Employer of Record Risks for Startups and Growing Companies

What is an Employer of Record (EOR)?

An Employer of Record (EOR) is a company that acts as an intermediary for an employer and an employee who are in different countries (or in some cases, U.S. states, though we’ll stick to countries here). The EOR either owns an entity/subsidiary or contracts with one whose sole business is hiring people as contractors and/or employees for the benefit of another business. 

An EOR can help reduce entry costs - both time and money - when hiring employees in a new country. The EOR will have the administrative pieces set up: an entity, tax number, and ideally, local experts to ensure that pay, benefits, and conditions of work are compliant with local laws. You can have an employee in a different country onboarded and ready to work quickly.

What are Some Key Risks for Companies Using EORs?

EORs are often operating in a grey area of the law, which makes it critical that you have your own counsel and appreciate the risks. The reality is, laws in most countries haven’t caught up to the scenario of a company based in Country A that wants to hire a software engineer in Country B as a regular employee but doesn’t want to spend thousands of dollars creating a foreign subsidiary. An EOR’s attorneys work for the EOR, not for you.

The Major Risk of an EOR: Misclassification isn’t just a contractor-or-employee issue, though that is the most well-known scenario. Hiring someone with “employee status” with the EOR still leaves you open to claims of illegal subcontracting. Many countries have laws that state that the employer is whoever directs and benefits from the work done by an employee, regardless of what company is the employer on paper. This is because companies have used similar arrangements for decades to avoid union organizing, shield themselves from liability, or stay below the employee headcount thresholds that trigger stronger labor protections. Just because your intent behind using an EOR is legitimate does not change the potential legal exposure. 

Your Legal Exposure: Some EORs will indemnify you for employment claims or cases, some won’t. It will always depend on the specific type of claim, amount at stake, and processes established by the EOR. Some have sharp time limits on indemnification that mean your deadlines with the EOR may lapse before you even have knowledge of a claim. Almost all have limitations on their own liability if the EOR arrangement itself is flawed, meaning that an employee should have been directly hired by your company instead of an EOR. Employment claims are common, even when you do everything right; with an EOR you are not always in control of the circumstances leading to a lawsuit or administrative sanction or how they are handled, but you may be responsible for the judgment and/or penalty. 

Additional Risks:

• EORs can change their services, increase their pricing, or sever your relationship at their discretion. This can put companies in a precarious position of having to fire employees and replace or re-onboard them later, or get stuck in a relationship of necessity that isn’t working for the business anymore. 

• Some EORs directly own the foreign entities they use to contract, and some use third parties. Where third parties are used, you may not have the chance to vet the company before getting deeply involved with them, or they can change with little-to-no notice to you. 

• Using an EOR also doesn't eliminate the risk that your company has permanent establishment - essentially, a taxable presence in the employee's country. This is entirely outside what most EOR arrangements address and can expose your company to unexpected corporate legal and financial obligations abroad.

• Some EORs limit your legal arrangements with the employee to the EOR’s contracts, which may leave critical gaps around NDAs, non-compete agreements, & intellectual property. 

• Many EORs leave health & safety and workers compensation completely outside of the scope of your contract.

If you’re considering using an EOR, your company’s specific exposure and risks should be evaluated by an attorney who knows global employment law. Contact Woodhead’s Law for a free consultation.