What is an employer of record? Here's how they can help firms embrace global working

Companies like Uber, Lyft, DoorDash, and TaskRabbit popularized a new employment model that helped give rise to the gig economy. Millions of people could reap the benefit of a side hustle or new source of income.

However, the model also sparked – and continues to spark – fierce policy debates over the right classification for this type of worker.

Today, there’s a new employment model on the rise, and it’s not without its own set of hurdles to overcome, mostly because policy-makers have yet to grasp its true potential or understand how it works.

It’s called “employer of record”, or EOR, and it’s essentially cross-border employment facilitation.

In this process, facilitator companies assume responsibility for all functions related to employment where the worker is located but the employer is not.

This model has been offered by companies like Velocity Global and Globalization Partners for years, but new tech-forward platforms like Deel are now offering more scaled customer support and compliance expertise to accelerate global hiring.

Not long ago, employers had limited options when it came to hiring workers outside the countries where they were established.

If an employer didn’t have an established business, or “legal entity” in the jurisdiction where the worker lived, often their only option was to hire the worker as an independent contractor.

Companies couldn’t hire full-time employees and were thus unable to grant health insurance, pension and other benefits. It also opened them up to misclassification risk.

The EOR model addresses these issues by allowing companies without entities to employ people full time and give them benefits they couldn’t grant to them as contractors.

It’s a structure that levels the playing field for smaller businesses who want to hire across borders, but don’t have the resources to open an entity to do so – resources like legal teams and budgets available to larger enterprises.

The employer of record market is projected to reach $6,795 billion by 2028, up from $4,236 billion in 2021, at a compound annual growth rate of 6.9% during 2022-2028.

It’s seen an uptick in adoption in the past few years because of a few reasons. First of all, the pandemic normalized the concept of remote, distributed work.

Second, the prolific availability of workplace productivity tools like Slack, Zoom and other cloud services made it easier for anyone with a laptop and an internet connection to work across time zones and borders.

And third, the current economic situation has incentivized companies to seek workers abroad to optimize talent costs while gaining local expertise and accessing new markets.

According to Deel’s State of Global Hiring Report, workers in countries including Brazil, Philippines, India, and Italy are seeing salary increases because of their high demand. Popular industries for cross-border hiring include tech, education and finance.

The overall value of an employer of record is that it levels the playing field, so that companies of all sizes can hire talent from anywhere and make their work experience just as equitable as if they were traditional employees.

The ultimate vision is that millions of people get to work for the best companies in the world, no matter their location. And because demand for great talent in other countries is growing, workers’ average salaries are increasing in places like Brazil and India.

What stands in the way of employer of record’s power to transform cross-border work is a fundamental misunderstanding of how the model works and what it enables. Sometimes the EOR solution is confused with temp agencies.

Equity-based compensation for global workers has also raised some concerns for both the employer and the worker.

Employer of record workers are not entitled to the tax advantages reserved for regular employees. Equity granted to EOR workers is treated like a benefit in kind and thus subject to income tax, like a regular income and adds considerable employment costs, such as employee benefits or payroll tax.

Governments should begin to meaningfully address the policy gaps associated with employer of record. Some have already done so, to great effect: the Netherlands, for example, has formalized the EOR arrangement by providing a safe harbour for firms, with some exceptions.

The Dutch EOR system, known as ‘payrolling’, offers a permanent global hiring solution that ensures workers are entitled to at least the same working conditions and protections as fixed-term or permanent-contract employees.

Payrolling companies are obligated to offer a pension plan that is either equal to or more advantageous than the company’s plan.

At the very least, the EOR model should be formalized in law as a solution, albeit with some exceptions if deemed necessary. Instead of imposing arbitrary time limits, governments might want to establish exceptions depending on the industry, the size of the company, and market growth.

In addition, employees hired through an employer of record should be granted all the benefits of regular employees, including similar tax treatment on equity compensation and immigration status.

It’s high time for policy-makers to recognize the new reality of global work, and the EOR model should be at the centre of the discussion.

Hiring through an EOR should be an attractive and universally viable option. The workforce of tomorrow is increasingly global, and labour policies must evolve accordingly.