The Importance of Due Diligence When Choosing an Employer of Record Service Provider
An Employer of Record (EOR) can bring multiple benefits to your business, but how do you ensure you pick the right one for you?
Is global expansion the next step for your business?
It’s no secret that there’s often a lot of red tape and it can take months—or even years—to establish your business in another country.
That’s where an Employer of Record (EOR) comes in.
A good Employer of Record (EOR) can help you quickly expand at a fraction of what it typically costs to incorporate in a new country. This third-party organization will handle the hassle of legal, HR, tax, and local compliance, which allows you to focus on the core of your business.
That said, not all Employer of Record providers are equal. Since EORs are responsible for overseeing a large portion of your international operations, it’s important to find one you trust. This is why due diligence is paramount.
So, what should you look for? Here are some things to consider.
The Onboarding Process Is More Important Than You Think
During a global expansion, many businesses put a sharp focus on hiring the right international team. After all, it’s talent that helps catapult your business forward.
But the work isn’t done once you find your star employees. The onboarding process can actually make or break your business.
The onboarding process is linked to both employee retention and productivity. According to research by Glassdoor, organizations with a strong on-boarding process improve new hire retention by 82% and productivity by 70%. Meanwhile, HR managers claim that a lack of a formal on-boarding process can lead to:
Higher employee turnover
Inefficiency in business performance
Your Employer of Record handles onboarding, which can get quite complicated when dealing with international employees. Immigration laws, visa requirements, and work permit requirements vary from country to country and are dependent on your employee’s nationality. Employment contracts and offer letters need to comply with local laws. On top of that, you need to communicate in a way that shows cultural understanding in order to retain employees and create a positive work environment.
EORs Are Responsible for Local Legal Compliance
EORs aren’t just responsible for managing your international employees — they also mitigate your legal risks within the country of operation. Since your EOR is considered the legal employer, they’re responsible for complying with local laws. You still get to call the shots, but they’ll make sure your operation has the required insurances, adheres to legal minimum wages and mandated employee benefits, and pays the proper local employee taxes.
Beyond that, EORs should have a deep understanding of the local market. They should know which offers are competitive and can attract top talent. Remember: work culture, wages, and the cost of living are different everywhere. Your EOR can act as your cultural sounding board to help you get it right.
Overall, when you’re searching for an EOR, make sure you find one that is well-versed in the country where you plan to expand. A smooth and compliant employee onboarding experience is essential, so make sure they have the knowledge and the processes in place.
Indirect Employer of Records Can Reduce Efficiency
When you’re conducting due diligence, you’ll come across two types of EORs—direct models and indirect models. Some companies may be a hybrid of both:
Direct Employer of Records: Direct EORs fully own and operate the entities in each country that they provide services in.
Indirect Employer of Records: Indirect EORs contract with third-party entity owners and local service providers to manage your global operations.
Indirect EORs can have a greater reach than direct EORs—but it’s often at the expense of efficiency. Each additional party is an extra link in the chain. That means that when a global employee encounters an issue, it can feel like a game of telephone. The message is relayed across multiple companies in different time zones before anyone can even think about a solution. This can slow down business operations and cause administrative headaches.
Direct EORs, on the other hand, haven’t outsourced their operations. If you or one of your employees needs assistance, they can speak directly with in-house local support. Direct EORs are also free to make their own policies and contracts, without having to consider any additional local partners. This model is far more streamlined and efficient, not to mention, typically more affordable.
Before you choose an EOR, make sure you understand exactly how their operations are structured. That way, you can avoid the surprise of getting passed off to a third party when all you were looking for was a quick solution.
Paycheck Problems Make Employees Bounce
An Employer of Record can often take on international payroll duties. This means you won’t have to spend time searching for a foreign payroll service, maintaining a foreign bank account, and constantly keeping tabs on a local HR department. Unfortunately, payroll problems can stop your expansion before it starts.
A study by Kronos found that almost half of US workers will start searching for a new job after just two problems with their paycheck. Choose an EOR that you’re sure can deliver. Make sure to ask about employee support and the payroll processes before you sign on the dotted line.
Avoid Hidden Fees
Typically, it’s far more affordable to use an EOR than create a local business entity on your own. When you create a local entity, you’ll have to spend on everything from local capital requirements, tax compliance, and employment registration to payroll, international staff, and financial and legal council. On average, you could expect to spend as much as 80,000 dollars if you do the job yourself.
EORs, on the other hand, eliminate a large swath of those costs. On average, you can expect to spend around 10,000 dollars incorporating a business in a new country—but some EORs don’t have such straightforward pricing. Generally, you’ll have one of the following pricing structures:
Flat-rate pricing: You pay a flat per employee, typically per month, depending on the employee’s unique needs.
Percentage pricing: The EOR will charge a percentage of employee salaries.
Each pricing structure has different benefits. You could save money on percentage pricing in industries that command lower wages. At the same time, percentage pricing can thwart innovation by discouraging raises and bonuses. Flat rate pricing gives you the flexibility to reward employees as desired.
Keep in mind that your overall spend will change depending on the country. It’s not just about the cost of employee salaries and your EOR. Some countries require employers to pay for additional taxes, pension schemes, and insurance.
When you’re choosing an EOR, ask about all of these costs upfront, including any costs you may incur as you continue to grow. Make sure they outline additional fees so you're not saddled with a surprise bill.