An Employer of Record (EOR) is a third-party provider that takes responsibility for recruiting, onboarding, and managing international employees on behalf of a business. EOR services include payroll processing, writing employment contracts, administrating workplace benefits, remaining tax compliant, and more.
EOR services allow startups to hire top talent and grow their workforce globally without setting up a legal local entity in another country. Establishing local entities comes with a range of costs, including:
- Initial setup fees. Registering your business abroad, obtaining necessary local licensure, and setting up foreign financial accounts will involve a significant initial cost.
- Employee overhead costs. Setting up a legal entity abroad means recruiting and managing a global team, including human resources (HR) and legal professionals. Hiring via EOR means you cut out the overhead costs associated with building an in-house team in a foreign country.
- Onboarding costs. EOR providers have already developed strategic sourcing, recruiting, hiring, and onboarding practices. This saves startups time and money, allowing them to focus on business growth instead.
- Legal and professional fees. When establishing a local entity, you’ll require costly ongoing legal counsel to ensure you comply with evolving local employment laws and regulations.
- Ongoing fees. Years after setting up your legal entity, you’ll still be paying recurring expenses such as annual renewals, tax filings, and other compliance requirements.
- Insurance costs. Securing international business insurance, including liability and employee coverage, can be a significant expense.
- Office space. Leasing and setting up an office space with the right furniture and equipment can add to your operational costs.
This article will explore how cost-effective EOR services are for startups.
EOR pricing models
Prices vary depending on the EOR provider you opt for, but there are also several different EOR pricing models, including:
Fixed fee model
Many EOR providers use a fixed-fee model, charging a fixed monthly amount per employee that they hire and manage on your behalf. This is a popular choice for startups, as it offers predictable costs that give you better control over your EOR expenses and the flexibility to expand your team.
While rates vary depending on the EOR provider, prices range from between £400 and up to £700 a month per employee. You are likely to get a discount if you pay annually.
Percentage of payroll
Other EOR providers will charge you a percentage of each employee’s salary. This model can put pressure on how much you can pay your global employees, as high salaries will make these percentage-based fees significantly more expensive than a fixed fee.
In addition, the percentage of the payroll model is often an indicator of hidden costs, and the costs increase when you give salary increases, bonuses, or hire more employees.
Custom pricing
The custom pricing model is based on which services you need from an EOR provider. For example, you can pay a monthly or annual fee for recruitment, payroll processing, and employee management.
Custom pricing allows startups to choose the EOR services they need without paying for the ones they don’t. This is an excellent option for startups that can recruit their own global employees and only need the help of an EOR provider for HR tasks, such as onboarding, document management, and time tracking.
However, like the percentage of the payroll model, the long-term costs can be challenging to predict.
Hidden costs of EORs
While it’s understandable that your costs will vary, there should never be any hidden costs that affect your cash flow. Before committing to an EOR provider, make sure you ask a few crucial questions to understand all of the costs involved, including:
- Setup fees. Ask your prospective EOR providers if you are required to pay upfront for the initial cost of establishing services for your employees.
- Termination and offboarding fees. Ensure you understand the conditions and associated costs for ending your contract with the EOR provider or when an employee terminates their employment.
- Currency conversion fees. Some EOR providers might charge fees for converting to foreign currencies when paying your international employees.
It’s also important to understand what EOR services your contract includes. You don’t want to be charged extra for services like maintaining legal compliance and managing your employees’ benefits.
Wrapping up
As mentioned, setting up a legal entity is costly and often complex. However, this shouldn’t put you off expanding your team across the globe. Startups can benefit from the cost-effectiveness of hiring an EOR provider to recruit and/or manage any international employees.
Always carefully review the contract and service agreement to understand the entire pricing structure of your chosen EOR and avoid any unexpected costs.
