What is an Employer of Record (EOR)?

21 April 2020 | Tom Waddick

When a business hires an employee, it is responsible for paying the employee for their labor and services. But just as important are the often overlooked responsibilities, liabilities, and labor compliance issues that go along with making that hire.

An employer of record is a third-party service that can save you time, money, and more than a few gray hairs by taking on some payroll and compliance responsibilities for your company.

What is an employer of record?

Simply put, an employer of record is a company that administers payroll taxes, workers compensation insurance, and other employee benefits while employees perform work at a different company.

Think of it as an outsourced payroll and compliance department.

Employer of record companies are responsible for managing payroll and taking on many of the responsibilities that an employer traditionally would. This includes ensuring compliance with federal and state labor laws for payroll, workers compensation, and other benefits.

With an EOR, the terms of who is responsible for what are delineated in the contract between the contract employer and the and the EOR. However, EOR services typically include:

Processing and distributing payments

Employer of record companies manage payroll and related administrative tasks like disbursing payments.

Filing Taxes

Employer of record services calculate and withhold taxes for employees and payroll taxes for businesses.

Collecting and issuing relevant forms including W2s and 1099s

As part of the withholding and reporting process, companies are responsible for collecting and furnishing relevant tax documentation. Employer of record companies handle all state and federal documents including W2s and 1099s.

Some employer of record services also have additional support for things like documenting and issuing reimbursements to employees, such as kit fees.

Workers’ Comp and other benefits

Many employees are entitled to benefits like workers’ compensation and unemployment insurance. Employer of record services administer workers’ compensation insurance and claims when they arise.

Onboarding new hires

When hiring a new employee, it’s important the employee be properly entered into your payroll system. It is also sometimes necessary to conduct background checks and drug testing. Employer of record companies can do both.

So what don’t employer of record services do?

Employer of record services do not have control over business operations. The business retains all responsibility for supervision of workers and matters relating to the workplace. An employer on record covers payroll, workers compensation, unemployment, and other benefit compliance.

Why use employer of record services?

Employer of record services can free up valuable time a business would normally have to dedicate to managing payroll and human resource responsibilities.

These responsibilities are absorbed by the employer of record meaning you can dedicate your time and attention to more important aspects of your business’s operation.

Employer of record services also can help ensure compliance with labor and tax laws across multiple states. An employer of record in California stays updated on changes in state and local laws across the country and helps ensure compliant payroll processing so you don’t have to.

Employer of record services manage independent contractors as well as full and part time employees, so no matter how your workers are classified, an EOR can help you fulfill your employer’s responsibilities to employees (how the employer on record processes payroll does differ depending on the worker’s classification).

In short, employer of record services provide a cost-effective way to help outsource payroll and benefit compliance, saving you time and money.

EOR vs PEO?

There is another category of third-party employee management services known as professional employer organizations, or PEOs.

Employer of record services and professional employer organizations are similar but provide different services to clients, and so the distinction between an EOR vs PEO is important to understand.

Especially when managing employees across multiple states and in situations where employment regulations become more complex. A few things to consider when comparing an EOR vs PEO…

Contracts

A PEO enters into what’s called a co-employment relationship with its business clients. This means that an employer’s responsibilities to employees are shared between the business and the PEO. In other words, the PEO is not the full legal employer.

When it comes to the contractual relationship between a PEO, its business client, and that company’s employees, employment contracts are held between the company and its employees. The PEO engages the company in a separate client service agreement.

With an EOR, the client business enters into an employer of record agreement with the employer of record service and the EOR in turn engages in employment contracts with the client’s employees.

Insurance

Insurance coverage is another important consideration when deciding between an EOR vs PEO as it can differ between the two due to a PEO’s co-employment relationship.

When working with a PEO, a business must opt-in to have coverage under the PEOs policy, which often means paying separately for additional coverage, carrying your own employment insurance, or most likely a combination of the two

In contrast, an EOR carries unemployment, workers comp, and disability insurance and employees are covered under the EORs policy, as outlined in the employer of record agreement.

Registration

The co-employment relationship also has an important implication when it comes to doing business across multiple states, as each state has their own registration requirements with varying complexity.

If a business engages a PEO, the business must still establish the required presence in every state where it has employees.

If a business’s EOR partner is already set up in a given state, however, the company can engage workers in that state through the EOR because the company does not retain responsibilities of co-employment.

So even if your business is only registered in New York, you can easily hire employees across the country and even internationally when working with an employer of record — California, New York, Rhode Island, Alaska — so long as the employer of record service is set up to do business in these states.

Wrapping Up

Managing a business can be headache enough, without also worrying about the tedium of payroll processing and complex compliance issues that come with paying a staff of rockstar professionals.

Employer of record companies can save you time and money while helping ensure you remain compliant with federal, state, and local labor regulations.

If you’re curious about working with an employer of record company, Wrapbook acts as a digital employer of record and administers payroll compliance and workers compensation insurance on behalf of employers while ensuring workers are paid on time.

Disclaimer

This informational post should not be misconstrued as legal advice. Wrapbook and its authors are not responsible for decisions made based on the information covered in this article. For legal advice, please hire a insurance professional, like Wrapbook, who can help figure out your specific situation.

Tom Waddick

Tom is a filmmaker, producer, and marketing specialist based in Los Angeles.

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