The Employer of Record service platform has become an increasingly popular staffing solution over the last several years, but, unfortunately, a lot of employers don’t actually know a lot about this service model.

This blog describes an Employer of Record, the kind of staffing challenges it was created to address, and what needs to be in place before you migrate into an Employer of Record service model with one of your temporary or contract service providers.     

What is an Employer of Record (EOR)?

An EoR is a third-party employment company who becomes the legal employer of a worker hired by another company to perform work on their behalf. 

An Employer of Record takes responsibility for agreed-upon employment functions such as payroll, payroll taxes, workers’ compensation, unemployment insurance, benefits administration, and employment-related compliance. While the EoRs client continues to direct the employee’s day-to-day work, the EOR manages all of the behind the scenes payroll and benefit administration required of any W2 employment relationship.

How do EoR Services Differ from Traditional Temporary or Contract Staffing?

The key difference between the EOR service model and traditional temporary or contract staff arrangement lies primarily in who identified and hired the “covered” worker and a more detailed understanding of who does what in the employment relationship.

• With temporary staffing, the staffing company generally recruits and supplies a worker to meet a client’s staffing need. In an Employer of Record staffing model, the client always sources and hires the candidate and uses an EOR to provide oversee the administrative components of the employee-employer relationship. In that context the client and their EoR are co- employers – a relationship just the opposite of what is intended by most temporary staffing arrangements.
• In an EoR arrangement the client typically identifies a specific set of workers it wants to be “covered” in an Employer of Record service model while in traditional temporary or contract service models, that up front specification is not necessary. For example, if a client wants an Employer of Record to provide pay agent services for all members of its “training team” that group will be identified up front and all members of that “training team” will be covered under an Employer of Record agreement.

How do EoR Services Differ from Traditional Payroll Services?

This one is simple. In most payroll service models, the paymaster does not directly employee the worker – they only provide paymaster services, leaving the employer with all the auxilliary responsibilities of onboarding the employee, ensuring compliance with internal eligibility policies, administering benefit eligibility, dealing with WC and unemployment claims, etc. A payroll service solution is not the same one stop “back office employer function” provided by an EoR.

What Staffing Problems Does an EoR Solution Solve?

An EOR service is especially useful when the challenge isn’t recruiting talent but finding a practical and compliant way to employ that talent. As example, hiring an employee is usually straightforward when that employee works in a state where your company already operates. But maybe the employee you’d like to hire lives in another state. Or maybe you need an employee to work on site in a location where you don’t normally do business. Or maybe you need specialized talent for a project but want to avoid the pitfalls of staffing that role with a 1099 contractor.

Those are situations where an Employer of Record (EOR) arrangement can be a practical, easy solution to an otherwise complicated employment challenge.

When Is Using an EOR the Right Solution for You?

There isn’t just one or two scenarios where an EOR makes sense. Its value is often greatest when the administrative burden or compliance risk of directly employing someone is disproportionate to the size or duration of the staffing need. Here are some common examples.

1. You want to hire someone in another state.

Remote work has dramatically expanded the geographic reach of recruiting. A Washington employer. for example, might find its best candidate in Tennessee, Texas, or Florida. But employing someone in another state can create new obligations involving payroll withholding, unemployment insurance, workers’ compensation, wage and hour rules, paid leave requirements, and other state-specific employment laws.

When there are only one or two employees involved, establishing all of that infrastructure may not make sense. An EOR that is already equipped to employ workers in that state can provide a simpler path.

2. A valued employee is moving to another state and you want to retain them.

Sometimes the staffing challenge isn’t finding a new employee—it’s keeping a great one.

An employee who has been with your company for years may decide to move to another state for family, lifestyle, or other personal reasons. If their job can be performed remotely, you may want to keep them. The complication is that their move can create a new set of employment obligations for your company.

In most cases, employment requirements are based on where the employee actually performs the work, not simply where the employer is headquartered. Having even one employee working from another state can mean dealing with new payroll tax registrations, unemployment insurance, workers’ compensation coverage, wage and hour requirements, paid leave programs, and other state-specific employment rules.

For a larger company with employees across the country, adding another state may be routine. For a smaller employer, setting up and maintaining all of those requirements for a single employee may be expensive and administratively burdensome.

That’s where an Employer of Record can provide another option. Instead of losing a valued employee because they are relocating, the company may be able to transition that employee to an EOR that is equipped to employ workers in the employee’s new state. The employee can continue doing essentially the same job for the same company, while the EOR takes responsibility for payroll and agreed-upon employment administration in the new location. The EoR solution can be particularly valuable when the employee has skills, knowledge, client relationships, or company experience that would be difficult—and expensive—to replace.

Sometimes the most cost-effective hire is the employee you don’t have to replace.

3. You think you’d like to hire a particular candidate for a job, but you’d like to see them “on the job” first.

One of the best ways to make sure you are hiring right, is to check out a candidate’s performance “on the job” before you actually make them an offer of employment. . Outsourcing the employer responsibility to an Employer of Record is the perfect way to put someone to work quickly but withhold the final hiring decision until you make sure they are the right for your team. Hiring them direct = is a potetial hiring mistake. Letting an Employer of Record assign them to your work environment for an on the job audition is a safe easy way to get confirmation that you’ve selected the right candidate.

4. You need to hire someone to work on site in another state.

This situation is particularly relevant for staffing companies, consulting firms, contractors, and other businesses that place employees at client locations. You may not otherwise be conducting business in that state, but a new contract requires an employee to work there for several months. Rather than establishing employment operations for a single assignment, an EOR may be able to employ and payroll that worker on your behalf.

5. You need specialized talent for a limited period.

Sometimes the right person for a project is someone not prepared to pass the scrutiny of being an independent contractor—but your need is temporary. An EOR can make it easier to bring that individual onboard for the duration of the assignment without building additional employment infrastructure around a short-term need.

This can be particularly useful for project managers, technical specialists, administrative professionals, implementation teams, and other roles tied to a specific initiative.

6. You want access to talent without running the risk oif misclassifying workers as contractors.

Hiring someone as an independent contractor may appear to be the simplest solution when the work is temporary or remote. But calling someone a contractor doesn’t necessarily make them one.

Federal and state agencies use specific tests to determine whether a worker is truly operating as an independent business or should be treated as an employee. If the working relationship looks like employment, using an EOR may provide a better alternative than trying to fit the worker into an independent-contractor arrangement that doesn’t match the reality of the job.

7. You need to hire quickly.

Sometimes the issue isn’t whether your company could establish payroll and employment operations in a new location. It’s whether you can do it fast enough. A project may start next month. A client may need someone immediately. A hard-to-find candidate may not be willing to wait while registrations, payroll accounts, insurance coverage, and employment processes are established.

An EOR can sometimes shorten the distance between “we want to hire this person” and “this person can start working.”

7. You want to test a new market before making a larger commitment.

Suppose your company is considering expanding into another state but isn’t ready to establish a permanent operation there. Hiring one or two employees through an EOR can provide a way to test the market before investing in a larger infrastructure. If the business grows, those employees may eventually transition to your company’s payroll. If it doesn’t, you haven’t built an employment operation you no longer need.

What an EOR Can’t or Doesn’t Do…

An EOR can simplify employment administration, but it shouldn’t be viewed as a way to outsource an employer’s legal responsibility associated with having workers. You will still need to manage the workplace appropriately, provide clear job expectations, maintain a safe working environment, and coordinate with the EOR on all the employment related decisions related to pay, benefit eligibility, performance based bonuses etc. Your EoR is responsible to ensure your employment policies are executed to your specifications, but its your specifications that often make a difference to the employee’s performance and retention.

EoRs are Great Solutions for all those Crazy Exceptions

For many businesses, the best way to think about an Employer of Record isn’t as a replacement for their normal hiring process. It’s a solution for situations that don’t fit the normal process. An EOR can help businesses say yes to the right employee, deal with all those crazy exceptions, or take advantage of an opportunity without unnecessarily re designing your employment infrastructure.

The question isn’t “Can we hire this person ourselves?” but rather, “Given where this employee will work, how long we’ll need them, and what it takes to employ them correctly, what’s the most practical way to put them to work?”

Sometimes direct employment is the answer. Sometimes a staffing arrangement makes more sense. And sometimes, an Employer of Record is exactly the tool the situation calls for.

One More Thing – In the State of Washington EoR Services Require Contractual Protection!

EOR terminology and legal treatment can vary by state and arrangement, particularly where different types of temporary staffing, PEO, employee leasing, or specific taxing or licensing laws apply.

In the state of Washington for example, there are very specific eligibility requirements that must be met in order for your EoR to receive favorable tax treatment under the DoR regs. Because EoR services, unlike temporary staffing services, are not subject to sales tax, most EoRs will make sure that certain qualifying events are in place in order to deduct the direct payroll costs of a B&O tax otherwise calculated as a percentage of total revenues.

Getting favorable tax treatment allows EoR providers an opportunity to provide these services at a significantly reduced pricing structure than would be available to them if operating under the temporary staffing service category. It is particularly important for a company providing both EoR and temporary staffing services to the same client, to make it clear that their EoR service model is significantly different and limited in scope as compared to the traditional temporary staffing services they might otherwise provide.

• There needs to be a written agreement with their client describing their limited role as “pay agent”, specifying that they have no obligation to pay an employee other than in their capacity as their client’s agent. This agreement also needs to spell out that their client, and only their client has hire/fire authority, and the authority to set compensation and benefit eligibility. Normally included in an EoR agreement is the understanding that the EoR has no responsibility for the performance or work product of a covered employee.
• The “covered employee” must receive a document describing the relationship between their two employers – with the EoR’s role as pay agent clearly defined and the clients role and authority to hire, fire and set their terms of employment.

Final Thoughts…

Not all staffing companies are willing to provide EoR services because of the risks associated with their exposure as an employer without commensurate pricing offsets. PACE has been providing EoR services for a handful of PACE clients for several decades, and frequently expands the base service model to include staffing cost reporting and allocation of those costs against specific cost centers or programs – in other words a one stop shop for both cost and revenue recognition.

If you have a one off staffing situation that fits one or more of the staffing scenarios described in this blog – or would like to know moure about our EoR service model, give our Partner Services team a call at 425-637-3312.