Cross-Border Catch-Up: Global Hiring—Choosing Between Employer And Agent Of Record (Podcast)

In this episode of our Cross-Border Catch-Up podcast series, Diana Nehro (shareholder, New York/Boston), who is the chair of the Cross-Border Practice Group, and Kate Thompson (associate, New York/Boston) discuss the nuances of global hiring, focusing on the differences between an employer of record (EOR) and an agent of record (AOR). The speakers evaluate the pros and cons of each model, highlight compliance risks, and provide practical tips for employers to effectively and compliantly build their international teams.

Transcript

Announcer: Welcome to the Ogletree Deakins podcast, where we provide listeners with brief discussions about important workplace legal issues. Our podcasts are for informational purposes only and should not be construed as legal advice. You can subscribe through your favorite podcast service. Please consider rating this podcast so we can get your feedback and improve our programs. Please enjoy the podcast.

Diana Nehro: Welcome to the Cross-Border Catch-Up, the podcast for global employers who want to stay in the know about cutting-edge employment issues worldwide. My name is Diana Nehro, and I'm here with my wonderful colleague, Kate Thompson. We are cross-border attorneys here at Ogletree. Today, we are going to discuss global hiring options for employers with a specific focus on using an employer of record versus an agent of record. I'm actually really interested to hear about this because I don't think I know the difference between an employer of record and an agent of record. So, thank you so much for being here today, Kate, to talk me through it.

Kate Thompson: Of course. I am really looking forward to it. Thanks for having me.

Diana Nehro: Absolutely. So, as companies go global, they face a maze of local labor laws, tax regulations, and compliance risks. I'm familiar with using a solution and is the employer of record solution, but I understand that you have some information on the agent of record solution, and I would love to hear how that's different from being an EOR and what the pros and cons of both are. So, can you start with the basics? Can you tell our audience what an employer of record is?

Kate Thompson: Yes, definitely. And that's a great question. So, while their acronyms sound similar, an employer of record and an agent of record are quite different. So, an employer of record is a third-party organization that basically it legally employs workers on behalf of a company. So, the EOR takes on all of the legal and administrative responsibilities of employment. So, think things like payroll or tax withholding, benefits administration, complying with local labor laws and even handling terminations. And then your company would manage the day-to-day work and performance of the employee. This model is especially useful if you want to hire full-time employees in a country where you don't have a legal entity. So, the EOR acts as the official legal employer allowing you to onboard talent quickly and also compliantly without the headache of setting up a local subsidiary.

Diana Nehro: That makes tons of sense and is very interesting. Now tell me about an agent of record.

Kate Thompson: Of course. So, an agent of record, or an AOR, is a service that's designed for engaging independent contractors or freelancers. So, the EOR doesn't necessarily become the legal employer. Instead, they act as an intermediary, really ensuring that contractors are properly classified, that contracts are going to be compliant with local laws, and that payments are processed smoothly. So, the AOR helps you avoid the costly mistake of misclassifying employees as contractors, which can really lead to various risks, including fines, back pay or even legal disputes.

Diana Nehro: So, at a very high level, it sounds like EORs are responsible for hiring employees and taking on full employer responsibilities, and AORs are for engaging contractors and ideally helping you with compliance and administration without becoming the employer. So, now I want to talk about the pros and cons of each arrangement. Can you talk me through this?

Kate Thompson: Of course. So, let's start with the employer record. In terms of pros, let's think about global reach fast. So, EORs, they let you hire in new countries without necessarily setting up a legal entity and that could save you paperwork and costs associated with it. Another pro is compliance and risk mitigation. So, EORs are going to help handle local labor laws, tax filings, and statutory benefits, ultimately reducing your risk of non-compliance. And a third pro to an EOR is administrative relief. So, they help with payroll, benefits, HR tasks are managed for you, really freeing up your internal team so that you can focus on your core business.
Now, when it comes to some cons, the first let's talk about is cost. So, EOR services, they typically charge a monthly fee per employee, which it can add up especially for a larger team. Another con is perceived control. So, some companies, they feel a loss of direct control over their HR processes since the EOR is the legal employer. And then the third con that I'll talk about is scalability. So, for a very large or long-term operation, it might eventually make sense to set up your own entity rather than relying on an employer of record.

Diana Nehro: That makes sense. I always think that, for long-term goals and when you have a critical mass of employees in a particular location, both for liability encapsulation purposes as well as corporate tax-related risk, you probably do want to focus more on getting yourself established as a separate entity in that country. So, that makes a ton of sense. So, tell me about the agent of record. What do you see the pros and cons with this one?

Kate Thompson: So, with the agent of record, some pros are contractor compliance. So, the AORs are going to help classify workers, drop compliant contracts and really avoid those misclassification penalties. Another pro would be administrative efficiency. So, they'll help handle your onboarding, your payments, documentation for contractors, ultimately with the goal of streamlining your operations. And then third is flexibility. So AORs are really ideal for project-based work, more short-term arrangement or when you need to scale your contractor workforce up or down quickly. And then, in terms of cons, the first would be limited scope. So AORs are not designed for hiring employees. If you need full-time staff, then you really are looking at an EOR or your own entity. Another con could be ongoing accountability. So, while AORs help with compliance, your company still needs to ensure that the contractors are managed appropriately, and that the relationship doesn't cross into an employment territory. And then last is, sometimes AORs are less comprehensive so they don't provide benefits or handle HR issues beyond just contractor administration.

Diana Nehro: That makes a ton of sense too because, if people are truly contractors, they shouldn't be getting benefits, they shouldn't be getting anything that crosses the line into employment or HR. And I think it's probably worth making clear that it sounds like this is a service, from the AOR perspective, that can help with administration, but it can't make compliant or classify properly a contractor who is truly an employee. And I think that is important. I think as these types of companies grow, there is a little bit of a misconception that, if you engage someone through an AOR, that suddenly you're insulated for misclassification risk worldwide and that's not the case.
These are for truly independent contractors who would pass the direction and control test under any country's specific and relevant test. And I think I would say that, typically speaking, if the person is not going to pass that test in the U.S, they're very unlikely to pass it outside the U.S. So, I think this is a great idea if you have true contractors, but if you're looking for folks that even anywhere touch employment that the EOR solution would be far better and a far safer one.

Kate Thompson: Yes, I completely agree.

Diana Nehro: So, let's go talk this through a little bit. So how would we choose between an AOR and an EOR? My feeling is obviously, if they're contractors, it sounds like the AOR makes sense, but truly contractors and not misclassified employees, but tell me what your thoughts are.

Kate Thompson: Definitely, and I completely agree with that. I think it really comes down to what are your workforce needs. So, if you want to hire a full-time or a part-time employee in a new country and you don't have a local entity, then an EOR could be a good go-to solution there. If you're engaging true independent contractors, Diana, like you've previously touched on or freelancers, especially at across maybe multiple jurisdictions, then an AOR could also be a good option there. Some companies even use both. Sometimes they use EORs for their core employees and AORs for their contractor workforce. It really depends on the arrangement and can be worked out in a variety of ways.

Diana Nehro: I think that's a really important point, and I think one of the hallmarks of proper classification, or one of the important key factors in having someone who is truly an independent contractor, if you have folks that take on multiple clients that work for competitors but also do project-based work for you, it sounds like the AOR would be a very helpful solution in that regard. So, before we wrap up, I think it would be very helpful to walk through a few practical tips when it comes to global hiring. Kate, what do you think?

Kate Thompson: So, first things first. You want to assess your workforce mix. Are you building a long-term team or do you need project-based talent? Second, really make sure that you're understanding the local laws. This is crucial, because misclassification risks are real, they're costly and they can lead to severe penalties, including back taxes, social security contributions, and even criminal liability depending on what country we're talking about.

Diana Nehro: That's a great point.

Kate Thompson: And third, it's important to plan for the future. So, we've talked about this a little bit in the beginning of the podcast, but as your global presence is growing, you may find that monthly fees for the EOR services start to outweigh the benefits, and it ultimately could be more cost-effective to establish your own local entity. So, planning for this transition early on can ultimately save time and resources down the line.

Diana Nehro: Really, really great points and super helpful tips. There is one final issue that I'm hoping we can chat about. Can you briefly highlight the joint employment risks inherent in both arrangements? Because I think some folks go into it thinking they don't have to worry about that, but it is a real issue in both structures.

Kate Thompson: Definitely. So, as you may know, joint employment arises when there's two or more entities who share control or responsibilities over the same worker, which can result in both parties ultimately being held liable for compliance with employment laws, wage and hour obligations and also statutory benefits. So, when we're talking about EORs, the third-party provider that's going to be the legal employer on paper handling payroll, tax withholdings, benefits and compliance like we've previously talked about. However, your company, they typically direct the day-to-day work. They'll set performance expectations, help to manage the employee's tasks, and this division of responsibilities can sometimes blur the lines of who is the true employer when it comes to in the eyes of the regulators. So, if the authorities determine that both the EOR and the company are exercising significant control over the employee, then both could be deemed joint employers. So, this means that the company could be held liable for employment law violations even if the EOR is the official employer of record. And this is why it's really crucial for employers to have robust indemnification language in their agreements with employer of records.

Diana Nehro: That's a great point, and it's important too before engaging the EOR because the indemnification provision is only going to be as good as the paper it's written on, that you deal with companies that have assets that actually are, in the event that you have to proceed against them, that there's actually something to collect. I think that does tend to be important.

Kate Thompson: Exactly. And I'll briefly touch on AORs. I know we're running short on our time, but the risk is slightly different, but it is still present. So, the AOR is really acting as an intermediary for independent contractors, again, focusing on your compliance and administration. However, if your company is exerting too much control over how and when and where that contractor is working, or if the relationship resembles that of an employer and an employee, then authorities may reclassify the contractor as an employee. And then, in those cases, both your company and the AOR could be considered joint employers, which would expose both to potential liabilities for misclassification, unpaid benefits and also other statutory obligations.

Diana Nehro: And it's funny, as you're talking about it, it does make me think, stepping away from the joint employer point for just one minute, but also in terms of your goals for the engagement of folks in the particular region that you're dealing with, I think something that you probably would lose with any independent contractor relationship, including with an AOR, is the ability to own any intellectual property that the folks are engaging. So if you're engaging software developers or IP developers and it's important to you that you own that IP, I think you want to be really careful about the arrangement because it'll be difficult to enforce if you don't actually have an employment relationship if it turns out that there is misclassification.
And I suppose something you can ask the AORs as well as the EORs in both circumstances is to negotiate whether they'd be willing to prosecute such claims for you. Obviously, in exchange for a fee, but just to ensure you're protected there. And that's why I always tend to think, going back to the EOR versus subsidiary point or AOR versus subsidiary point, if that's something that's important to you, it does start to make a lot more sense to actually think about setting up an entity and then having there be a direct employment relationship and then an IP assignment.

Kate Thompson: Exactly. All great points.

Diana Nehro: Wow. So, it sounds like both models could be great for compliance administrative benefits. It's really on the employer, the actual employer, the client, to be vigilant to avoid inadvertently assuming joint employer risk, misclassification risk, and any other associated liabilities. I think that's probably all the time we have for this episode. We hope this breakdown of employer of record and agent of record services help as you build your international teams. Thank you for joining us for today's Cross-Border Catch-Up. Follow us to stay in the know about cutting-edge employment issues worldwide. Until next time, happy hiring.

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