When hiring new employees, it is essential to understand your legal responsibilities and potential liabilities. There is a difference between managing employees with an EOR vs a common law employer. Any mistakes made can result in having to pay costly fees and fines. It can also negatively affect your staff team’s productivity.
Most countries have strict laws requiring employers to follow common law rules as decided by the national Department of Labor.
If you’re partnered with a third-party organization like an international Employer of Record (EOR), your responsibilities are not the same as if you handle all aspects of recruitment and HR services on your own.
This article addresses the distinctions between employment laws for both EORs and common-law employers. By giving you the facts, we want to ensure you don’t end up having to pay high fees or fines.
Employer of Record vs Common Law Employer
What are Employer of Record Services?
Put simply, EOR services are a range of benefits given directly to employees of other companies. An EOR acts as the official employer for the employee they hire on behalf of the client company. From the moment they are hired, contract management, payroll services, and HR are all handled by an EOR service provider.
Many companies will choose to partner with an EOR to outsource essential HR functions. This provides their employees with greater security, speed, and accuracy. Within an EOR arrangement, the EOR acts as a link between the company and the employees for legal purposes. The employment contract is directed by the client company but officially signed between the EOR and the employee.
The EOR is also responsible for all legal liabilities such as tax and labor compliance, payroll, immigration assistance, etc. They take charge of monthly payroll taxes, organize family and medical leave on your behalf, and ensure the employment relationship is stable and correct.
This reduces tasks for the company as the EOR has a legal team of experts that perform services to ensure that every aspect of the recruitment process adheres to local regulations.
What is a Common-Law Employer?
A common law employer is a person or company that has full control over the employee’s activities. This includes the type of work that is done and how it is carried out. Common law employers have the power to assign wages, determine employee benefits, and terminate employees.
A common law employee must perform their work within the guidelines and restrictions provided by the employer. It also requires employers to manage all employment responsibilities on their own. Employer responsibilities may include integrating labor systems from multiple countries and harmonizing contract process steps.
These factors distinguish them from independent contractors on the other hand. These contractors are those who are not classified as common law employees or as working through an EOR. Instead, they can choose their own workplace and method of working.
What are the Essential Differences Between an EOR and a Common Law Employer?
An EOR is responsible for liabilities around providing payroll and recruitment as specified in their contract with the client company. They cannot be held liable by the employee for complaints regarding wrongful termination or discrimination or any other employer vs employee disagreements.
In a common law employment arrangement, the employer may have more control over the method of recruitment and onboarding processes. However, this also means more paperwork and hassle for the employer. An EOR provides administrative services so that the employer can focus on company operations.
The success of an EOR partnership relies on the contract between the Employer of Record and the client company. If the EOR is not legally compliant and doesn’t follow through on its side of the contract, there may be problems. This is especially dangerous if the EOR provider or does not have the right knowledge of local administrative requirements.
On the other hand, a common law employer is solely responsible for any employment or payroll issues that arise, and this could be costly in terms of settling lawsuits and in terms of damage to the company’s reputation.
All in all, companies that are seeking an EOR partnership should be sure to check the references and experience of the provider. Finding mistakes in the EOR agreement may be a good way to determine if the provider lacks essential expertise.
A Common Law Employment Contract
A common law employment contract is required to state every aspect of the employment arrangement, including:
- Compensation amount in local currency
- Work time and leave, including statutory holidays and days off
- Sick leave and other additional leave benefits
- Taxes to be withheld for social security and health care
- Insurance for workplace accidents
- Severance pay and termination notice periods
In many countries, employees may also ask for a collective bargaining agreement (CBA) that provides benefits specific to their industry.
How Can You Choose Between an Employer of Record or Common Law Employment Contract?
When trying to decide between an EOR agreement or a common law employment contract, you should consider the complexity of the employee arrangement that you need.
Depending on the size of your company or the type of industry, you may need to use both types of agreement. If the job involves international travel, an EOR agreement might be better. This is typically the best way to manage the taxes and other legal requirements of employee residence.
However, if the job is based in one country, a common law contract may be more appropriate if you already have a company structure in place.
How Do EORs Guarantee Correct Worker Compensation?
EORs guarantee correct worker compensation by having a detailed agreement outlining all of the payments, benefits and conditions of employment.
The agreement should include all of the aspects listed above, and more. It should also include a dispute resolution procedure in case of any disagreement between the employer and employee. Finally, the agreement should be reviewed by a qualified legal professional to ensure that all of the terms are fair and legal.
EORs typically hire legal experts to guarantee correct contract lifecycle management (CLM). CLM involves the management of an agreement over its entire life cycle, from its creation to its expiration. This includes reviewing the agreement for any changes or updates, tracking payments, and ensuring that all parties abide by the terms of the agreement. This may require specialist knowledge of complex international contracts.
Proper CLM services can help to minimize disputes and provide better protection for both employers and employees. EOR providers do this by ensuring that all parties are aware of their rights and obligations. The EORs can also provide guidance and support with navigating the contract and dispute resolution process.
This will help to ensure that all workers receive their proper wages and benefits.