How to Choose an Employer of Record or PEO

How to Choose an Employer of Record or PEO

So, you’re looking for an Employer of Record or PEO partner. That’s great! You’ve identified a business need and you are ready to choose a service provider – or are you? Choosing an EOR or PEO isn’t a small decision. After all, these firms deliver an essential service to distributed teams, a service that many business leaders don’t always understand well. In this blog we’ll break down what an EOR or PEO should deliver, and how to make an informed decision.  

What Do EORs and PEOs Do?  

Employers of Record hire and payroll workers and then lease them out to other companies. Unlike staffing agencies, EORs don’t maintain a stable of workers to be contracted out to clients. Instead, they hire specific, highly skilled employees when directed by their clients. They act as an employment bridge for employers and employees, allowing their clients to hire people in jurisdictions where they don’t have an office or legal entity.  

Let me give you an example. A French soup company has identified a Canadian Marketing Director that they’d like to bring on full time. The Director has a new family, so relocating isn’t practical. The soup company can engage the Director as a contractor, or they can engage a Canadian EOR to hire the Director for them. Contractors are a great complementary resource, but some jobs are best done by full-time employees.  

The soup company engages an EOR and extends an offer to the Marketing Director. The EOR guides the soup company in developing their offer, creates the employment contract and onboards both the new Marketing Director and stakeholders within the soup company. They ensure the Director is set up for payroll, enrolled in benefits and retirement savings, and has access to all the work perks that the soup company offers. They set the soup company up for invoicing and for regular international payments. The soup company’s role is to bring the Marketing Director up to speed with their new job, the company’s culture and to direct the work being done.  

Not only do EORs act as a bridge between employers and employees, they are also responsible for processing payroll, including deductions and remittances, and should provide basic compliance support, in the form of locally sound offers and agreements, and ongoing advice on discipline, vacation and local employment standards.  

Choosing which EOR or PEO to partner with, then, is a big decision!  

What Are your Business Goals?  

The first step to choosing an EOR is to clearly define your business goals for the next five years, in relation to your workforce. That is, will you need to rapidly scale up, including hiring many new staff members? Do you hope to expand to new territories with new branches? Or do you just want to take advantage of the globalized workforce to hire outside of your home base?  

It is important to understand what your future needs might be because not all EORs and PEOs are alike. Some EORs operate in one territory, others in a few, and others globally, subcontracting to a network of local service providers.  

If you are expanding to scale up rapidly, your EOR partner or partners should be able to match that pace. If you need to payroll hundreds or thousands of workers in a few years, your EOR partner must have that capacity. And if you expect you will need deep workforce analytics, then your EOR partner should be able to provide relevant reports on demand.  

Define Your Payroll Needs  

Now that you know how your business goals will impact your workforce, it is time to define your payroll needs. Your payroll needs are determined by several factors.  

The Number of Workers  

The number of workers you are seeking to payroll has a profound effect on your payroll needs. What’s palatable with one or two employees – saving a little money and settling for manual processes and low service – is a nightmare as your team grows. Your payroll also gets more and more complex, as you grow your team. That’s because payroll isn’t just making payments, it also includes deductions, remittances, expenses, garnishments, benefits, bonuses, corrections and more. The bigger the payroll, the more there is to keep track of.  

Worker Type  

The next consideration is the type of workers you are or will employ. Are they salaried or hourly? Do they have fixed or flexible schedules? Salaried and hourly payrolls lead to different requirements that will affect which EOR you choose to partner with. Some EORs specialize in hourly workers, while others specialize in salaried, and still others do both.  

The biggest difference between the two is schedule management and the corrections that come with it. Salaried payroll tends to be stable, with employees only logging time off for sick days and vacations. Hourly workers, on the other hand, tend to have variable schedules that may be shortened or extended day-to-day. Because of this, hourly payroll tends to require more adjustment and correction and those corrections have implications for deductions and vacation pay. If you have an hourly payroll, your EOR partner should have expertise in employment standards for hourly workers and in processing timesheets.  

Worker Classification  

The first thing to know about worker classification is that it is not based on contracts alone. The second thing you need to know is that getting it wrong can be costly. Workers are classified based on the relationship between the employer and employee. Every jurisdiction has slightly different rules and tests, but a general rule of thumb is this: employees are directed, use equipment provided by their employer, work to a schedule, and can receive training and be promoted; contractors are independent, can subcontract work unless directed otherwise, and have a defined work term that ends (either after a set period of time or on project completion).  

Let me give you an example of a common classification mistake. A startup hires a group of “contractors” to help them scale. These contractors have their engagements renewed repeatedly. Over time, they take on core duties at the startup, work set hours, and even receive training and equipment. At some point, these workers stopped being contractors and started being employees. After an audit surfaces this mistake, the startup is hit with fines and back taxes.  

Your EOR partner should be able to provide you with basic classification and employment standards advice, create compliant employment contracts, and connect you with more expertise if needed.  

Location  

This one is obvious. Where are you located and where are they located? If you don’t have a branch office or legal entity where they are located, then you need an EOR to act as a bridge for you. If your employees are spread across multiple jurisdictions, then your EOR or EORs need to be able to process payroll and make remittances in those jurisdictions.  

Local EORs should also have expertise in employment standards, the talent market, human resources, and payroll practices. Global EORs and PEOs that promise to operate in all jurisdictions, anywhere in the world, often provide this service by subcontracting to local EORs. Having local experts helps you get your employment relationships off to the right start.   

Benefits and Perks  

The last consideration that should drive your decision-making is benefits and perks. Employers of Record are responsible for delivering core benefits like medical, pharma, health and life insurance and retirement savings. Because you are using the EOR as a bridge to your employees, and because you don’t have a local branch office or legal entity, you can’t include those employees in your existing benefit plans.  

Your EOR partner should be able to provide your new employees with similar or equal benefits through their existing offerings, or if you have a large group of employees, by creating a new plan that meets your needs. Delivery of benefits and perks impact payroll and your employees’ taxes. Processing them incorrectly can lead to big problems for you and your employees down the lines.  

Be sure to choose an EOR partner that can confidently and compliantly deliver a benefits package that meets your needs.  

Define Your Technical Requirements  

When it comes to choosing an EOR, technical requirements can be just as important as payroll requirements. You are committing to a service provider who will deliver core services to you and your workforce for years to come – they had better be able to deliver what you need!  

Let’s start with self-service. Your employees should be able to download their paystubs and tax forms digitally and make benefit claims without putting in a request to you or your EOR. In 2021 that may be the baseline but you may have broader requirements including expenses, document management or a full HRIS. Ask about this upfront because EORs have different technical capabilities.  

Payment schedule may sound like a pure payroll consideration, but it is actually a technical issue. Many EORs have a set payroll schedule for every employee on their books. Other EORs can offer multiple schedule options, such as biweekly, semimonthly, or monthly, or create something custom for your group. If a specific payment schedule is essential to your business, be sure to check that your EOR partner can deliver it.  

Next, you should consider security. In my experience, few employers consider security when starting an EOR relationship, but the data that passes between you, your employees and your EOR is all incredibly sensitive. Personal and banking data must be kept strictly confidential. Your EOR partner should be able to speak to their everyday treatment of data, and to how secure their systems are. That is, you should be confident that they treat confidential data with all due seriousness, and that their work environment, apps and servers are all secure.  

Define Your Relationship Requirements  

You have defined your goals, your payroll and technical requirements and are ready to choose an EOR! Wait, there’s just one more thing to consider before you make your final decision. What kind of relationship do you want to have with your EOR, and what kind of relationship do you want for your employees?  

That may sound wishy-washy, but there is a world of difference between an EOR that assigns you a dedicated account rep, and one where tickets are your only option for support. This isn’t about partnering with the EOR that emits the most positive vibes, but the one that communicates their expertise and can deliver an appropriate level of service and support to you and your employees.  

When hiring in a jurisdiction where you do not have a branch office or legal entity, you are putting your trust in your EOR to ensure payroll, benefits and the whole employment relationship are administered accurately and with compliance. Ideally, your EOR should assign you a rep with a background in human resources, not sales. They should have certified payroll practitioners processing payroll and keeping on top of the continuous changes in rates and rules.  

If you have a large and growing group, you may want your EOR to support that growth with sourcing and recruitment services. Some EORs focus on payroll, while others provide full-cycle recruitment. An EOR that can do both is usually preferable, as they are more familiar with your organization and can present cost savings and efficiencies because of it.  

And that’s it, everything you need to consider before engaging an EOR or PEO! 

Ready to start hiring through an EOR? Contact us today!

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