An Employer of Record and a Common Law Employer - What is the difference?

If you plan on running a global company, you may have noticed the terms “Employer of Record,” and “Common Law Employer.” At first, the two may seem similar, but they have significant differences.

It’s important to get familiar with these before you hire people from other countries. The difference between the two can also affect your business expansion plans.

Let's cover all you should consider in the Common Law Employer vs. Employer of Record dilemma.

What is a Common Law Employer?

A Common Law Employer is an entity or an individual that hires permanent employees. The Common Law Employer also directs all aspects of an employee's work and compensates them with salaries or wages.

The Common Law Employer has to meet all the legal obligations of the employer-employee relationship. It includes being compliant with labor and employment laws. The employer also has to oversee payroll and withholding taxes. They must also provide statutory benefits.

Typically, everyone who hires people is a Common Law Employer. There are exceptions, of course. This term usually doesn’t include self-employed individuals and non-profit organizations. It also excludes other types of employers that operate on different sets of rules provisioned for the Common Law Employer.

What is an Employer of Record?

An Employer of Record is an organization that acts as a Common Law Employer for an employee in a country where the employer doesn’t have a presence. While an EOR takes on all the responsibilities of an employer, they don’t dictate the work the employee does.

An EOR is a good option for businesses that want to hire talent abroad. They allow companies to hire anyone without establishing a presence. Most countries require you to have a legal presence to meet the Common Law Employer’s obligations toward the employee.

When a business hires an employee through an EOR, it still maintains control over all aspects of the employee's work. An EOR doesn't influence the business on who to hire or let go. They have no control over the hours the employee works, as long as they meet the provisions of local labor law. An EOR also doesn't affect which benefits the employer offers, apart from the statutory ones.

An EOR maintains compliance with employment and labor laws of the employee’s country. It also handles payroll, withholds taxes for the employee, and meets statutory benefits. Depending on the EOR, they may offer additional services.

Typically, relying on your Employer of Record when you want to hire up to ten people in a single country is cost-effective. If you consider hiring more people per country, establishing a presence in that country might be a more cost-effective option.

How do these differ in terms of employment?

There are two main differences between a Common Law Employer and an Employer of Record.

The first and most important one lies in who dictates what tasks the employee completes. With the Common Law Employer, they have full control over what their employees do during their work hours. It also controls when and how they perform their daily tasks.

An Employer of Record doesn’t influence the day-to-day work. What the employee will work on is entirely up to the Employer of Record's client and their requirements. An EOR handles the administrative tasks behind the employment. However, the employee works for and follows the instructions of the employer who hired them through an EOR.

The other important factor is the country that the employee works from. A Common Law Employer is limited to hiring talent that lives in the same country.

If they want to employ someone from another country, they must establish a presence there or hire an EOR to maintain compliance. They might opt to hire independent contractors instead of employees. But, the relationship between the two may be less beneficial to the employer.

On the other hand, a good Employer of Record can hire people globally. They typically have a presence in each country listed in their offer. It allows them to become Common Law Employers all over the globe for the employer.

These organizations take on all the Common Law Employer legal obligations for their clients. But, they don’t influence the actual work the employee does.

Which is better, hiring an EOR or becoming the Common Law Employer in each country?

Now that you know the differences between the two, you also know the answer depends on your business goals and expansion plans.

When hiring abroad, going with an EOR as the legal employer while you maintain control over the work of a small global team is more cost-effective. But, if your team continues to grow and a new country shows great opportunity, setting up a presence there might be a better option.

Both options provide you with control over your workers' day-to-day work.

But, you also benefit from outsourcing administrative tasks and maintaining compliance requirements with an EOR.

However, as your team grows, setting up a presence in another country and becoming a Common Law Employer might be more cost-effective. Once you establish a presence in another country and become a Common Law Employer, you are responsible for ensuring compliance. Consider hiring a local HR team or relying on a global payroll provider to stay on top of the legal requirements of a different country.

To make the right decision, keep your short-term and long-term expansion plans in mind. If you plan on expanding to another country, establishing a presence in a new country is a good option. If you want to hire individuals from different countries and maintain compliance, an EOR might be a better option.

Either way, you maintain control over day-to-day tasks. So, making the right decision depends on your budget and expansion plans. Also, consider whether you are more comfortable outsourcing the obligations toward your employees for a flat fee or managing it in-house.

FAQ

What is a Common Law Employee?

A Common Law Employee is any individual permanently employed by an employer. The employer has control over the work the employee does. An employee is eligible for compensation and statutory benefits.

What is the difference between an employee and an employer?

An employee is someone who is hired to perform a job. The employer is the one who hires the employee. The employer decides what, when, and how the employee works. They are also obligated to provide compensation and meet other legal requirements for the employee.

What’s the difference between a Common Law Employee and an Independent Contractor?

An employee is hired permanently by someone to fill a job position. They receive either a wage or a salary for their work. An independent contractor employs themselves and performs a temporary job for a client. With an employee, the employer has complete control over how, when, and where they work. The contractor sets their working hours and relies on universal best practices to complete project-based work.