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Employer of Record vs. Umbrella Company

Global Business Strategy
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Whether you’re building a strong team of talented employees, moving your operations to a remote work model, or entering new, international markets, your company will benefit from assistance with employee payroll and logistics. Both an Employer of Record (EOR) and an umbrella company can help you manage some or all of your administrative tasks related to employment law, payment, and benefits — but these two options are not the same.

Learn more about the difference between an international or domestic umbrella company and an EOR to make the best decision for your business.

Using an Employer of Record

EORs are a type of global infrastructure with a presence in countries across the globe. They help businesses like yours remain compliant with all local labor laws in your chosen region, manage employment contracts, create enticing benefits packages, and more. EORs are beneficial regardless of your industry, niche, or business.

Legally, the EOR company is your employee’s employer, while you are the EOR’s customer. This does not mean you lose any control over your operations. In fact, an EOR handles so many administrative and employment-related tasks that you have more time and resources available to focus on your business and daily responsibilities.

1. Responsibilities

EORs do not have any control over your business operations or interfere with day-to-day processes within your company at all. Partnering with an EOR keeps your data, intellectual property (IP), employee information, trade secrets, and other sensitive information secure and private. You remain responsible for employee supervision, disciplinary actions, training, management, and all tasks related to your company’s core functions and industry. The contract between you and your EOR will detail all terms of your agreement, including which tasks the EOR is responsible for.

EOR responsibilities may include the following:

  • Employ long-term remote, in-house, or international employees in all necessary roles, even at the executive level
  • Handle all payroll and related tasks, including payment dispersion, compensation, and benefits
  • Adhere to ever-changing labor and employment laws in each country
  • Offer and manage employee benefits packages and tailor those benefits to meet local market needs and competitor offerings
  • Maintain compliance with labor laws and avoid costly penalties, fines, or legal action
  • Offer ongoing local support for you and your team
  • Help you secure top talent, regardless of immigration policies, international borders, or other common barriers
  • Provide custom, locally compliant employment contracts
  • Process unemployment or workers’ compensation claims, when applicable
  • Protect employees from mistreatment or employment challenges with expert guidance and legal compliance
  • Employ tactics that may help you access lower rates on insurance, compensation, and other benefits
  • Provide guidance for employees and employers regarding work visas and associated legalities

Globalization Partners is an EOR that owns its entire infrastructure for a strong local presence in more than 185 countries with talented local advisors and in-house lawyers for ongoing legal compliance. We maintain world-class standards for all data privacy and security. Using an EOR frees up your time and resources, and opens your company to new markets and top talent to expand and strengthen your operations.

2. Payroll and taxes

As the legal employer, the EOR processes and manages your payroll for each employee. You still get access to all payroll information and may supervise as needed.

Your EOR can manage these payroll and tax duties:

  • Calculate and withhold taxes, pension, insurance, and other relevant benefits and withholdings
  • Collect and issue tax forms
  • Offer support for employee reimbursements or compensation
  • Monitor changing tax regulations and adjust as needed
  • Calculate fair and competitive pay according to the country of operation
  • Compare your rate to local competitors and other businesses in your industry
  • Ensure all employee payments are accurate and delivered to the employee on time, protecting you from costly fines and penalties

Be sure to work with an EOR that can manage payroll and taxes in your chosen location’s local currency. Globalization Partners works with 180 currencies worldwide.

3. Human resources

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A company’s human resources (HR) department is the backbone of successful employee relations. When you’re establishing your business in international markets or hiring an employee from another country, you need an HR department that understands and specializes in each country’s specific laws, regulations, and expectations. That’s where an EOR comes in.

An EOR can handle:

  • Onboarding: An EOR lets you find and onboard top talent in a matter of days without wading through months of complicated paperwork and working with outsourced third parties. They can help with background checks, drug tests, and similar onboarding tasks, so your employee can get to work as soon as possible. Globalization Partners’ comprehensive solution makes it easier to manage employees and track personnel information, like salary and benefits.
  • Benefits: EORs create custom benefits packages to attract and keep top-performing employees based on local needs and expectations in your chosen country. Our system lets you securely and privately administer and track all benefits.
  • Termination: If your company decides to move in a different direction during your global expansion, an EOR will guide you through lawful termination and severance to avoid fees or penalties.

4. Factors to consider

Ask the following questions before choosing and working with an EOR:

  • What model does your EOR company use, if applicable? Do you own the entire infrastructure, or do you use an aggregator business model?
  • How do you support international teams?
  • What about remote employees?
  • What local expertise do you have in my chosen country?
  • What does the onboarding process look like for the employee or contractor? How long does it take?
  • What businesses and services do you work with?
  • How do you handle IP?
  • What are my responsibilities, and how do they differ from yours?
  • Do you cover my chosen country, currency, region, or language?
  • What are your software and systems like? Are they easy to use and log in to? What information is accessible there?

Using an umbrella company

An umbrella company — sometimes called a Pay As You Earn (PAYE) umbrella — does not onboard employees onto your payroll. Instead, the domestic or international umbrella company works with companies and agencies requiring temporary employees or fixed-term contractors, like independent contractors (ICs). They play no role in employee relations, legal compliance, or other HR-related labor duties. They are strictly involved with conducting and dispersing payments from you to the contractor.

A contractor will sign a legal agreement with the umbrella company, agreeing to benefits and terms where applicable. You’re responsible for hiring the said contractor instead of a full-time or part-time employee. Umbrella companies are one choice for temporary employment agencies and business support services that don’t require long-term employment relationships and lack resources to handle payroll management for contractors.

1. Responsibilities

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Umbrella companies organize IC contracts, usually from a template, and facilitate payments between you and your contractors.

Here’s how it works:

  1. You secure the right contractors for the job and assign tasks as needed.
  2. You partner with an umbrella company and pay them for their services and any other applicable fees.
  3. The contractor completes their assigned tasks and submits regular invoices to the umbrella company.
  4. The umbrella company calculates the final pay, minus deductions, taxes, national insurance contributions and pensions, and disperses it to the contractor.

In terms of recruitment, umbrella companies are not responsible for finding or onboarding contractors. It’s more challenging to verify if an umbrella company is compliant with local labor laws since they often outsource legal support. Some umbrella companies may also utilize third-party outsourcing that could create miscommunication from multiple points of contact and leave your data, IP, and sensitive information vulnerable.

2. Payroll and taxes

Contractors track their time worked according to your and the umbrella company’s preestablished method, like timecards. They submit these invoices — along with any expenses — to the umbrella company at regular intervals. The umbrella company then calculates and withdraws deductions and contractor taxes and disperses pay according to the set payment schedule.

3. Human resources

Unlike an EOR or PEO solution, standard umbrella companies do not handle tasks like onboarding, legal guidance, or labor law compliance. Umbrella company HR responsibilities do not extend far beyond financial or payroll-related issues, questions, complaints, and obligations.

4. Factors to consider

Always ask a payroll agency or umbrella company the following questions before entering into a contractual relationship:

  • How involved are you in the interviewing and onboarding process, if at all?
  • What fees do you charge, and what do those fees cover?
  • How do you manage contractor fees?
  • What types of employment contracts do you work with?
  • How often do contractors get paid? Do I get to choose the payment schedule and options?
  • Do you offer any HR assistance?
  • Do you include business or liability insurance? What about other benefits?
  • Which tasks are you responsible for?
  • How will we communicate?
  • Do you have international experience?

Employer of record or umbrella company: Which is right for your company?

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Since both solutions offer payroll assistance, should your company work with an EOR or umbrella company? While they appear similar, EORs are better equipped to help you expand internationally and maintain legally compliant employee relationships in your chosen country. They also offer more flexibility and free up your valuable time and resources while adhering to changing labor and tax laws across regions.

Umbrella companies have received criticism for their treatment of temporary workers and have faced investigations for possible exploitation. For example, some temporary workers in the United Kingdom report losing as much as 104 British pounds a week due to excessive taxes and administrative fees from their umbrella company.

Make the right choice for your company by considering the following.

1. Are you expanding or conducting business internationally?

An umbrella company can assist your company if you rely on fixed-term contracted help in a known market.

An EOR is right for you if you:

  • Are unsure about expanding into a new market and want to test it out without establishing your own legal entity there
  • Want to hire talented employees in other countries or regions with different tax and labor laws
  • Need assistance managing international HR tasks
  • Are integrating global outsourcing as a part of your larger expansion strategy
  • Are building a remote team and need relevant payroll guidance

Don’t forget to factor in an EOR and umbrella company fees comparison to see which one will better suit your budget — EORs are a cost-efficient solution for outsourcing many of these tasks without relying on third parties that may leave IP and data vulnerable.

2. Does your company need flexibility?

Because an EOR specializes in hundreds of countries with local experts and in-house legal consultants, operations are fast, efficient, and highly scalable to your changing needs and expansion goals. They can also protect your IP and personnel information by keeping everything in-house without third-party outsourcing.

Umbrella companies specialize in contractor-business relationships for a fixed term, but they do not offer additional HR options beyond payroll management.

3. Do you work with employees, contractors, or both?

Hiring several employees in different or unknown markets is a complex, risky process if you don’t have the guidance and legal assistance you need to navigate labor laws. An EOR is the ideal option for companies that want to hire professionals for long-term assignments across the world, regardless of country. They work with full-time and part-time employees and may have policies in place for contractor help as needed.

Umbrella companies only work with contractors hired for a fixed term, making them the best option if you only need someone for a short-term or one-time assignment.

Learn more about the EOR solution from Globalization Partners

Globalization Partners is a global EOR that can help you expand your company into new and international markets and hire employees without establishing a legal entity. We’ll help you attract top talent with competitive benefits packages scaled to meet local laws and needs, with built-in compliance for more than 185 countries. Our ongoing local HR support is always accessible for you and employees to access important information or ask questions.

Save your resources and focus your time on building a profitable international company without worrying about complex administrative tasks and managing changing labor laws and tax policies. Contact Globalization Partners or download our eBook, “The Guide to Choosing an Employer of Record Model,” to learn more about working with an EOR and making the right decisions for your company.

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