Employer of Record Pros and Cons: Key Benefits and Risks to Consider

It’s essential you consider employer of record pros and cons before hiring an EOR. Here’s the truth about the benefits and risks of an EOR.
EOR Pros and Cons, employer of record benefits, eor benefits, employer of record risks, EOR in Canada
Estimated read time
13
minutes
Category
Employer of Record
Written by
Melissa Hamer-Jackson
Published on
June 25, 2024

Is your U.S. or international company considering hiring an EOR in Canada? Before you do, here are the employer of record pros and cons you should be aware of.

Content at a glance

    Working with an employer of record in Canada can benefit many U.S. and international companies. But, it’s not the best choice for every business. Therefore, it’s important to understand the various employer of record pros and cons to determine if an EOR is right for you.

    In this article, our Canadian employment experts will share an unbiased look at the risks and benefits of EOR services. We’ll also provide insight into when using an employer of record is beneficial and when alternative employment options are better.

    But first, let’s take a brief look at what an EOR is and the role it plays in supporting your business.

    For an in-depth look at EORs and the services they offer, check out our article: What is an Employer of Record (EOR) in Canada? Essential Information for International Employers

    What is an employer of record, and what does an EOR do? 

    An EOR (employer of record) is a company that helps businesses legally and compliantly hire employees in locations where they don’t own a legal entity. For example, suppose a U.S. company wants to hire employees in Canada but doesn’t have a subsidiary there. In this case, it can work with an EOR to legally hire employees without setting up a legal entity.

    What is the role of an EOR? An employer of record functions as the legal employer of the international employees it hires on your behalf, assuming full legal accountability. An EOR is responsible for regulatory compliance and handles all employee-related administrative tasks, including payroll, payroll deductions, employee benefits, etc. If required, an employer of record may also assist with employee immigration, including Canadian work permits.

    Now, let's look at the employer of record pros and cons every company should consider before hiring an EOR in Canada.

    Employer of Record Pros and Cons to Consider

    As an experienced EOR, the Thirdsail team is intimately familiar with the benefits and risks of working with an employer of record. To help you decide if an EOR is right for your business, we’ve created a comprehensive and unbiased list of employer of record pros and cons.

    Employer of Record Benefits

    What are the benefits of working with an EOR? Below are some of the most significant benefits of an employer of record.

    Pro #1: Easily hire abroad.

    If your company wants to hire employees in a foreign country, working with an EOR makes this quick and easy. With the help of an employer of record, your company won’t need to set up a subsidiary company or navigate complex international employment laws. By avoiding this tedious and complicated process, you can save time and money.

    Pro #2: Reduce global expansion and administrative costs.

    Expanding your workforce internationally can be costly, especially if you must establish a legal entity in a new country. In addition to the high cost of setting up a subsidiary, you may require a physical office and additional legal, financial, and HR teams. But, with the help of an employer of record, you can avoid these complex, time-consuming, and expensive global expansion initiatives. 

    Working with an EOR can also help reduce administrative costs by minimizing the employment-related tasks (e.g., payroll, taxes, employee benefits, etc.) your internal team is responsible for. With the ability to leverage economies of scale, an EOR can also help reduce employment expenses by offering better rates for health insurance and other benefits.

    In terms of employer of record pros and cons, these cost-savings are a significant benefit!

    Pro #3: Enter new markets faster.

    Since working with an EOR allows you to skip the time-consuming step of setting up a legal entity, you can hire employees in new markets much more quickly. In addition, partnering with an EOR will allow you to avoid the painstaking process of sifting through unfamiliar employment laws and regulations to ensure compliance. Experienced EORs also have efficient onboarding processes to help you rapidly scale your business and enter new markets.

    For example, with the help of an EOR, your business can hire and onboard international employees in just a week or two. This process is quick and easy, especially if you have all the information you need ready to go.

    On the other hand, the time it takes to set up a subsidiary can vary greatly. Many types of corporations also require a resident director in Canada, which complicates the process. In some cases, setting up a subsidiary can take three to six weeks or more (if all paperwork is complete and there are no delays). The process must be completed before you begin recruiting, hiring, and onboarding.

    Pro #4: Guarantee compliance with local employment laws and regulations.

    The legal and employment experts at established EORs, like Thirdsail, are familiar with local labor laws and policies. Backed by extensive experience and knowledge, they’ll ensure your business operates compliantly in foreign markets. As a result, you can avoid the cost and inconvenience of legal issues and penalties.

    For example, an employer of record will implement proper hiring practices, help you issue detailed employment contracts, file local taxes, and ensure you offer compliant and competitive employee benefits packages.

    Pro #5: Eliminate employment-related risks and liabilities.

    An EOR assumes complete and sole legal responsibility for the employees it hires on your behalf. Therefore, working with an employer of record can eliminate employment-related risks and liabilities and shield your business from costly legal conflicts. 

    This is a significant benefit when considering employer of record pros and cons, especially when comparing an EOR vs PEO.

    Pro #6: Reduce administrative burdens and free up your internal resources.

    Outsourcing back office and HR-related responsibilities to an EOR will allow you to better utilize your internal resources for core business functions and strategic initiatives. Therefore, an employer of record can be a valuable resource when expanding your operations.

    Pro #7: Access a bigger, better talent pool.

    Hiring internationally opens up a much larger and more diverse talent pool. With experience hiring top talent in the foreign market you wish to enter, an employer of record will know where to find the best candidates and how to attract them! As a result, you can enhance the quality of your workforce and boost your competitive advantage.

    Pro #8: Enhanced employee experience.

    In addition to helping you find and attract top talent, an EOR will help you retain valuable employees by providing a favorable employee experience.

    There are numerous employer of record benefits that enhance employee experience, including:

    • Fair and competitive employment agreements
    • Attractive benefit packages
    • Employee protection (e.g., employee rights)
    • Accurate, timely, and convenient payroll and benefit distribution
    • Prompt HR support and resolutions

    These EOR benefits can ensure a happy, healthy workforce, leading to higher job satisfaction and improved retention. 

    The benefits of an EOR for employees are another significant consideration when contemplating employer of record pros and cons.

    Pro #9: Increase operational efficiency.

    In addition to enhancing operational efficiency by implementing streamlined hiring and employee management processes, an EOR can provide valuable workforce data and insights. Using this information, you can optimize your global operations and make better, more informed business decisions.

    After reviewing the employer of record pros above, you might wonder - what’s the catch? Are there risks to using an EOR? Let’s examine some disadvantages.

    Employer of Record Risks and Disadvantages

    While partnering with an EOR has many benefits, there are also potential drawbacks. Here are some key risks and disadvantages to consider when evaluating employer of record pros and cons.

    Con #1: More expensive than other hiring options.

    Hiring international employees through an EOR is cheaper than setting up a subsidiary in a new country. Employer of record services are especially cost-effective for businesses that want to hire a small number of employees (i.e., under 10 to 20). However, as a premium service, an EOR is not the lowest-cost option. For instance, working with an employer of record is much more expensive than hiring individuals as independent contractors.

    For many small businesses, this cost is the biggest downside when considering employer of record pros and cons.

    Con #2: Inconsistent employee benefits.

    In some cases, working with an EOR may result in inconsistencies in employment agreements and benefits between countries. EORs often have certain constraints (e.g., on vacation accrual or benefit options), and their offerings are not always fully customizable. Therefore, you may be unable to offer all your employees (in the different countries where you hire) the same employment arrangements and benefits.

    Con #3: Fluctuating operational costs.

    When hiring international employees through an EOR, you’ll be exposed to fluctuations in foreign currency exchange rates. As a result, your month-to-month costs will vary.

    For example, Canadian employees must be paid in Canadian dollars (CAD). Therefore, as the relative value of the CAD and USD change, so will your employment costs.

    Con #4: Loss of control.

    When you partner with an EOR, their HR, legal, and tax experts will manage many employment-related tasks associated with your international employees, including payroll. For many companies, this can feel like a loss of direct control.

    To minimize your loss of control, it’s necessary to work with a top-rated EOR, like Thirdsail, who will view you as a partner. By working with an employer of record like this, you’ll maintain authority over day-to-day employee operations and oversee all important business decisions relating to your workforce.

    Con #5: Poor employee management and communication.

    Working with an inexperienced EOR can pose employer of record risks for employees, including poor management and communication. For example, an inexperienced EOR may rush the onboarding process or have insufficient communication skills to manage HR tasks effectively. 

    In terms of employer of record pros and cons, this is a significant risk that can impact trust, job satisfaction, retention, and even the ability to attract new employees.

    Con #6: Negative impact on employee experience and company culture.

    Sometimes, third-party management can cause employees to feel disconnected from the company. This may affect their engagement and sense of belonging, negatively impacting your company culture.

    To mitigate this risk, it’s essential to discuss an EOR’s views on employee experience before hiring them. Look for an employer of record who is committed to a positive employee experience and provides clear and open communication.

    PRO TIP: To get a feel for an EOR’s communication skills and style, contact them with a few initial questions. Based on their reply, you can determine whether their communication is timely, thorough, helpful, and able to meet your needs.

    Con #7: Data security and digital compliance.

    An employer of record requires access to sensitive data to manage your international employees effectively. This introduces the potential for data security risks. If the EOR has inadequate digital security or doesn’t meet compliance regulations, this can pose a significant threat to your employee’s privacy. 

    To avoid data breaches and digital non-compliance, partner with an experienced EOR that has robust data security protocols in place.

    Con #8: Third-party dependency.

    Working with an EOR means your company is dependent on a third party for critical employment-related functions. As a result, disruptions or issues with employer of record services may negatively impact your business operations and employee satisfaction.

    Con #9: Legal and compliance risks.

    Although most EORs are compliance experts, there is still the potential for legal and compliance issues. For instance, if your EOR fails to comply with local employment laws, your company may face backlash, negatively impacting trust and the employee experience.

    To mitigate legal risks, it’s essential that you hire an established and experienced EOR, like Thirdsail, with a strong track record of success.

    IMPORTANT TO NOTE: Hiring an experienced EOR can mitigate many of the employer of record risks discussed above.

    That brings us to the end of our employer of record pros and cons list. If, at this point, you’re still unsure whether an EOR is the right choice for your business, keep reading.

    Is an EOR right for your business? 

    Wondering when to use an employer of record? The scenarios below showcase some common business initiatives that may be similar to your company’s goals. For each scenario, our team will provide insight into whether working with an EOR is beneficial or if an alternative international hiring option is more suitable.

    Scenario 1: Rapid Growth In a New Market

    ABC Tech is a small but rapidly growing technology company based in the United States. Company executives have identified a significant market opportunity in Canada. They would like to hire a team of local software developers to support a product launch within the next six months. The company has a small HR and legal team. They don’t currently own a legal entity in Canada but would like to hire 12 local employees.

    Is an EOR right for this business? Yes.

    In this case, ABC Tech's best option is to work with an employer of record in Canada. This will allow the company to hire local employees without setting up a costly subsidiary. In addition, while the EOR helps hire, onboard, and manage Canadian employees, the internal team at ABC Tech can focus on their product launch and market entry strategy. As a result, the company will be able to enter the Canadian market quickly, easily, and cost-effectively.

    Scenario 2: Long-Term Growth In a New Market

    XYZ Manufacturing, a large manufacturer based in the U.K., wants to expand its operations to Canada. Initially, the company would like to hire 20 to 30 employees in Canada. However, over the next five years, they aim to set up a new manufacturing facility and hire a substantial number of local staff. XYZ Manufacturing has a large team of HR, legal, and financial professionals.

    Is an EOR right for this business? No.

    In this case, XYZ Manufacturing has sufficient resources to establish a foreign entity. Therefore, setting up a subsidiary in Canada is the best option. Doing so will give them direct control over operations, allowing for greater customization in HR policies, procedures, and benefits. It will also help them build a strong company culture and a more permanent presence in Canada. Although it requires a considerable initial investment and more administrative effort, the long-term benefits of setting up a subsidiary outweigh the advantages of using an EOR.

    An Overview of Employer of Record Pros and Cons

    Below is an overview of the pros and cons of working with an EOR.

    EOR Pros EOR Cons
    Hire abroad without setting up a legal foreign entity or navigating complex international employment laws. More expensive than other international hiring options, like hiring individuals as independent contractors.
    Reduce expansion and administrative costs by eliminating the need to establish a legal entity, physical offices, or additional legal, financial, and HR teams. Possibility of inconsistent employee contracts and benefits due to EOR constraints.
    Enter new markets faster. Fluctuating operational costs due to exposure to changes in foreign currency exchange rates.
    Ensure compliance with local employment regulations and laws. Loss of direct control over employment-related tasks, like payroll, employee benefits, etc.
    Eliminate employment-related risks and liabilities. Risk of poor employee management and communication, which can affect trust, job satisfaction, retention, and the ability to attract new employees.
    Reduce administrative obligations and free up internal resources for core business activities and strategic initiatives. Threat of negatively impacting employee experience and company culture.
    Gain access to a larger, more diverse talent pool. Possibility of data security breaches and digital non-compliance, especially with inexperienced EORs.
    Enhance employee experience and retain top talent. EOR service disruptions can negatively impact business operations and employee satisfaction.
    Increase operational efficiency with the help of streamlined processes and valuable employment data and insights. Risk of legal and compliance issues and penalties if the EOR fails to comply with local employment laws.
    Still not sure if partnering with an EOR in Canada is right for your business? Contact our international employment experts to learn more about how (and if) an employer of record can benefit your business.

    Benefit from EOR Services with Thirdsail

    Is your business looking to expand into Canada without investing the significant resources required to establish a legal local entity? As one of the best EORs in Canada, Thirdsail can help.

    Our team of legal, financial, and Canadian employment specialists will do the heavy lifting - so you can utilize your internal resources elsewhere. With the help of our streamlined processes and convenient tools, we’ll manage employment contracts, onboarding, payroll, employee benefits, worker’s compensation claims, taxes, contract terminations, and more. Backed by years of experience, our team guarantees compliance with local regulations and labor laws, so you can rest assured your business and employees are in good hands.

    Ready to grow your business? Contact Thirdsail today.

    Employer of Record Pros and Cons: Key Benefits and Risks to Consider

    It’s essential you consider employer of record pros and cons before hiring an EOR. Here’s the truth about the benefits and risks of an EOR.

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