The shift towards remote work, as part of workstyle reforms, has seen a rapid increase in adoption by companies following the outbreak of COVID-19. According to the Ministry of Internal Affairs and Communications' "Information and Communications White Paper" for the year Reiwa 5 (2023), 51.7% of companies have introduced teleworking. Alongside this increase in remote work, the concept of "EOR (Employer of Record)" has gained attention among businesses.
In today's era of widespread telework, companies eager to hire talented global personnel are increasingly allowing remote work from abroad. However, employing staff residing overseas necessitates compliance with local laws and tax systems. Most of these challenges can be resolved by utilizing the EOR mechanism.
This article will introduce the structure and applications of EOR, as well as its advantages and disadvantages.
"EOR" Explained
EOR (Employer of Record) is a type of employment agency service that handles overseas employment on behalf of a company. Literally translated, it means the "employer on record." An EOR provider manages legal and administrative employment-related tasks like human resources and payroll, while the contracting company handles business-related tasks.
When employing staff in new countries or regions, traditionally, it was necessary to establish a local branch or subsidiary. This process used to be time-consuming, labor-intensive, and costly. EOR has become popular as a means to remotely employ international talent without the need to set up a local entity.
The EOR system enables a provider to take over various human resource functions such as payroll, tax payments, social security processes, and labor management on behalf of the company. This allows companies to efficiently and smoothly proceed with their employment processes.
EOR is gaining international popularity, and according to research firm QYResearch, the global EOR market is expected to grow at an average annual rate of +6.8% from 2022 to 2028, reaching $6.62 billion by 2028.
How to Utilize EOR Services
There are various ways to use EOR services. Some of the most common use cases include:
Use During the Preparatory Period for Establishing a Foreign Entity
Companies planning to establish a foreign entity can use EOR services during the preparatory phase. It often takes several months to a year to establish a local entity, so many companies start their operations locally using EOR during this period.
EOR is also frequently used for market research and talent acquisition in the local market as part of test marketing before a full-scale entry into a country.
Hiring Global Talent
By utilizing EOR, companies can more easily recruit excellent global talent.
Expanding the recruitment scope beyond domestic borders to international talents can address domestic talent shortages. With EOR’s understanding of local employment conditions and legal constraints, companies can smoothly proceed with employment procedures while avoiding complex legal and tax-related risks.
EOR is also used to continue employing foreign talent who return to their home countries.
Flexible Global Expansion
EOR providers offer services to resolve employment process issues like legal and tax matters, making it easier for companies to adapt to different countries and regions. This flexibility saves time and effort in researching different legal and labor conditions, aiding in global expansion.
Major corporations like NIKE, Shopify in Canada, and Dropbox in the USA are also utilizing EOR.
Three Benefits of Using "EOR"
The use of EOR presents several benefits compared to establishing a local corporation or hiring as contractors:
Saving Time and Cost in the Employment Process
Establishing a branch or subsidiary overseas can be costly and risky. For example, setting up a British corporation through a labor and social security attorney's office can cost around ¥500,000 for establishment and about ¥200,000 for annual maintenance from the second year. It can also take about a year to start operations.
Using EOR eliminates the need for local incorporation and outsources the responsibility of being an employer in the local area, freeing from cumbersome tasks like adapting to each country's labor laws. With EOR, business can start in a few weeks, thanks to their expertise in expediting procedures.
Compliance with Laws and Risk Mitigation
Legal compliance and risk mitigation are probably the main reasons companies use EOR.
EOR providers support the employment process and legal compliance between foreign companies and employees, reducing the risk of legal violations due to personal procedural errors. Direct employment or contracting requires handling back-office tasks like legal and tax matters independently, often necessitating professional consultation and local response.
A significant concern for many companies is the risk associated with Permanent Establishment (PE). Without realizing it, allowing employees to remote work from abroad can create a tax obligation in that country, potentially leading to tax evasion.
EOR helps companies comply with labor and tax laws, thus avoiding complex legal issues related to employment. This significantly reduces the risk of compliance violations and related troubles.
Employees Can Receive Full-Time Employment Benefits
For employees wishing to work remotely for overseas companies from their home country, a significant advantage of using EOR is receiving full-time employee benefits.
Traditionally, cross-border remote work often involved using foreign staff as contractors rather than employees.
For instance, in Japan, maternity leave benefits are not available for contractors, making it impossible to take parental leave. Contracting often leads to more stringent requirements in rental agreements and necessitates annual tax filings.
Using EOR allows employees to enjoy the status and social trust associated with being a full-time employee in their resident country, enabling them to focus on their work without additional worries.
Disadvantages and Issues with Using "EOR"
While there are many advantages to using EOR, there are also some disadvantages and issues:
Increased Costs with Scale
Using an EOR provider involves initial and ongoing management costs. As the business scale and number of employees increase, these costs may also rise. In cases where a company plans to employ a large number of employees from the start, establishing a local branch or subsidiary might be more cost-effective than continuing to use EOR.
Restrictions in Certain Jobs
When adopting EOR, the provider becomes the legal employer, which may impose restrictions on some tasks and job types. It's advisable to consult with an EOR provider familiar with the specifics of each country for detailed information.
Conclusion
Utilizing the employment agency service "EOR" enables companies to employ remotely without a local entity or branch, and employees can work remotely for overseas companies while residing in their preferred country.
Several foreign EOR providers are operating in Japan, but many are not yet fully localized to Japanese laws, corporate culture, and language. No boundaries is one of the few Japan-originated EOR providers. Designed by international business consultants and Japanese lawyers, our service is supported by professionals knowledgeable in Japanese law and taxation. If you're considering implementing EOR, please feel free to contact "No boundaries".
Article supervised by
Kiyotsugu Manabe (No boundaries Ltd. CEO / Specially Appointed Associate Professor at Kyoto University's office of Society Academia Collaboration for Innovation)
Kiyotsugu Manabe brings a wealth of expertise in international development and management, backed by a robust academic foundation with a Master's degree from the Johns Hopkins University School of Advanced International Studies (SAIS) and the Graduate School of Frontier Sciences at the University of Tokyo, where he specialized in International Cooperation. His professional journey is marked by significant roles at leading international organizations, including the World Bank, JICA, and McKinsey & Company, where he has offered strategic consulting services to governments and multinational corporations across the globe. Manabe's extensive field experience spans a diverse array of countries, including the USA, Vietnam, Thailand, Bangladesh, Iraq, Jordan, South Africa, and Kenya, underscoring his deep understanding of global development challenges and solutions.
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