Contractor, local entity or EOR? That´s the question

It is essential for an employer to appreciate the differences before making a decision on which method is optimal for their business objectives and available resources. 

There are two distinct methods for a multinational company to enlist and manage staff in a foreign market: Contractors and EOR.

Contractors run their own business and sell their services to others, unlike employees who work in someone else’s business. They generally use their own processes, tools and methods to complete the work. They usually negotiate their own fees and working arrangements, and can work for more than one client at a time.

Contractors have workplace rights and protections but have different responsibilities relating to insurance, taxation and superannuation.

On the other hand, an Employer of Record (EOR) is a third-party organization that hires and pays an employee on behalf of another company and takes responsibility for all formal employment tasks. Using an Employer of Records allows companies to legally and efficiently engage with overseas workers either in a new country or state, without having to set up a local entity or risk violating local employment laws.

The EOR is charged with carrying out the legal and regulatory requirements of immigration, employment and payroll, but does not participate in day to day work activity.

From the employee perspective, EOR will feel identical to being on payroll, with tax and social security contributions being taken from their monthly paycheck, and the same benefits as any other employee. But for the employer, it eliminates the admin headache and liability. The company can simply engage in a contract with the EOR, and the EOR will outsource the employment to a local partner in the same location as the employee. This local partner also handles HR such as working hours, vacation days, sick leave, and more, reducing operational costs and administrative overhead.

As more companies plan to expand their business globally, it is important to understand that employing abroad directly can be a complex process. Each country has their own rules and regulations regarding compliance, regulatory frameworks, employment laws and taxes. Communicating with specialist tax accountants and employment lawyers will also be necessary, and those costs can rise very quickly. Therefore, setting up an entity can become a costly and time-consuming process which can prove a real distraction to core business.

If a business is looking to expand into a more developed economy in Europe or test a potential market in Latin America, EOR could be a better solution to setting up an entity. An EOR solution is a more cost-effective and faster way to expand a business and hire workers in a foreign country compliantly. Businesses can hire internationally without risk and be operational in a few days without having to set up an entity allowing more time to focus on their core business.

EOR:

• Receive employment benefits, like health care and paid time off .

• Are subject to financial deductions such as income tax and Social Security tax, among others

• May join a union

• Are often protected by state and federal law for overtime, minimum wage, and employment discrimination issues