An employer of record and an umbrella company can both be useful for businesses that are hiring internationally or pursuing global expansion. But should businesses compare these options? Understanding the difference between these two types of organizations is crucial for choosing the right hiring solution.
What is an EOR?
An employer of record (EOR) acts as the legal employer of employees who work with a client business. For instance, a company that sells sneakers might want to expand to a new market in India. They can use an employer of record to hire employees in India and work with them while the EOR covers everything else, such as contracts, payroll, taxes, compliance, benefits, HR and even onboarding.
Hiring an EOR is essentially outsourcing the main functions of an employer. A business becomes a client of the EOR, which manages its employees. At the same time, the business retains all of the working relationship functions. For example, they still collaborate directly with their international colleagues employed by the EOR. The EOR simply handles all of the time-consuming administrative tasks of an employer.
What is an umbrella company?
An umbrella company is a similar type of organization to an EOR, but there are some important differences. Umbrella companies are primarily for hiring temporary or contract employees, whether internationally or domestically. Unlike an EOR, umbrella companies do not take over HR-related duties like training or onboarding. They only facilitate hiring and paying employees and may also arrange benefits.
Umbrella companies typically work specifically with independent contractors and freelancers, rather than hiring people as employees. They can be thought of as an intermediary between the contractor and the client business. The umbrella company oversees the distribution of payments to contractors and facilitates communication between the two parties.
Employer of record vs. umbrella company
When considering the benefits of employers of record vs. umbrella companies, employers should know both organizations have unique pros and cons. Each is best suited for a specific type of business. Ultimately, the choice comes down to the reason a business wants to outsource some part of its hiring.
Either an EOR or an umbrella company can be helpful when hiring internationally. Both are simpler to work with compared to setting up a new company or subsidiary in order to work with employees in other nations. However, there is a difference in the type of employees each organization will work with.
Employee type and responsibilities
Businesses that only want to collaborate with freelancers or temporary workers should consider an umbrella company. Employers of record are better suited for long-term relationships with employees. Businesses must have a clear understanding of the differences between employees and contractors before choosing an employer of record vs. an umbrella company.
Additionally, EORs and umbrella companies have different responsibilities in relation to both workers and client businesses. An EOR will handle much more of the employer’s administrative tasks compared to an umbrella company. Businesses can outsource many time-consuming aspects of hiring and managing employees when they work with an EOR. For example, the EOR will often take care of hiring, training and onboarding. They also cover many employer costs, such as payroll and benefits packages.
In contrast, umbrella companies are almost exclusively limited to minimal intermediary tasks. They connect businesses with contractors or freelancers and oversee payments to those contractors. The client business is responsible for everything else. Umbrella companies may offer their contractors benefits, but not always.
Flexibility and guidance
The limited scope of an umbrella company’s responsibilities isn’t necessarily a negative. Some businesses may want more control over their onboarding process or a more direct HR relationship with their contractors. In these cases, an EOR might offer more services than a business actually needs, making an umbrella company a better fit.
On the other hand, some companies may need more guidance and support with their employees. For example, a business trying to expand to a new region could benefit from the knowledge and guidance an EOR can offer. This is especially true when it comes to complicated processes like payroll, taxes and compliance in other countries. In this situation, the hands-on nature of an EOR can be very helpful.
Opting for an EOR or an umbrella company
Understanding the differences between an employer of record and an umbrella company can help business leaders make the right decision when hiring internationally. Either of these organizations can help facilitate hiring and working with employees or contractors all over the world. However, both are best suited for different types of businesses and goals.