Remote work has made it easier than ever for companies to tap into global talent pools.
However, navigating the complexities of international legal systems and regulations can be daunting for business owners.
Employers of Record (EORs) take on the responsibility of employment law compliance for companies employing a global workforce. But, working with an EOR could also pose some potential risks.
Key takeaways:
- EOR providers simplify global expansion by acting as the legal employer for international employees, overseeing compliance with local employment laws.
- Asking for recommendations, reviewing client testimonials, and requesting pricing breakdowns will help you select an EOR that best fits your business.
- Companies should actively monitor the EOR's compliance with local labor laws and data privacy regulations to minimize potential risks.
What are Employer of Record Services?
EOR services help businesses expand their workforce by acting as the legal employer of the company’s international staff. The EOR partner handles all the legal ins and outs of hiring and managing the company’s employees across borders, like:
- Entering new markets
- Navigating complex local labor laws
- Onboarding new employees
- Managing human resources tasks
While partnering with an EOR offers significant advantages and generally reduces your company's exposure, it's essential to be aware of some potential issues that might arise if you do not select the right partner.
Risks of Partnering with an Employer of Record
Legal Compliance Violations
One of the primary benefits of working with an EOR is that they manage employment legal complexities, including tax regulations, wage laws, and statutory employee benefits like healthcare, vacation, and sick leave. EORs can also assist with background checks and visa applications.
Keeping up with evolving changes to these local labor laws, which can vary significantly from country to country, can take time and effort. Choosing a reputable EOR with proven expertise in international compliance can make the process easier.
Hidden Financial Costs
While EORs offer a convenient solution, their pricing structures aren’t always fully transparent. Hidden fees, such as administrative costs associated with hiring and terminating international staff, can negatively impact your bottom line.
Other costs, from fees for handling visas and work permits to fluctuations in exchange rates, can also make your budget take a hit.
Employment Contract Errors
It’s necessary for employment contracts to be accurate and compliant. However, if your EOR completes them manually, there is always the potential for human error.
Well-drafted contracts should include clauses to safeguard your company's intellectual property (IP), work product, and confidential information. Failure to adequately protect your IP can let competitors exploit your work, erode customer trust, and have financial impacts ranging from lost revenue to legal fees.
Payroll Errors
While an EOR offers convenience, ensuring you oversee the partnership is essential, especially when it comes to your company’s payroll.
Failure to track an EOR's work (as you would for an internal HR department) can result in mistakes caused by:
- Communication breakdowns: Misunderstandings or delays in relaying information about employee changes, such as salary adjustments, promotions, or terminations, can cause incorrect payments.
- Data entry errors: Mistakes when inputting employee data, such as hours worked, tax information, or bank account details, can lead to inaccurate paychecks.
- Software glitches: Technical issues with the EOR's payroll system or integration with your systems can cause processing errors.
To mitigate the financial risks of payroll errors, maintain open communication with your EOR, establish clear reporting procedures, and implement regular audits to ensure payroll accuracy and timely payments.
Worker Misclassification
Misclassifying workers as independent contractors if they are later found to be employees can lead to severe consequences, including hefty fines and back taxes.
While the EOR handles the employment relationship, the responsibility for penalties associated with inaccurate classification ultimately falls on your company. That’s why working with an EOR you trust is essential.
Data Protection & Security
Data protection laws, such as the General Data Protection Regulation (GDPR), impose strict requirements on collecting, storing, and processing personal information.
As with misclassification, failure to follow these laws can expose your company to significant penalties, including substantial fines, legal action, and reputational damage.
To avoid these pitfalls, choose an EOR with a demonstrated commitment to data protection measures and security.
How to Minimize Risk When Working with an EOR
Research and Vet Potential EORs
Selecting the right EOR can make international expansion easier. But take your time evaluating potential candidates before making a decision. This will help you identify the EOR provider that best aligns with your needs.
Seek recommendations and insights from colleagues or industry contacts who have worked with EORs, review client testimonials and case studies, request sample documents, such as employment contracts, and ask plenty of questions of any EOR you're considering hiring.
Then, when you've found a service that fits the bill, double check that the EOR operates in the countries where you plan to hire, since some EORs offer broader geographic coverage than others.
Drill Down on Legal and Compliance
Confirm that the EOR you partner with offers a thorough understanding of labor laws in the countries where you employ staff, including nuances related to benefits, leave policies, and termination procedures.
Then, make sure the EOR is equipped to stay ahead of any changes to local employment laws. For example, ask about their processes for monitoring and adapting to regulatory updates, such as changes to maternity leave, tax rates, or minimum wage.
Before finalizing any agreement, hire legal counsel specializing in international employment law to review the contract and confirm that your company's interests are protected.
Ensure HR Accuracy
To help ensure you minimize HR errors while working with an EOR, inquire about their standard operating procedures for:
- Contract generation: How do they ensure employment contracts accurately reflect local laws and protect your intellectual property?
- Payroll processing: What measures are in place to guarantee accurate and timely payments while adhering to tax regulations?
- Worker classification: How do they determine proper classification to avoid misclassification?
Throughout your partnership, proactively monitor the EOR's adherence to evolving employment rules and tax requirements.
Review Data Security and Privacy Protections
Scrutinize any potential EOR's data security measures, including how they store and process sensitive employee information like personal data, payroll details, and performance reviews.
Doing so can mitigate potential privacy breaches and protect your company and employees' sensitive information.
Also, ensure your contract with the EOR includes data security clauses that clearly outline their responsibilities and your expectations. These clauses should address data breach notification protocols, data retention policies, and the secure transfer of information.
Ask for Pricing Transparency
Before committing to an EOR, ensure you fully understand their pricing structure. Don't settle for a basic quote; request a detailed breakdown of all costs, including potential ancillary charges beyond the basic service fees.
For instance, inquire about onboarding and offboarding costs, fees associated with processing visas or work permits, and any charges related to currency conversion or international wire transfers.
Additionally, clarify whether any variable fees, such as those based on the number of employees, specific HR services utilized, or changes in local regulations, might apply.
Why Choose RemoFirst as Your Employer of Record
Through partnerships with trusted, established partners in each country where we operate, RemoFirst expertly manages the legal complexities that can make recruiting and managing global remote talent challenging.
Our partner-based model offers our clients flexible, scalable compliance support in over 180 countries and eliminates the need to open your own local entity in every country where you hire.
Schedule a demo today to learn how RemoFirst can help your business employ international talent.
