Understanding Employer of Record (EOR): When Should you Hire an Employee vs a Contractor?

Why and what is EOR?

An Employer of Record or EOR helps companies in hiring both Employees and Contractors. We have the necessary tools, partners, and vendors needed to send payments, hire compliantly and process benefits on a global scale. This is important for businesses that aren’t registered in the country their new hire resides in. EOR serves as a cheaper alternative so that you as the Employer don’t have to worry about allocating time and resources to building incorporations, understanding the country’s employment law, or building relationships with local payroll and benefits providers.

What are the differences between Contractors and Employees?

Many countries ensure that there are strict lines that separate and define Contractors and Employees separate from one another. If you believe some of the “Employee” definitions describe the relationship your company has with your Contractor, read below on how to transition them to permanent employees to avoid any misclassification risk. 

When should I hire a Contractor and when should I hire an Employee?

Employees have been proven to work with companies for a longer period of time. There is some correlation between time spent at a company and the benefits they’re provided, and as seen in the table above, there aren’t many Employer-provided benefits for Contractors. In addition to these benefits, employees also feel more protected by the local legislation related to labor law. 

With this being said, hiring Contractors is never a bad idea. Your business may have needs in specific countries that are too expensive to incorporate into, especially if the need is for a short-term project. A lot of testing and preparation can be done by hiring an Independent Contractor in the country of your choosing to see how the individual works and whether or not there is enough business in that country for your team to invest more resources into. However, your team will also have to manage payments through invoicing, currency/foreign exchange conversions, and any country-specific legislation for Contractors. 

An EOR that operates nationally can help to advise on the best route for you and your team; however, the decision of Contractor vs Employee is ultimately going to be based on your business needs.

What if I want my Contractor to be a permanent Employee?

An EOR can help make the transition process for Contractors becoming permanent Full-time employees easy to manage. Everything from Payroll and tax registrations to benefits and pension enrolments plus any other country-specific compliance requirements are covered by the EOR. We simply need you to handle most of the communications and training while we take care of the rest.

The first step in processing this transition is communication. Is your Contractor aware of the changes to come? Some examples include:

• Change in take-home pay: Employees receive the net salary after the tax burdens have been processed by the EOR
• Change in currency: As a Contractor, there is much more flexibility in currency type. As an employee, the EOR as the legal employer will need to remit taxes and process pay in the country’s registered currency
• Benefits: Some countries require mandatory health benefits. Some others require a mandatory enrolment in a pension or retirement plan. 

Once you’ve aligned with your Contractors on the transition, the EOR will be ready to guide you and your hire through the rest of the onboarding process from early welcome emails all the way up to the Employment Agreement execution. 

What about terminations?

The EOR as the legal employer is responsible for terminations and the processes associated with it, including final pay, vacation payouts, benefits continuation or termination, and record of employment. Similar to the onboarding process, the EOR will be responsible for communicating all steps of the termination process in relation to the country’s labor laws and will manage all expectations before anything is communicated to the employees.