Payrolling vs Employer of Record: How are they different?

Payrolling vs Employer of Record are often confused due to overlapping functions. While both address employee management needs, they operate on entirely different levels.

Employer of Record services provide a comprehensive solution for international hiring and compliance. It acts as the legal employer for workers in foreign countries.

While Payroll solutions, on the other hand, focus solely on processing salaries and managing tax deductions.

Even though both handle employee-related tasks, they serve very different purposes.

This blog aims to dissect these two models, clarify the roles of payrolling vs employer of record services, and help you decide which fits your business needs.

What is an Employer of Record (EOR)?

An Employer of Record is a service provider that acts as the legal employer for your workforce in a particular country. Such an arrangement enables businesses to hire employees in regions where they lack a legal entity.

The employer of record services ensure that the company is compliant with the local labor laws.

When it comes to payroll services, an employer of record manages the entire payroll process. It also handles employment contracts, enabling companies to focus on their core operations.

EOR is your trusted ally who helps you face the stormy seas of global employment.

That means the EOR services provider acts like a bridge between your company and an international workforce. It ensures all requirements regarding regulation and the law are followed.

Unlike payroll services, an employer of record also takes care of the fact that you onboard your employees smoothly, and operate in full confidence. It allows you to do so without establishing a physical or legal presence in another country. 

What is Payroll Solutions?

Payroll solutions are software or service-based systems designed to manage salary disbursement and tax compliance.

They act like your in-house accountant’s best friend. Unlike employer of record payroll services, complete payroll solutions cater to businesses that already have a legal entity in a specific country. 

However, they are in dire need of efficient payroll processing. Payroll solutions, much like employer of record, automate and simplify salary management. But, they do not extend to broader labor law compliance or legal employer responsibilities. 

Please go through our blog to learn more about payroll services in India

Key Differences Between Payrolling vs Employer of Record

Here are the most common and significant payrolling vs employer of record differences described in detail for you: 

1. Employment Contracts and Onboarding

Drafting legally sound employment contracts is a critical task, especially in foreign territories. The employer of record ensures that all contracts adhere to local regulations.

Additionally, they manage the onboarding process, making sure new hires have everything they need to start their roles effectively.

They ensure that the new hires receive essential resources, tools, policy training, and orientation.

This includes facilitating access to local workplace systems, clarifying job roles, and ensuring compliance with cultural and professional norms.

Read through our blog to learn how Remunance conducts effective employee onboarding for all its clients. 

2. Employee Lifecycle Support

From onboarding to exit interviews, the EOR manages the entire employee lifecycle. This support extends to resolving disputes, managing benefits, and facilitating employee transitions. A few of the unique ones are elaborated on here:

• • Conflict Resolution: EORs mediate disputes, offering you neutral solutions. These solutions comply with your company’s laws and protect employer-employee relationships.   
  • Benefits Administration: Managing benefits like health insurance, retirement plans, and leave policies, ensuring employees receive entitlements on time.
  • Career Development: Some EORs provide training opportunities, career path guidance, and professional development support.
  • Exit Processes: From resignations to layoffs, the EOR ensures all legal and procedural requirements are met. This includes severance calculations and final settlements.

3.  Compliance with Labor Laws

Every country has unique labor laws, and keeping up with these can be challenging. A few of the challenges are listed below:

• • Frequent Updates: Labor laws can change periodically, requiring constant monitoring to avoid violations.
  • Regional Variations: Different regions within the same country may have varying regulations, complicating compliance.
  • Complex Terminology: Legal jargon and intricate clauses make interpretation and application daunting for businesses unfamiliar with local frameworks.
  • Severe Penalties: Non-compliance can lead to hefty fines, legal action, or reputational damage.

Employer of record payroll services ensure you’re always on the right side of them. The EORs take care of all local employment laws, covering aspects like working hours, minimum wages, and termination procedures.

4. Employee Misclassification Prevention

An EOR solution categorizes workers as either employees or independent contractors based on their jobs and responsibilities.

Misclassification attracts heavy penalties, litigation, lawsuits, and loss of goodwill for the firm.

For example, an employee wrongly classified could claim unpaid benefits or back pay.

Did you know? Some countries, like the US and the EU, can penalize errant companies that classify employees as independent contractors at a rate of up to USD 100,000 per violation. 

By conducting thorough role evaluations, EORs mitigate these risks. They handle employee lifecycle in line with classification rules.

The following chart gives you an exhaustive list of the differences between the two models. Care to have a look?

Aspect	Employer of Record (EOR)	Payrolling Solutions
Scope of Services	Comprehensive HR, compliance, and payroll support	Focused only on payroll management
Legal Employer	Acts as the legal employer for workers	Does not take on the role of legal employer
Employee Misclassification	Prevents misclassification risks and liabilities	Offers no solutions for misclassification issues
Employment Contracts	Drafted, maintained, and compliant with local laws	Not handled by payroll solutions
Compliance Management	Ensures compliance with labor laws, tax laws, and employment standards	Only ensures payroll-related compliance
Employee Lifecycle Support	Provides end-to-end lifecycle management, including onboarding and exit support	Limited to payroll functions
Geographic Reach	Enables global hiring without local entities	Works best within countries where companies have legal entities
Risk Mitigation	High level of risk mitigation across compliance and employment	Low-risk mitigation, specific to payroll
Support for Global Expansion	Ideal for expanding into new markets	Not suitable for global expansion management
Administrative Burden	Significantly reduces administrative workload for HR and compliance tasks	Reduces payroll-specific administrative tasks only
Cost Implications	Comprehensive service comes at an optimized cost but adds value to your remote team	Cost-effective for payroll-only needs

To give you a more detailed overview of the differences between payrolling and employer of record solutions, we have jotted down the key responsibilities of both models. Let’s have a look at them.

What Are the Key Responsibilities of an EOR?

An EOR is more than just a middleman. It shoulders multiple responsibilities to simplify international employment. Here’s what it handles:

• • Hiring International Talent: An EOR solution scouts talent across borders and helps you build the dream team. 
  • Payroll and Tax Management: A report by Ernst & Young said that companies identify payroll as the most significant challenge in managing and securing talent for the company. An employer of record payroll administers the payroll, including salary disbursement, tax deductions, and compliance with local taxation law on your behalf.  
  • Employee Rights Protection: This encompasses the EOR solutions addressing potential instances of discrimination, harassment, unequal pay, or wrongful termination. 

What Are the Key Responsibilities of Payroll Solutions?

This section primarily discusses the significant contributions made by payroll solutions. Hence, you will notice the payroll solutions tasks deviating from the employer of record payroll tasks here. 

• • Salary Disbursement: Payroll solutions ensure employees are paid accurately and on time. These systems handle complex calculations, including overtime, bonuses, and deductions.
  • Tax Compliance: By managing tax deductions and timely filings, payroll solutions help companies avoid penalties for non-compliance.
  • Detailed Payroll Reports: Payroll solutions provide comprehensive reports that give insights into payroll trends, tax liabilities, and employee costs.

Eyeing the key features closely, we can establish that “complete payroll solutions” is a significantly different concept from the EOR solution and EOR payroll.  

What Are the Benefits of Choosing Employer of Record Payroll Services Over Payrolling?

I’m sure you’ve understood the concepts of payrolling vs employer of record, and the key differences.

We’ll thus move to the next big things to know about them. Hence, the elaboration on the benefits of EOR. Let’s get started.  

1. Performance Management

Employer of record provides tools and systems to monitor employee performance effectively.

This includes productivity levels, the completion rate of tasks, and employee adherence to KPIs. EORs facilitate performance reviews, feedback loops, and goal-setting sessions.

2. Employee Engagement

Employer of record leverages localized expertise to design team-building events and wellness programs and celebrate regional festivals.

Regular surveys, feedback sessions, and employee achievement programs help gauge employee sentiment and address concerns promptly. Such customized engagement strategies lead to higher retention rates and a motivated workforce. 

3. Employee Satisfaction

Employer of record contributes to employee satisfaction by offering job security to employees.

EOR solution addresses grievances promptly and provides clear communication about policies and expectations. Employees feel valued when their professional and personal needs are met.

4. IT Support

EOR solutions often offer IT support to bridge technological gaps for remote teams.

This includes providing secure communication platforms, collaboration tools, and technical assistance. EOR solutions facilitate cybersecurity and swift troubleshooting services. 

5. IP Protection

EOR solution drafts comprehensive employment contracts that include clear intellectual property (IP) clauses.

These contracts specify ownership of creations, inventions, or ideas developed during employment. EORs ensure that businesses retain exclusive rights to their intellectual assets. They minimize risks associated with IP theft or misuse.

Which One Between EOR Payroll and Payroll Solutions Should You Choose?

Here comes the pivotal question for which you’ve gained knowledge about EOR payroll and complete payroll solutions from this blog and maybe 10 others that you’ve come across.

While measuring on a weighing scale, both models will have their respective wins in some situations.

Let’s assess those situations, starting with the EOR payroll.

However, which model, payrolling vs employer of record, wins when it comes to a decision? Well, this is entirely based on what your business demands. Let’s see how.

When to choose an employer of record payroll service: 

1. Expanding into New Countries or Regions Without Setting Up a Legal Entity

Setting up a legal entity in a foreign country is expensive and time-intensive. It may take months to establish a presence, especially when navigating unfamiliar regulations.

An EOR eliminates the need for a legal entity by acting as the employer on paper. This allows you to operate in the new market almost immediately.

2. Startups Hiring Remote Global Talent

Startups often want to hire the best talent worldwide but lack the resources to cope with international compliance. Employing talent from different countries means dealing with diverse employment structures.

Take, for example, facilitating payment in local currency. For a lean startup, handling this complexity in-house is impractical. EORs simplify the process by managing these intricacies on your behalf.

3. Companies Seeking to Offload Compliance Complexities

An EOR becomes your compliance partner. They ensure your employees are hired and paid legally by staying updated with local regulations.

They relieve businesses of the burden of varied tax regulations and employment standards.

When to choose Complete Payroll Solutions: 

1. with Established Legal Entities in a Region

Companies that already have a legal entity and HR infrastructure may not need an EOR to provide their services.

However, the payroll management is still handled manually. This entails that mistakes, delays, and inefficiencies can persist.

A complete payroll solution connects to the company’s HR system to ensure accurate and timely payments.  

2. Businesses That Independently Manage Compliance and HR But Need Efficient Payroll Processing

Even if your company has a strong HR and compliance team, payroll calculations are prone to human error. Manual mistakes can lead to underpayments, tax penalties, or employee dissatisfaction.

Payroll solutions use algorithms to process accurate calculations and automate reporting.

 

Conclusion

I will conclude this blog by creating a Venn diagram comparing payrolling vs employer of record as two individual sets.

The diagram portrays that all EOR services take care of payroll solutions for employees. However, no payroll solution assumes the responsibilities of an EOR.

Their point of intersection lies in timely and accurate payments to all employees. Now, which set to choose? I’m confident that this blog can help you with that. If you still need more clarity or information, our experts are always available to address your questions.