What is an Employer of Record (EOR) in Employment / Staffing?

[What are the benefits of using an employer of record? 

What is the definition of an Employer of Record? 

An Employer of Record is the official employer of a workforce for compliance purposes. They are also sometimes known as the ‘statutory employer‘. The Employer of Record is often contrasted with the ‘worksite employer’, (also known as the onsite employer’ or ‘operational employer’), who is the individual or body that has direct supervision of workers in a workplace. 

As the official employer, the employer of record is usually responsible for processing payroll, payroll and income tax compliance, social security deductions and benefits administration.  

The difference between Employers of Record and Professional Employer Organizations (PEOs)

Sometimes the terms ‘Employer of Record (EOR)’, and ‘Professional Employer Organization (PEO)‘ are used interchangeably. However, an EOR and a PEO are different things. 

While most PEOs offer Employer of Record services, not all Employers of Record are PEOs. For example, in some US states a special type of Employer of Record known as a ‘public authority’ or ‘fiscal intermediary’ has specific powers to be the statutory employer for home carers.

Under the law, these are Employers of Record, but they are not Professional Employer Organizations, as defined by state law, nor do they advertise themselves in that way: Unlike a PEO, these entities are not a commercial service available to all businesses seeking an HR compliance solution. 

For more on the difference between EOR and PEO see our EOR vs PEO comparison guide. 

The difference between an Employer of Record and an employee leasing company

Employee or staff leasing began in the 1960s as a way of managing employer pension contributions and workers’ compensation premiums. While the concept of employee leasing still exists today (and some companies still use it in their bam), most employee leasing companies have rebranded as Employers of Record or PEOs.

While the concepts of Employer of Record and employee leasing are very similar, there are a few differences. Namely: 

• An employee leasing company has more control over employees than an Employer of Record. While the details depend on applicable laws and the employee leasing agreement, generally speaking, the employee leasing company has some say over worker pay and conditions. If the employee leasing company is not satisfied, they are not required to lease that employee to the worksite employer. 
• A leased employee may work on successive contracts. With an Employer of Record, in most cases, the employee’s contract begins and ends with their time spent with the client company. This could be onsite, or working at the client company’s direction as a remote employee. By contrast, in employee leasing it is common for the worker to finish with one client company, and then be engaged by another. 
• Employee leasing may have an increased risk of dispute/ litigation. In employee leasing, it is not completely clear which legal responsibilities lie with which party; for this reason, employee leasing has commonly been subject to litigation. 

How does an Employer of Record work?

An Employer of Record enters into agreements with client companies or organizations to provide the services set out and that agreement. While the EOR agreement or contract is the most important document, the relationship is also governed by applicable laws and regulations. 

Usually that agreement will commit an Employer of Record ito the following services: 

• Payroll processing, for the agreed amounts on an agreed schedule
• Administering benefits and deductions, covering health insurance, pension/401K contributions, and workers’ compensation among other things. It also covers other benefits such as annual leave and sick leave administration.
• Employee income tax withholding and payroll tax.  payroll taxes,  also commonly known as employment taxes, cover compulsory medical and employment texts that both the employee and the employer need to contribute to.
• Tax and employment compliance. This includes sending the necessary forms to the tax authorities and making payments when necessary.
• Contract administration. This covers the initial drafting of the contract, but also the off-boarding of the employee if they are terminated or resign. 

What do Employers of Record not do? 

Employers of Record do not usually do everything that a regular employer would. They do not do: 

• Recruitment, though this may be an additional service that a Professional Employer Organisation might provide for an additional fee. 
• Visa assistance and global mobility. This covers applying for visas on behalf of employees, sponsoring those visas and managing the work permit process
• HR strategy. This covers ad hoc consultancy and advice on matters such as the appropriate mix of employees and contractors, and whether to hire internationall. 
• Employee performance management. This covers performance plans, performance review and associated pay rises. 

Pros and cons of Employer of Record solutions

Why would you wish to engage an Employer of Record? Some of the benefits of engaging one are considered below. 

The Benefits of Employer of Record Solutions

An Employer of Record arrangement can have a range of benefits both to the organization itself, and to the employees, including: 

• Cost savings for the business. By engaging an Employer of Record, an organization outsources a range of payroll compliance and HR obligations. As the Employer of Record is a specialist in employment compliance, it can often provide services more cost-effectively than those doing it in-house. 
• Enhanced compliance. An Employer of Record is completely familiar with the labor and tax laws that govern employment. This means they are generally less likely to make an error than a regular company or organisation. Furthermore, according to the terms of the engagement contract, the Employer of Record is contracted to take on the legal liability for many of those formal employment tasks.
• Improve employee health and well-being. An Employer of Record system was introduced in California to enable home carers to access employee benefits. Without an Employer of Record sit up, those employees were treated as independent contractors, and did not have access to health insurance, pension contributions, sick leave and the like. 
• Avoid employment misclassification. Related to the previous point, is it common for businesses who don’t use an Employer of Record set up, to engage workers as independent contractors when they should have been employed. This is known as ’employer misclassification’ and constitutes a major risk for business that could be subject to claims for unpaid taxes, employee contributions and applicable penalties.
• Simplify internal processes. By contracting out employer compliance to a third party, the organization can focus on its core business. This is particularly beneficial for smaller businesses such as doctors offices

What are the disadvantages of an Employer of Record solution? 

Employer of Record solutions are not for everyone. They do come with some receive disadvantages or risks: These potential disadvantages include: 

• A narrow service selection. Employer of Record solutions do not necessarily include recruitment, visa assistance, employee relocation assistance, background checks, and human resource consultancy. For these services it is often better to go for larger companies that market themselves as ‘Professional Employer Organizations’ or ‘payroll companies’. 
• Compliance ambiguity. Sometimes, an Employer of Record solution can leave it unclear to employees and other stakeholders who is the employer, and for which purposes an individual is the employer. For example, is the Employer of Record liable for health and safety on the work site?  Furthermore, engaging an Employer Record solution, will not always remove employment tax liability from the worksite employer. The IRS has held in several cases that the the worksite employer still meets the ‘common law employer’ test applied by the IRS for liability. This means that if the Employer of Record disappears with employment taxes owing, the worksite employer/client company can be liable. In order to deal with the possibility the IRS introduced a certified Professional Employer Organization system.
• Reduced control. When a client company engages an Employer of Record, they handover some control over payroll to a third party. This means, for example, that if there are errors in payroll processing, the client company cannot immediately fix them (except by leaning on the Employer of Record).

Managing the potential risks of an Employer of Record solution

The risks or disadvantages of Employer of Record solutions are best managed through the following two steps:

• Choose your Employer of Record Carefully. When searching for a good EOR company, look up online reviews and testimonials, and ideally talk directly to other clients of the Employer of Record you are interested in. Furthermore, make sure that the Employer of Record provides the exact services that you need. For example, if the fiscal intermediary (a particular type of Employer of Record in public sector contexts) may not serve commercial enterprises at all. Or, a national Employer of Record I only served clients within the country. They may not be able to work internationally (for that you need an international EOR)
• Sign a robust Employer of Record contract. An Employer of Record contract should identify exactly which services are to be provided, and who has legal responsibility and liability for which aspect of employment.