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May 13, 2024

Understanding 3 Types of Employer of Record Operating Models

EORs don't have legal entities in all countries and that's where these operating models help. Learn and find out which one would suit you.

Understanding 3 Types of Employer of Record Operating Models

Akhil Reddy

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Employer of Record (EOR) services have gained popularity as a solution for companies looking to hire talent globally without setting up legal entities in every country. EORs act as the legal employer for your international workforce, taking on responsibilities such as compliance, payroll, and benefits administration.

But when an EOR claims to offer global hiring services, does that mean they have a presence in all 195 countries worldwide?

The answer is no. Most EORs do not have legal entities in every country. Instead, they operate through a combination of direct, indirect, and hybrid models.

When an EOR claims to offer global hiring services, it often means they have a network of direct and indirect operations that collectively cover a wide range of countries. The extent of their coverage can vary significantly between providers.

As a company looking to hire globally through an EOR, it's essential to understand these nuances and ask targeted questions about an EOR's coverage and operating models in your specific countries of interest. This will help you choose the right EOR partner that aligns with your global expansion strategy.

Direct model

The direct model is one of the primary operating structures used by Employer of Record (EOR) service providers. In this model, the EOR has its own legal entity established in a specific country, allowing it to directly hire employees on behalf of their clients.

Here's how the direct model works:

  1. Legal entity: The EOR sets up a legal entity in the country where their client wishes to hire employees. This entity is fully owned and operated by the EOR.
  2. Employment contracts: When a client company wants to hire an employee in that country, the EOR's legal entity becomes the official employer of record. The EOR signs an employment contract with the employee, assuming all legal responsibilities and liabilities associated with the employment relationship.
  3. Compliance: The EOR ensures compliance with all local labor laws, regulations, and statutory requirements. This includes managing payroll, withholding taxes, providing benefits, and handling employment-related disputes.
  4. Client relationship: The client company maintains day-to-day operational control over the employee's work, while the EOR handles the administrative and legal aspects of employment.

Advantages of the direct model:

The direct model offers several advantages for client companies. It provides greater control and visibility over the employment process. The client company can work closely with the EOR to ensure that the hiring process, employment contracts, and HR policies align with their company culture and objectives. This level of control is particularly valuable for companies that have specific requirements or a strong corporate culture they wish to maintain across their global workforce.

The direct model also enables seamless communication between the client company and the EOR, as there are no intermediaries involved. This direct line of communication can be beneficial in resolving any issues or concerns that may arise during the employment relationship. This model reduces compliance risks for the client company, as the EOR has direct knowledge of local labor laws and regulations, ensuring that all legal requirements are met.

The direct model is particularly advantageous when a client company has a significant presence or long-term hiring plans in a specific country. It provides a higher level of control and transparency, ensuring a smoother employment experience for both the client and the employee.

Disadvantages of the direct model:

One of the main drawbacks is the limited country coverage. Setting up legal entities in each country where the client company wishes to hire employees can be a time-consuming and expensive process. This limitation can be a significant barrier for companies looking to expand rapidly or hire in multiple countries simultaneously.

The direct model may involve higher costs compared to indirect models, due to the overhead expenses associated with maintaining legal entities in each country. These costs can include legal fees, administrative expenses, and compliance-related costs. As a result, it may not be the most cost-effective option.

Indirect model

In this model, the EOR does not have its own legal entity in a specific country. Instead, they partner with a local third-party entity to hire employees on behalf of their clients.

Here's how the indirect model works:

  1. Local partnership: The EOR establishes a partnership with a local entity in the country where their client wishes to hire employees. This local entity acts as an intermediary between the EOR and the employee.
  2. Employment contracts: When a client company wants to hire an employee in that country, the local partner becomes the official employer of record. The local partner signs an employment contract with the employee, assuming all legal responsibilities and liabilities associated with the employment relationship.
  3. Compliance: The local partner ensures compliance with all local labor laws, regulations, and statutory requirements. They handle payroll, taxes, benefits, and employment-related disputes.
  4. Client relationship: The client company maintains day-to-day operational control over the employee's work, while the EOR and the local partner handle the administrative and legal aspects of employment.

Advantages of the indirect model:

The indirect model allows EORs to offer services in a wider range of countries without the need to set up their own legal entities. This flexibility enables client companies to hire employees in countries where the EOR may not have a direct presence. That also makes it more cost-effective for client companies. The local partners' expertise and knowledge of local labor laws and regulations can be beneficial in ensuring compliance and navigating any country-specific challenges.

Disadvantages of the indirect model:

The indirect model can create an additional layer of communication between the client company, the EOR, and the local partner. This can sometimes lead to delays or miscommunications in addressing employment-related issues. The client company may have less visibility and control over the employment process compared to the direct model, as they are relying on the EOR and the local partner to manage the relationship.

The indirect model is a good option for client companies that have short-term or limited hiring needs in a particular country and are looking for a more flexible and cost-effective solution.

Hybrid model

The hybrid model is a combination of the direct and indirect models used by Employre of Record (EOR) service providers. In this model, the EOR uses a mix of their own legal entities and partnerships with local third-party entities to hire employees on behalf of their clients.

Here's how the hybrid model works:

  1. Direct and indirect presence: The EOR has its own legal entities in some countries (direct model) and partners with local third-party entities in others (indirect model).
  2. Employment contracts: Depending on the country, the employment contract is signed either by the EOR's legal entity or the local partner, who becomes the official employer of record.
  3. Compliance: The EOR or the local partner ensures compliance with all local labor laws, regulations, and statutory requirements, handling payroll, taxes, benefits, and employment-related disputes.
  4. Client relationship: The client company maintains day-to-day operational control over the employee's work, while the EOR and/or the local partner handle the administrative and legal aspects of employment.

The hybrid model offers a balanced approach, combining the advantages of both the direct and indirect models:

Advantages of the hybrid model:

The hybrid model allows EORs to offer a wider range of services and coverage to their clients. They can leverage their own legal entities in countries where they have a strong presence and expertise while partnering with local entities in countries where setting up a legal entity may not be feasible or cost-effective. This model provides more flexibility for client companies, as they can choose the most suitable approach based on their specific needs and the country in question.

Disadvantages of the hybrid model:

The hybrid model can create some inconsistencies in the client experience, as the level of control, communication, and service quality may vary between countries with direct entities and those with local partnerships. Managing a mix of direct entities and partnerships can be more complex for EORs, requiring processes and communication channels to ensure seamless service delivery. Clients may need to navigate different processes and points of contact depending on the country, which can be challenging for companies with employees in multiple locations.

The hybrid model is a popular choice for EORs that want to offer a comprehensive global solution to their clients while balancing the benefits and challenges of the direct and indirect models. It allows them to adapt their approach based on the specific country, client needs, and their own operational capabilities. For client companies, the hybrid model offers a flexible solution that can cater to their diverse global hiring needs.

Conclusion

When evaluating potential EOR partners, it's essential to ask about their operating models in your target countries. Here are some questions you can ask:

  1. Do they have a direct legal entity in the country or work with a local partner?
  2. How do they ensure compliance with local labor laws and regulations?
  3. What level of control and visibility will you have over the employment process?
  4. How do they handle communication and issue resolution?

By understanding the EOR's operating model and how it aligns with your company's requirements, you can make an informed decision and choose the right partner for your global expansion journey.

At Thera, we offer a comprehensive EOR solution designed to simplify global hiring. Our all-in-one payments platform combines the best aspects of the direct and indirect models, providing a flexible and compliant solution for fast-growing global teams looking to expand their workforce internationally. With Thera, you can hire top talent in over 150 countries while we handle the complexities of compliance, payroll, and benefits administration.

Our team of global hiring experts is ready to help you navigate the challenges of international expansion and build a talented, diverse workforce. Contact us today to learn more and discover how Thera can transform your global hiring experience.

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Elizabeth Wellington

Liz writes about business, creativity and making meaningful work. Say hello on Twitter or through her website.

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