As businesses expand globally, the responsibility of managing payroll and HR becomes increasingly complex with each country where a company establishes a presence. As part of their global expansion strategy, today’s companies seek to balance the need to have efficient payroll systems and high employee satisfaction while minimizing errors and compliance risks overseas. A critical decision point that companies face is deciding how to handle payroll—whether to choose an Employer of Record (EoR) or a Payroll Company. In this blog, we will explore the differences between an EoR and a Payroll Company and when one might be the better choice.
What is an EoR? (Employer of Record)
An Employer of Record (EoR) is a service provider that handles most aspects of HR tasks (including hiring and payroll) for companies looking to expand their operations abroad. Essentially, an EoR becomes the legal employer of record for a company’s workforce in another country. This allows the company to operate in that country without having to establish a legal entity (a taxable presence in a country). Many companies choose this option as a fast and easy way to hire workers overseas quickly without the administrative burden. One key distinction is that while the EoR provider handles the administrative tasks related to hiring and managing employees, the daily supervision remains yours. Here’s how an EoR can help your globally expanding company:
Comprehensive HR Services
An EoR offers a wide range of HR services, including:
- Employee onboarding: Managing the hiring and onboarding process to ensure compliance with local laws.
- Payroll processing: Ensuring accurate and timely payment of salaries.
- Benefits management: Administering employee benefits such as health insurance, retirement plans, and other perks.
- Compliance: Ensuring adherence to local labor laws and regulations.
- Risk management: Handling employment-related liabilities and legal issues.
Benefits of Partnering with an EoR
- Simplified global expansion: Companies can quickly enter new markets without establishing a legal entity.
- Compliance assurance: EoRs stay updated with local labor laws and regulations, reducing compliance risks and eliminating the burden of compliance from in-house teams.
- Reduced liability: The EoR assumes legal responsibility for employment, mitigating the company’s risk.
What is a Payroll Company?
A Payroll Company focuses primarily on payroll processing and management. There’s a bit of overlap with what an EoR provider does: both handle the administrative tasks associated with paying employees, ensuring that salaries are calculated correctly and disbursed on time. However, a Payroll Company is limited to payroll, whereas an EoR provider has a broader range of tasks. Here are the services that a Payroll Company typically provides:
Payroll Services
- Payroll processing: Calculating employee salaries, taxes, and other deductions.
- Tax filings: Ensuring that payroll taxes are filed accurately and on time.
- Compliance: Ensuring payroll processes comply with local tax laws and regulations.
Payroll Solutions
- Global payroll: Managing payroll across multiple countries, ensuring consistency and compliance.
- Payroll management: Providing tools and systems to streamline payroll processes and reduce errors.
- Data security: Ensuring that sensitive payroll information is secure and protected from breaches.
How is an EoR Different from a Payroll Company?
While EoRs and Payroll Companies might appear similar at first glance, they offer distinct services that cater to different business needs. Here are the key differences:
Scope of Services
- EoR Services: An EoR provides comprehensive HR services, including payroll processing, benefits management, employee onboarding, compliance, and risk management. They act as the legal employer for the company’s workforce in the foreign country.
- Payroll Company Services: A Payroll Company focuses mainly on payroll processing and management. They handle salary calculations, tax filings, and compliance with local payroll regulations.
Legal Responsibilities
- EoR Liability: An EoR (not your company) assumes legal responsibility for employment-related matters, thus reducing your company’s liability and risk. They ensure compliance with local labor laws and manage any legal issues that arise.
- Payroll Company Liability: A Payroll Company handles payroll compliance but does not assume legal responsibility for employment matters. Your company, not the Payroll Company, remains the legal employer and is liable for compliance and legal issues.
Complexity of Services
- EoR: EoRs offer a broader range of services, making them suitable for companies looking for a one-stop solution for HR, payroll, and compliance needs in a foreign market.
- Payroll Company: Payroll companies provide specialized payroll services, which are ideal for companies that already have established HR functions and only need support with payroll processing.
Which Option Is Right For Me?
Choosing between an EoR and a Payroll Company depends on your company’s specific needs and goals. If you require comprehensive HR services and want to minimize legal risks, an EoR is the ideal choice. On the other hand, if you only need specialized payroll services and already have an established HR department with the expertise and capacity to handle employees overseas, a Payroll Company may be the better option. Here’s a more detailed comparison to help you decide which option is better for your globally expanding company:
EoR
- When to choose an EoR:
- You need comprehensive HR services, including payroll, benefits management, and compliance.
- You want to enter new markets quickly without setting up a legal entity.
- You prefer to minimize liability and legal risks by transferring employment responsibilities to a third party.
- Benefits of partnering with an EoR:
- Simplified global expansion with quick market entry.
- Assurance of compliance with local labor laws.
- Reduced legal and employment-related liabilities.
Payroll Company
- When to choose a Payroll Company:
- You have established HR functions and only need support with payroll processing.
- You require specialized payroll management services to ensure accuracy and compliance.
- You want to maintain legal responsibility for employment matters and prefer a more focused service.
- Benefits of partnering with a Payroll Company:
- Efficient and accurate payroll processing.
- Compliance with local payroll tax laws and regulations.
- Enhanced data security for sensitive payroll information.
EoR: Your Start But Not Your Endpoint
Employer of Record (EoR) solutions are often the starting point for businesses hiring talent abroad (specifically, outside of the company’s home jurisdiction). However, given that an EoR is rarely an effective permanent solution for most companies, you’ll want to consider when it makes business sense to transition from EoR to establishing a legal entity.
Here are some factors to help you evaluate whether your company is ready for a transition to legal entity.
-
Your growing headcount in a country can be more expensive under EoR.
-
The types of hires you make under EoR can expose you to Permanent Establishment (e.g. tax) risk.
-
EoR can hinder the success of Mergers and Acquisitions (M&A).
It’s common (and advantageous) for companies to start with an EoR solution for their first international hires. Doing so serves as an important stepping stone towards broader international expansion. However, think of EoR as the beginning of your global HR expansion strategy, not the endpoint—you are not bound to this approach indefinitely. As your business grows and the global landscape changes, transitioning to a legal entity can offer you more control, compliance, and cost-effectiveness across your growing international operations.
To find out more, read our latest blog: 4 Key EoR to Entity Transition Considerations in 2024 (hsp.com)
Partner with HSP to navigate the complexities of your payroll needs
By understanding the differences between an EoR and a Payroll Company, you can make an informed decision that best suits your business objectives and ensures smooth operations in your international markets. No matter which you choose, you’ll find easy solutions to your EoR and payroll problems with help from HSP.
HSP is an end-to-end global expansion solutions provider focused on helping companies scale their operations overseas effectively and efficiently. We are the only global expansion expert to offer growing companies a full suite of end-to-end solutions designed to help them scale to any size and country.
Our in-country experts have delivered the full spectrum of global expansion solutions—from EoR to entity set-up and management—across more than 100 countries (and counting). HSP brings full payroll, accounting, tax, legal, compliance, and HR services to corporate teams, integrating with in-house staff to both guide and execute across every domain.
Our Employer of Record and Global Payroll services can help you seamlessly navigate the complexities of international expansion. Contact us to learn more.
