Alternatives to Hiring an Independent Contractor

Topics Covered

There is a high risk and penalty of having an employee misclassified as an independent contractor. In addition, setting up an entity in a country to have an employee can be expensive and administratively time-consuming. This articles discusses the advantages and disadvantages of:

• Employee of Record (EOR)
• Professional Employer Organization (PEO)
• Staffing Agencies

Employee of Record (EOR)

EORs provide legal protection and the opportunity to hire employees in foreign countries for companies that are not in a position to hire in those countries. This arrangement is beneficial when using remote workers located in foreign countries and creating a legal entity in that country is not practical.

The EOR is the employee’s legal employer and takes on the responsibility of traditional employment tasks and liabilities, such as payroll and HR functions. In addition, the EOR takes care of all employer responsibilities such as employee benefits, workers' compensation, and insurance.

Advantages:

• Legal protection for workers and companies with workers in multiple geographic regions.
• Assist in HR needs and compliance in various regions.
• Beneficial when creating a legal entity in a country or region is not practical. For example, when there are only one or two employees in a country, that is expensive or difficult to set up or maintain a legal entity.
• Short onboarding procces; most EORs can onboard an employee in five to ten days.

Disadvantages:

• Larger expense compared to other hiring routes.
  • EOR vendors charge between $400 to $1,400 USD per employee per payroll period plus the costs of benefits packages.
  • The price range depends on the involvement and responsibility level of the EOR vendor.
• Benefits and plans are limited to the offerings of the EOR. But there are ways of doing a side letter or stipend to compensate for benefits not covered by the EOR.

Notes About EORs:

• Ask the EOR vendor if they have their own legal entity in the countries you want to use workers.
  • Some EORs do not have their own entity in every region, meaning they outsource this role. This limits their control and abilities in the region.
  • It may be beneficial to ask how many employees they have in a region. This could affect the size and variety of benefits packages they offer.
• EOR vendors vary broadly in how they service their clients and employees.
  • Some vendors are heavily automated and standardized, making them much more affordable.
  • Other vendors have bespoke arrangements and can be highly accommodating, making them much more expensive.
• Note that the employee is an employee of the EOR, not your organization.
  • The employee will not have legal authority in many aspects of your organization; including the ability to sign or authorize legal documents, expense items, and company cards must run through the EOR.
• Many EORs have a 6-month contract. Keep this in mind if you intend this to be a short-term arrangement.
• Employee benefits packages can vary significantly across EOR vendors and even across countries within the same vendor. Therefore, ask for specific packages when meeting with these vendors

Professional Employer Organization (PEO)

PEOs are like an outsourced HR department that provides some HR functions, including:

• Benefits administration
• Recruiting and hiring
• Payroll administration
• Unemployment administration
• Workers' compensation administration

PEOs have a joint-employment relationship with the company, meaning employee-related responsibilities and liabilities are shared between the two. However, legally the company (not the PEO) is responsible for the employees.

Advantages:

• Wages are reported under the PEO’s federal employer identification number (FEIN). Therefore, PEOs pay employment tax liabilities and file returns with the IRS.
• PEOs can assist, if needed, with hiring in other states or overseas. PEOs require that the company own a local legal entity in the country or region

Disadvantages:

• Most PEOs require companies to have a minimum of 5-10 employees managed by the PEO.
• PEOs are not responsible for compliance with local labor laws. PEOs do not bear legal responsibility or liabilities.

Staffing Agencies

Staffing agencies recruit employees for client businesses. These primarily provide temporary staff, but in some cases, they can offer temp-to-hire arrangements with the business (meaning the company may hire the employee as a full-time worker after a set period). Some also provide direct hire, in which the agency acts as a recruiter.

Advantages:

• Employees are considered under the staffing agency and not of the business
• Responsibilities and liabilities are under the staffing agency
• The staffing agency is in charge of all the paperwork (contracts, taxes)

This is the best option if you’re looking for people to fill in roles temporarily and find them quickly.

Disadvantages:

• Lack of Loyalty - Since temporary employees know they are only at your company for a short time, they can lack motivation and have lower productivity due to their lack of permanence.
• Alignment in Values - Staffing agencies may not understand your exact needs and company culture. It's essential to provide them with specific qualifications and traits to ensure you and the potential employee are a good fit.