EOR: Not the only answer to your expansion questions.
In recent years, the use of Employer of Record (EOR) services has become increasingly popular in various industries. An EOR is a service provider that assumes the legal responsibility for employing and managing workers on behalf of a company. The EOR handles payroll, benefits administration, tax compliance, and other human resources functions. They essentially serve as the official employer for the workers, taking care of all employment-related obligations, while the company maintains operational control over the employees. This arrangement helps companies streamline their international expansion, manage compliance, and minimize administrative burdens associated with employment.
However, there hasn’t been much information published about the possible drawbacks and limitations of using an EOR. This lack of knowledge has left many organisations unaware of the challenges they might encounter when employing using this approach. It is important for businesses to conduct thorough research and carefully consider the potential risks as well as indicate possible alternatives before engaging an EOR. By understanding and addressing these risks, companies can make informed decisions and effectively manage their international workforce and expansion.
When is EOR an amazing service?
EOR serves as an amazing tool for supporting developing businesses, allowing international expansions, without the huge liabilities of setting up own entities during the initial stages. Navigating foreign regulations, figuring out mandatory benefits, risking huge liabilities and costs early in your exploration could be disastrous.
EOR is perfect for research and development; The fast-onboarding times and low effort buys expanding businesses the time to truly realise their full potential in new markets, before deciding to take the bold next steps. However, there are still limitations to be aware of in several territories, and those all-important next steps to navigate.
What are the limitations of using EOR?
Although utilizing an Employer of Record (EOR) can offer numerous benefits to businesses expanding internationally, it should not be regarded as the ultimate solution. Let’s outline the most common limitations of EOR and address them individually:
- Differences in legislation per country.
- Maximum duration of contracts.
- Limitations on regulated professions.
- Restricted benefits.
- Cost inefficiency with larger teams.
It is important for businesses considering EOR to carefully evaluate these restrictions and assess their impact on their specific expansion plans and requirements.
1. Differences in legislation per country.
One significant limitation arises from the fact that not every country regulates EOR as a service, which can lead to potential compliance issues. In countries where EOR is not fully regulated, employing employees through this service may not guarantee 100% compliance with local labour laws and regulations.
2. Maximum duration of contracts
EOR is a highly effective service regulated in The Netherlands, and so many of these limitations are not present. That is not the case for many other countries. For example, in France, Spain and Portugal, you can apply EOR as a service compliantly for the maximum duration of 6 months. The same can be said for Germany and Poland, although there a service provider can provide complaint EOR for up to 18 months.
This is because EOR as a service is not regulated in these countries. Therefore we are providing a creative solution workable within the laws of these countries, utilizing a temporary worker agency setup, which has a predetermined end date.
Portage: an EOR replacement in France
Besides Interim, Portage is the only employment model that legally allows a worker (in this context a independent contractor) to be on the payroll of company A, whilst working under management/supervision of company B. Portage is the only model that comes close enough to what EOR expects.
3. Limitations on regulated professions
Due to the fact that EOR is not an regulated employment solution in all countries, employees who hold certain regulated functions cannot be employed using EOR. These contain medical, legal and notary professions among others.
In the Netherlands it is accepted that an EOR provider is an employment company that employs people on behalf of another organisation. Therefore if the client organisation is licenced to employ certain professions, everything works compliantly even though the EOR provider does not have these licenses.
In countries where EOR is not regulated, an EOR provider needs to fully employ people on their payroll, effectively taking full responsibility for that employee. If that employee practises a regulated occupation, the EOR provider needs to have the required licenses to employ that employee. Which in most cases is simply not viable, or very expensive.
4. Restricted Benefits
Additionally, within an EOR arrangement, certain perks and benefits may be restricted, therefore limiting the extent of employee incentives and rewards. For example:
- Providing a lease car.
- Share equity options.
- Customized benefits.
5. Cost inefficiency with larger teams
Lastly, as stated in the beginning EOR is an amazing service to use in the initial stages of your international expansion. Providing a quick and easy solution for one or a few employees to do market research to analyse if a foreign market suits their product or services. When that has proven fruitful, bringing more people on board to engage the next step in their expansion using the same EOR service will become expensive. Balancing that tipping point can be different for each organisation, but there comes a point where the expenses no longer serve the results.
It is crucial for organizations to thoroughly understand the specific restrictions and legal considerations of using an EOR in each country of operation to ensure compliance, manage employee expectations and their own goals effectively.
Let’s find your answer together!
While Employer of Record provides many useful benefits that maximises the outcomes of your early stages of expansion, there are different solutions that might fit your goals better. Like our Payroll & HR full service, which includes a comprehensive HR package, taking care of all employee management needs.
Contact our expert to discuss together what your expansion goals are and how our services could provide maximal results in your international expansion journey.