An employer of record or EOR is an organization that helps startups expand quickly, by taking care of the employment relationship (hiring, payroll and taxes) in the country of expansion. This makes it much faster for startups to flexibly expand growth teams, especially overseas.
Understanding the EOR model
In the former expansion model, when companies wanted to grow internationally, they opened small subsidiaries, for the sake of having a representation in the country of operations and to make new hires.
While this model works, it also carries hidden costs, for companies.
In fact, understanding the intricacies of each country’s regulatory system requires incredible competence.
And if a company, especially a startup, wants to be focused on growth, it might get easy to get bogged down in bureaucracy.
Instead, as the pandemic hit, many companies are opting for a different model, that of the Employer of Record.
In this model, a company is created by a third-party entity, to take care of all the needs of the startup or company that is expanding internationally.
In this way, the third-party entity enables the startup to quickly set up operations in any country, without having to worry about the legal intricacies of that country.
Advantages for startups
Some of the advantages of this model are speed, reduced regulatory risks, and reduced bureaucracy.
When expanding globally, setting up an entity in each country where you want to expand, might not be a viable option, at first.
In some countries, setting up an entity might require that you also have an accountant, a payroll, and a legal representative.
In addition, the timing might stretch from a few weeks to a few months.
Therefore, the EOR model tries to offer a solution to that, by enabling companies to expand quickly.
Thus, speed is definitely one of the core values of this model.
Reduced legal risks
Another key element, is the hidden legal risks, in each country you expand. Indeed, not only it’s hard to understand in hindsight what are all the legal components that might haunt you later on.
But, the local regulatory environment is changing from time to time, making it time-consuming and unpredictable for startups to keep up.
Thus, through the EOR, the third-party company, specializing in this sort of service, takes care of navigating thourhg the regulatory risks for each country.
And they are the ones responsible for these risks.
Setting up an entity in some countries is quite straightforward.
However, in other countries, especially when you have to hire new people in that country, it gets way more complex.
Disadvantages for startups
There are of course some drawbacks to this model.
You don’t own the working relationship
Even if de facto the employee responds to the company using the EOR service, from a formal standpoint, the working relationship is in the hands of the EOR.
This limits the possibility of the expanding organization.
For instance, since the employee is hired through an EOR, the company using the employee won’t be able to include it in that contract stock options.
Instead, it will need a separate agreement.
Permanent establishment risk
It’s critical to structure the EOR so that there is no risk of permanent establishment.
In fact, a company if considered permanent in a country (with a stable organization) will owe the taxes there, with all the other legal consequences of having a fixed organization in that country.
It’s critical to structure the EOR model in a way that makes it hard to run into the permanent establishment risk.
Does it make sense to outsource a core team?
Another key question to answer is when does it make sense to use this model?
Of course, this is great for exploratory purposes. Think of a startup that is building a marketing and sales team overseas.
Initially, before committing to a fixed organization in that country you might want to test the water and see whether that market will be important enough (from the revenue standpoint) to justify such an organization.
However, over time, especially if you’re hiring a growth team, it makes sense to evaluate when to go from the EOR model to simply set up a fixed organization.
Indeed, if the growth teams have become established it makes more sense to internalize them.
In short, initially, it makes sense to leverage this model. Over time it makes more sense to internalize if you’re building a core team abroad (meaning a team tied to the strategic success of the company).
What if you are an employee?
This model has become very popular for remote teams, or for the growth of young startups that want to kick off their operations, quickly.
If you’re an employee, in a regular role, it’s important to take into account also the risks associated with this sort of employment and weigh them against each other.
If you’re an executive. It’s extremely important to customize your contract, in order to feel 100% comfortable with this type of setup.
For instance, you can ask for a higher base and variable salary, and work on setting up a separate agreement for stock options.
And smooth other key parts of the contracts (like probation period and notice period). In this way, you can secure your contract against the uncertainty coming from a lack of a stable organization in your country.
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