Employers of Record (EORs) help businesses compliantly employ international employees and avoid some of the potential pitfalls of managing global remote teams through three different business models — direct, indirect, and hybrid.
To choose the right EOR for you, it's essential first to understand that each model has advantages and disadvantages related to cost, compliance, control, and flexibility.
We'll break down the three operating models, including pros and cons, to help you determine the right type of EOR for your company’s global expansion goals.
Key takeaways:
- EORs operate via three distinct models — direct, indirect, and hybrid.
- Before choosing an EOR provider, you should evaluate the advantages and disadvantages of each model.
- The best EOR provider for your business will depend on your company’s size, expansion goals, and budget.
The Indirect Model
EORs that utilize the indirect model don't own legal entities in the countries where they operate. Instead, this model works similarly to subcontracting, with indirect EORs partnering with local providers on the ground to provide the necessary employment services.
For instance, let's say an EOR based in France is helping an EU-based client employ remote talent in Jordan. Instead of setting up its own Jordanian subsidiary, the EOR contracts with local Jordanian service providers to provide onboarding and payroll services, manage benefits administration, etc.
In the indirect model, the local partner handles all the employment responsibilities for the client's new hire, while the EOR manages the overall relationship with the client.
Pros of the Indirect Model
The indirect model offers many benefits to EORs and their clients. Primarily, it provides flexibility, allowing EORs to quickly adapt to changing client needs. Since the EOR doesn’t have to absorb the expenses of setting up and maintaining foreign entities, it’s also the most cost-effective option.
Additionally, the indirect model enables a broader geographic reach. By leveraging local partners, EORs can offer services in more countries where establishing a direct presence could be complex or time-consuming.
As a result, EORs using the indirect model often have a larger footprint and can support clients in more countries than EORs operating on the direct model.
Cons of the Indirect Model
There are some potential drawbacks to the indirect model, including possible service quality inconsistencies.
While most client experiences are smooth, relying on a third-party local entity can introduce the potential for delays or communication gaps when resolving issues or responding to client questions.
The Direct Model
In the direct model, EORs take a hands-on approach by establishing their own legal entities in the countries where they operate. This means the EOR serves as the legal employer for a client’s employees and directly assumes all responsibilities related to employment contracts, legal compliance, global payroll processing, compliance with labor laws, and other HR functions.
Unlike the indirect model, an EOR that uses the direct model does not work with third-party partners. Instead, the EOR is fully accountable for staying abreast of local laws and regulations, ensuring compliance, and managing all aspects of the employment relationship.
This direct presence provides greater oversight but also increases operational complexity and cost.
Pros of the Direct Model
One of the advantages of the direct EOR model is that by establishing their own entities EORs have greater control and visibility over all aspects of their operations.
Maintaining regional entities also streamlines processes, as there's no need to rely on third-party intermediaries for communication or problem solving — leading to faster response times and improved efficiency.
Cons of the Direct Model
There are some limitations to direct EORs, the most significant being diminished geographic reach — since they can only operate in countries where they’ve established a legal entity.
Pricing for direct model EORs also tends to be more expensive as the EOR is responsible for all operational expenses associated with maintaining its entities.
Often, this results in direct model EORs having a smaller global footprint and higher prices than EORs operating on an indirect model.
The Hybrid Model
The hybrid model combines elements of both the direct and indirect models. This method allows EORs to prioritize flexibility as they expand their global reach.
EORs that choose this model strategically establish legal entities in key markets where they see a strong need for direct control and presence. At the same time, they leverage partnerships with local providers in other regions to extend their reach and tap into local expertise.
This mix of direct and indirect operations allows hybrid EORs to offer clients a broader range of solutions.
Pros of the Hybrid Model
The hybrid model's strength is its adaptability. It's a particularly good fit for companies seeking customizable solutions that help balance costs.
Combining direct and indirect approaches allows hybrid EORs to tailor their services to specific client requirements. This model also allows them to offer services in a broader range of countries than a purely direct model does.
Cons of the Hybrid Model
The primary con of the hybrid model is the potential for inconsistent service. Since the model relies on a mix of the EOR's entities and third-party partners, it can be challenging for the EOR to maintain a consistent level of service across its network.
Additionally, the hybrid model can be more complex to navigate internally, requiring unique management processes and communication channels to ensure smooth operations and client satisfaction.
Choosing the Right Employer of Record Service for Your Business
Selecting an EOR is an important step for any business venturing into international markets.
The right EOR partner makes it easier to navigate employing a global workforce.
Before making a choice, first consider your:
- Business size and structure
- International expansion goals
- Complexity of local employment laws
- Employee experience
- Budget
By carefully evaluating these factors and comparing the strengths and weaknesses of direct, indirect, and hybrid models, you can confidently select the EOR that best aligns with your business needs.
Why Companies Choose RemoFirst as their EOR
At RemoFirst, our indirect Employer of Record (EOR) model of working with local partners offers what we think is a superior solution for businesses expanding globally.
Some of the benefits of working with partners include:
- Broader global coverage and deeper local expertise
- Enhanced focus on compliance and mitigating risk
- Greater flexibility and cost-effectiveness
Schedule a demo today to learn more about how our EOR solutions can help your business employ international employees and grow your global team.
