Argentina, it’s common to include utility bill compensation in the benefits package. An EOR can help you navigate local benefits offerings or administer a centralized benefits plan, keeping your employees happy and compliant.

  3. Onboarding efficiency: Even in our AI-powered age, we still need time to onboard new people smoothly. And a lot of time. With an EOR, you can leverage their streamlined onboarding systems to get your new team members up and running quickly.

Think beyond HR: a word about strategic advantages

  • Global expansion made easy: One of the most significant employer of record benefits is the speed of tapping into a global talent pool and new markets. This opens doors to a wider range of skilled professionals and makes your growth strategy an A-game.

  • Reduced risks and increased flexibility: EORs handle the legal and administrative risks associated with remote hiring. First and foremost, this gives you peace of mind. Yet, the flexibility matters as well since it eases scaling your team up or down. Need to bring on a seasonal marketing whiz in Australia for the holiday rush? Your EOR can make it happen quickly and efficiently.

  • Focus on core competencies: With the EOR handling the day-to-day employment tasks, your team can zero in on what you do best — whether that's innovation, customer service, or breaking into new markets. Aligning resources toward core competencies consequently accelerates growth and improves overall business performance.

  • Cutting through red tape: Dealing with employment laws, payroll, taxes, and benefits can tie you in knots. An EOR cuts through this red tape. Instead of drawing the line in the sand, you can rest assured that these tasks are managed efficiently. This way, your internal teams can focus on driving the business forward rather than getting bogged down by paperwork.

The Devico difference: We go the extra mile instead of just being an EOR. While we don’t shy away from responsibility, we are flexible enough to allow you to change processes and oversee them. We offer a seamless onboarding experience that makes managing your remote team a breeze.

When does an EOR suits perfectly: Top scenarios

Employment of record gains ground as there are way more businesses becoming global. However, there are also scenarios where using an EOR becomes a game changer.

1/ Rapid international expansion

Just run through this potential expense when expanding to a new market:

  • Registration fees

  • Foreign expert consulting

  • Legal fees

  • VAT registration

  • Bank account setup (research, selection, incorporation documents to present and Know Your Customer process)

And this list is totally incomplete. When you are ready to tap into new international markets, an EOR is your number 1 choice.

Top trick: Before choosing an EOR, check the employer compliance index of the target country, which typically ranges from simple to highly complex. This will ensure that the EOR's capability aligns with local complexities. Also, don’t forget to research the average time to fill remote positions in these target markets. A reputable EOR should be able to significantly reduce this timeframe compared to traditional hiring methods.

2/ Project-based work in foreign locations

An EOR is ideal for projects that require a temporary workforce in countries where you don't have an entity or simply for projects that experience demand peaks throughout the year. Typically, these are e-commerce projects around New Year and Christmas, St. Valentine’s Day, etc.

Moment to pay attention to: Evaluate the project's duration against the break-even point for setting up your own entity, which often becomes cost-effective if the project exceeds two years.

3/ Hiring remote workers globally

We’ve already mentioned Gartner’s report and their statement on remote work becoming standard. For this reason, using an EOR to handle diverse legal requirements is the best step possible.

Top trick: Assess the average employment cost savings per remote worker when managed by an EOR versus in-house. Savings typically should exceed 15% to justify outsourcing. By the way, the average setup cost in the popular direction, Argentina, is USD 14,000+ without accounting support and taxes. This may seem not a big deal, but you can definitely double the amount in practice.

4/ Testing new markets

Testing the waters of the new market but wanting to be sure everything will work out? This is your answer to the why-employer-of-record question. EOR can facilitate this without heavy investment.

Moment to pay attention to: Monitor market exit flexibility offered by the EOR, ensuring you can scale down or terminate the arrangement without significant penalties. Look for EORs with established compliance certifications in the specific countries you're interested in expanding to. This ensures they have a proven track record of navigating local regulations.

5/ Need for rapid scalability

Scalability is crucial for businesses experiencing rapid growth phases. The offered model adjusts your workforce size quickly and legally.

Top trick: Verify the potential partner’s scalability metrics. Pay special attention to the time to hire and the maximum number of hires per month. This way, you’ll be able to check their ability to meet your growth trajectory needs.

Know your problem: how to address potential concerns

Employer of record increases your meaning in today’s business environment. Yet, it also has concerns about the cost and control over your employees. Before applying the EOR model, know how to address these problems.

Cost concerns

Many businesses worry that hiring an EOR might be too expensive compared to in-house management. But consider the hidden costs associated with managing a remote team yourself:

  • Fines and penalties for non-compliance with complex international employment laws.

  • Increased HR overhead due to the time and resources needed to handle payroll, taxes, and benefits for a global team.

  • Missed growth opportunities since it takes much time to set up legal entities in new markets.

Consequence: Companies might continue to manage HR tasks internally, missing out on potential cost savings from reduced legal fees and administrative costs that an EOR can provide. An EOR, in turn, can streamline operations and often offers a more cost-efficient solution when the hidden costs of compliance and setup in new markets are considered.

Control concerns

Very common fear, to be honest. However, using an EOR doesn’t mean losing managerial control over your employees.

Consequence: Frightened by this, companies might resist outsourcing HR tasks. Hence, they stretch resources and potentially have compliance mishaps due to unfamiliarity with local laws. EOR actually allows you to maintain control over all work assignments and company culture while it handles the administrative and compliance aspects.

Time concerns

EOR is a strategic partner rather than just an outsourced service. Such an attitude will definitely transform your approach to global hiring. An EOR enhances operational efficiency and reduces risks associated with compliance and payroll, which are especially critical in unfamiliar markets.

Not convinced? Well, this is not our goal. However, we can provide a sad story. In 2021, oil and gas service company Holland Services misclassified 700 employees. This misstep resulted in the company owing over USD 40M in back wages and damages.

In a nutshell, EOR mitigates legal risks and ensures proper classification and compensation of employees, thereby safeguarding businesses against costly legal challenges and financial liabilities.

To sum it up

EOR services handle complex HR responsibilities like payroll, tax compliance, and employee benefits across different jurisdictions. This simplifies entering new markets and reduces the risk of non-compliance with local laws.

This is a strategic move that allows businesses to focus on core activities and strategic initiatives. Imagine the possibilities:

  • Focus on attracting and retaining top talent.

  • Fill critical positions quickly and efficiently (which basically takes at least 40 days on average).

  • Simplify compliance and streamline your hiring process.

  • Hire the best and brightest, anywhere in the world.

Devico offers a comprehensive library of articles detailing the ins and outs of EOR solutions. But let’s face it, the meeting works better.

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