Handling the responsibilities that come with having employees work for you can be a huge burden for some businesses. In order to take advantage of the benefits of having employees and eliminate some of the responsibilities associated with hiring them, some businesses partner with an employer of record (EOR). These companies manage the process of hiring and paying employees, as well as ensuring compliance with and the completion of all employee contracts and related employment paperwork on behalf of another business. Before partnering with an EOR, it is important to understand what one is, how it operates and how it differs from other staffing models.
What is an EOR?
An EOR is a third-party organization that hires employees and fully compensates them for performing a job for another business. Businesses of all sizes can utilize an EOR. Companies that need employees but do not necessarily want the accompanying burden of having multiple personnel on the company’s payroll can turn to an EOR for partnership.
Often, businesses have both their own employees and EOR-hired workers. The EOR is directly responsible, as the primary partner to a business, for executing all regulatory requirements of employment and payroll for its employees. However, the EOR does not play a role in shaping how the business is run.
EORs can be a real enhancement as it relates to recruiting and managing employees. Using an EOR permits companies to legally and efficiently access and utilize workers without having to set up a full human resources and administrative entity within the business. [Related article: How to Recruit New Employees]
How does an EOR work?
An EOR is much more than an HR outsourcing tool. Rather, an EOR supplies employees for a business and charges a fee for that service. The business receiving employees from its EOR partner pays a service fee for access to the workers.
Here is an example of how an EOR operates. An EOR named ACME Staffing hires five employees for J&J Construction (the customer business). Even though these five employees are directly employed by ACME Staffing, they are managed and scheduled by J&J Construction. J&J Construction manages all day-to-day activities for the business as well as the employees’ duties. ACME Staffing is simply the entity that pays, hires and terminates workers within the employment partnership. ACME Staffing is an employment agency, while J&J Construction manages their business without the burden of employee administration.
An EOR does not involve itself in the day-to-day operations of a business; the business (the EOR’s client) only manages the workers the EOR provides.
PEO vs. EOR: Which is right for you?
A professional employer organization (PEO) and an EOR are similar in many ways. However, there are important differences that companies need to know prior to making the commitment to work with one or the other, as not all staffing strategies are the same.
An EOR allows you to expand your business by adding personnel to your existing workforce. An EOR is typically better suited for smaller businesses. An EOR essentially hires a number of employees to work for your business and places them on their own payroll (while your business may still have employees directly on your payroll). An EOR assumes liability only for the employees that it provides.
A PEO operates under a co-employment model. In this model, a PEO manages the entirety of the employee administrative experience. It handles the payroll and many of the HR-related aspects of the employee engagement. A PEO assumes responsibility for all of the business’s employees and is able to provide all required HR and administrative services.
Generally, when partnering with a PEO, a business signs the employment contracts, while with an EOR, it manages and retains the employment contracts of the workers they hire and pay.
Here is a breakdown of how PEOs and EORs stack up against one another.
|Is recorded as legal employer||May serve as a co-employer (may have, at times, a shared liability)|
|Absorbs all legal liabilities and hires/terminates employees||Shared or joint liability for and administration of employees|
|Often manages a portion of HR-employee relations||Takes on all liability for and administration of employees|
|Does not manage all employees||Manages all employees|
|Assumes total tax liability for employees||Often assumes the full tax burden (although this may vary by state)|
|Records and manages all workers’ compensation claims||Is state-dependent; PEOs may record and manage workers’ compensation claims or may share the burden with the business, or state requirements may have the business manage them|
|Offers services for as few as one employee||Is generally utilized by larger businesses|
|Allows businesses to expand into other states and countries without creating a new business of record||Allows expansion and use of workers in additional states and countries, but only if a business of record has been established|
When partnering with a highly rated PEO, your company pays for the PEO’s insurance as well as your own business insurance. When partnering with an EOR, only the EOR’s employees are covered under the EOR’s umbrella insurance policies.
How can I work with an EOR?
Finding an EOR is easy to do, as there are many to choose from. If you have international needs, you may want to target certain EORs over others, as some are specifically designed to help manage employee administration overseas.
Here are the top four things to consider when selecting an EOR:
Search the web for “best employers of record” or something similar. Some of the biggest EOR services include TriNet (learn more about this company in our full review of TriNet), Innovative Employee Solutions and ShieldGeo. There are many more EORs to choose from, and each has a specialty that may be right for your business.
There are few parameters to the pricing of EORs. Some charge per employee, while others package their fees differently. Just be clear on the cost structure, and be sure to ask about volume pricing.
Structure of partnership
Not all EORs are created equal. Knowing exactly what is covered, or managed, under a provider’s EOR services is essential. Do not be afraid to ask questions about aspects of the service agreement you may not fully understand. Here are some questions to ask an EOR:
- Will your EOR legally employ our worker?
- Do you include new-hire onboarding?
- Are you the direct employer of record, or do you partner with other companies and/or EORs?
- How do you remain current on all state and federal employment laws?
- How do you ensure a diverse workforce?
- What obligations will you be responsible for, and which ones will we have to manage ourselves regarding workers?
- If I am unhappy with a worker, what is the process for replacement?
- Do you have expertise in payroll and tax laws in all relevant states?
- How is your data shared and protected?
- What is your cost structure?
- If I choose to end the service agreement, which steps must I take, and how much time is needed? Will there be any penalties for ending the agreement?
As noted within the questions above, ensure that your team fully understands what is required to end the service agreement with the EOR. In case you must end the partnership, you should fully understand how to do so before you need to.