EOR vs Entity Setup in the US

As companies strive to outshine competitors globally, the ability to adapt to the ever-evolving technological and digital trends hinges on having a workforce that is not just sufficient in numbers but in terms of skills and expertise.

International employment has become a solution for enterprises to bridge this skill gap and scale operations. By casting a wider net and tapping into the global workforce, employers gain access to individuals with the desired qualifications and experience needed to achieve sustained success. The increased popularity of remote work has enabled businesses to hire employees in countries like the United States of America without the challenges associated with relocation.

However, various federal jurisdictions in the US have stringent rules for international companies operating as legal employers. Even each state, with its unique set of local labor laws and income tax brackets, introduces a layer of complexity and legal nuance.

In this article, we explain the advantages and disadvantages of entity setup and partnering with an Employer of Record (EOR), so you can make the right choice for your business to grow.

EOR vs Entity Setup: US Employment 101

If you want to hire international employees in the US, you must understand the basic differences between setting up a local entity and partnering with an Employer of Record (EOR) provider. 

What is an Employer of Record?

An Employer of Record enables you to hire US talent compliantly without the need to set up a business entity locally. It acts as the legal employer on your behalf, taking care of administrative tasks, such as payroll and taxes, while you retain overall control of everyday operations. 

This includes aspects such as: 

• Legal Employment Facilitation: EORs act as the official employer for your hires in the US, managing payroll, benefits, and much more.
• Ease of Market Entry: By handling employment contracts and administrative tasks, EORs allow rapid entry into the US market, making it a cost-effective solution for expanding your business presence.
• Compliance Assurance: EORs ensure adherence to US employment laws and regulations, mitigating legal risks and ensuring the protection of your business from potential legal issues​.
• Scalability: Offers flexibility in scaling your workforce up or down in the US, focusing on business growth while the EOR manages legal and administrative duties​.

What is a Foreign Legal Entity?

A foreign legal entity, also termed a foreign subsidiary, refers to the establishment of a business entity in another country, allowing the organization to conduct operations and employ staff directly.

Creating a foreign legal entity involves: 

• Full Control and Autonomy: Establishing a legal entity in the US grants complete oversight of your business operations and workforce, encompassing talent acquisition and compliance responsibilities​.
• Delayed Market Entry: Unlike using EORs, setting up a business entity involves a thorough process, including registration and understanding tax and employment laws, which might slow down your market entry but establish a long-term foundation​.
• Risk and Responsibility: Direct management of legal and regulatory adherence increases the risk of non-compliance, potentially leading to fines and legal challenges​.
• Initial and Ongoing Costs: Establishing a legal entity requires a significant investment upfront for setup and ongoing expenses for maintenance and management of HR functions​.

Hire Employees - EOR vs Entity Setup: Pros & Cons

The decision between opting for an Employer of Record (EOR) or establishing a local legal entity demands a thorough examination of the advantages and drawbacks associated with each choice. Let's explore the key considerations that guide expanding businesses in choosing between engaging an Employer of Record or pursuing the incorporation route:

Cons of Setting Up Local Entity

High Initial and Ongoing Costs

Setting up a local legal entity often involves significant financial investments, both initially and in ongoing operational expenses. The Association for Talent Development (ATD) estimates that employers spend an average of $103 per hour on employee training and about 62 hours per year training employees. 

Companies must allocate resources for legal fees, registration costs, office space, and compliance requirements, along with labor costs. While this investment may yield long-term benefits and potential savings, the substantial upfront and continuous costs can be a barrier to growing businesses with budget constraints.

For more information about how much it can cost to hire an employee by location, try our cost calculator.

Lengthy Setup Process

One of the notable challenges associated with establishing a local legal entity is the time-consuming setup process. This involves navigating complicated bureaucratic procedures, obtaining necessary approvals and permits, and complying with local regulations, which can delay a company’s market entry. Merely obtaining an Employer ID Number for tax purposes can take 4-6 weeks. For businesses aiming for rapid deployment, the extended timeline can be a drawback.

Legal and Compliance Complexities

Navigating the legal and regulatory compliance landscape in the US can pose significant challenges for foreign companies. Ensuring full compliance with both federal and provincial-level complexities demands a deep understanding of local legal nuances, potentially requiring the engagement of legal experts. Failure to adhere to these intricacies can lead to legal complications, reputational damage, and financial penalties.

Pros of Setting Up Local Entity 

Long-Term Control and Autonomy

One of the primary advantages of setting up a local legal entity is the added level of control and autonomy. This strategic move allows you to align your operations with the broader organizational strategy, facilitating comprehensive control over long-term decision-making.

Establishing a Physical Presence and Brand Identity

Creating a local legal entity enables you to establish a tangible and identifiable presence in the chosen market. This physical presence not only contributes to brand recognition but also enhances customer trust and confidence. 

Tax Benefits and Incentives

Some jurisdictions offer tax benefits and incentives to businesses that establish local entities. This can include tax credits, deductions, or preferential tax rates. By strategically setting up a local legal entity, you can optimize your tax position and leverage potential financial advantages offered by the local tax landscape.

Pros of an Employer of Record

Rapid Market Entry and Reduced Time-to-Market

The average company spends over $1,500 on a new hire’s onboarding before they’re fully integrated. In addition, onboarding paperwork takes up approximately 10 hours of HR time, according to the ATD. Leveraging EOR services can significantly expedite your company’s market entry and swiftly establish a presence in the US without unnecessary bureaucratic hurdles. 

By outsourcing the entire employment process associated with international hiring, you can navigate local labor regulations and compliance requirements more efficiently. It also reduces the time required to recruit talent and commence operations. 

Cost Efficiency with Streamlined Payroll and Benefits

Partnering with an EOR streamlines the payroll and benefits process, contributing to significant cost savings. EOR providers assume responsibility for payroll processing, tax withholdings, and benefits administration, alleviating the need for in-house expertise in both federal and provincial jurisdictions. This not only reduces the administrative overhead associated with employing an HR department but also minimizes the risk of costly errors associated with unfamiliar local regulations and tax codes when it comes to hiring international talent.

Outsourcing Compliance With Local Labor Laws

Navigating the intricate landscape of global employment compliance can be difficult. EORs ensure compliance across diverse jurisdictions and guarantee adherence to relevant local labor laws, tax regulations, and HR best practices. By utilizing the services of an EOR for risk mitigation, you can spend more time focusing on core operations.

Cons of Employer of Record (EOR)

Limited Control over HR Processes

While EORs offer efficiency in handling administrative tasks, some businesses may find the model limiting in terms of control over HR and employment processes. Critical decisions, such as hiring, onboarding, and termination, may be fully administered by the third-party.

Addressing Geographic Dispersion Challenges

Managing a geographically dispersed workforce can be perceived as a cultural barrier when utilizing an EOR. However, this potential concern opens up the opportunity for efficient talent utilization. EORs specialize in navigating the complexities of diverse locations, ensuring seamless coordination and adherence to local regulations.

Perceived Lack of Long-Term Commitment

The nature of the EOR relationship may be perceived by some as transactional, emphasizing immediate needs over long-term commitment. However, businesses often find that this model provides flexibility, allowing them to test the waters in new markets or adapt quickly to changing circumstances. It can be a strategic advantage for companies seeking agility in their global operations.

What Does An Employer of Record Help Me With?

Managing your staff becomes a well-defined process when partnering with an Employer of Record (EOR) in the United States. The EOR handles the intricacies of compliance, global payroll, and employee management, leaving you free to focus on your core business operations and drive growth. Here is what you will not have to worry about with an EOR partner:

Employment Contracts and Documentation

Every employer in the United States, under the Fair Labor Standards Act (FLSA), is required to maintain records for workers. These include

• Employee's full name and social security number
• Address, including zip code
• Birth date, if younger than 19
• Sex and occupation
• Time and day of the week when an employee's work week begins
• Hours worked each day and total hours worked each workweek
• The basis on which employee's wages are paid
• Regular hourly pay rate
• Total daily or weekly straight-time earnings
• Total overtime earnings for the workweek
• All additions to or deductions from the employee's wages
• Total wages paid each pay period
• Date of payment and the pay period covered by the payment

An EOR not only streamlines the meticulous task of documenting this information but also preparing valid employment contracts within these regulations. This includes handling employment offers, obtaining signed contracts or other required documentation, and managing banking information, among other administrative duties. The EOR ensures the execution of employment agreements adheres to local labor regulations, preventing issues like misclassifying employees as independent contractors. In the US, this involves complying with federal and state employment laws, guaranteeing proper contract types, and fulfilling reporting obligations to government authorities.

Minimum Wage and Salaries

The federal minimum wage in the United States is established at $7.25 per hour. However, certain states impose more rigorous standards on employers. For instance, California enforces a statewide minimum hourly wage of $16. Your EOR will guide you through compliance with state-specific regulations, helping you navigate the nuances of compensation across the various jurisdictions in the United States. They will ensure that your chosen salary aligns with local norms and standards, preventing any deviations from employment laws.

Overtime Pay

Additionally, EORs can provide insights on factors like overtime pay, bonuses, and other compensation components, ensuring your payroll meets legal requirements. The Fair Labor Standards Act gives covered nonexempt employees the right to earn overtime pay for working more than 40 hours during a workweek. "The overtime rate must be at least 1.5 times the amount of your hourly pay rate," as per the local labor laws.

Payroll and Taxes

Calculating payroll taxes and managing payroll processes in the US can be complicated. Employers must deposit and report employment taxes and must prepare and file Form W-2, Wage and Tax Statement to report wages, tips, and other forms of compensation for each employee. Different regions in the country also have their own tax regulations.

States levy corporate income taxes ranging from 0% to 12%, while the federal government imposes a branch profits tax of 30% on dividend equivalent amounts for businesses not considered domestic, in addition to federal corporate tax rates. For instance, New York State requires foreign corporations to file and pay their local dues even if they are yet to be authorized by the Department of State (DOS).

An EOR in the United States will handle these complexities for you. This includes communicating and calculating expected payroll taxes, which encompass federal, state, and local taxes. Your EOR will also promptly pay employees and ensure accurate withholding of employee contributions and income tax, covering all the intricacies of compliant payroll management. This is essential for your financial planning, as miscalculations can lead to penalties, and legal issues, and can negatively impact employee morale.

Employee Insurance and Benefits

While not obligated by the government, employers generally provide private health insurance in the United States to remain competitive when hiring top American talent. Offering a benefit policy in the US can prove to be a complicated process that requires extensive administrative burdens and significant financial obligations. An EOR assists in crafting a comprehensive benefits package that’s in line with US regulations. This includes mandatory benefits like sick leave and maternity leave, along with optional benefits that vary by state. Your EOR will facilitate access to favorable corporate rates for essential benefits such as health insurance, wellness packages, and additional time off, contributing to bolstering your employee retention strategy.

Vacation and Public Holidays

Navigating vacation policies and public holidays is simplified with an EOR. In the US, vacation policies are typically given out at the discretion of employers, and an EOR can help structure and track these policies. Additionally, they will ensure compliance with federal holidays such as:

• New Year's Day (January 1)
• Birthday of Martin Luther King, Jr. (Third Monday in January)
• Inauguration Day (January 20, every 4 years following a presidential election)
• Washington's Birthday (Also known as Presidents Day; third Monday in February)
• Memorial Day (Last Monday in May)
• Juneteenth National Independence Day (June 19)
• Independence Day (July 4)
• Labor Day (First Monday in September)
• Columbus Day (Second Monday in October)
• Veterans Day (November 11)
• Thanksgiving Day (Fourth Thursday in November)
• Christmas Day (December 25)

Certain states and the District of Columbia also recognize their own holidays, such as Emancipation Day or Indigenous Peoples Day, marking important days in the history of the region.

Parental Leave

The US labor law ensures 12 weeks of paid parental leave to eligible Federal employees “in connection with the birth or placement (for adoption or foster care) of a child occurring on or after October 1, 2020.” This leave can be taken within 12 months from the commencement of the birth or adoption. An EOR ensures compliance with the Federal Employee Paid Leave Act (FEPLA) that governs the administration of this leave period.

What Are My Responsibilities While Working With An EOR?

Your EOR in the US will seamlessly manage the intricate legal and HR processes needed to support long-term growth, ensuring that your expansion into the American market is smooth and compliant. Their comprehensive scope of responsibilities encompasses:

Your Responsibilities

While your EOR takes care of the legal and HR intricacies of hiring and onboarding talent in the United States, you retain control over daily operational tasks and employee management. Your role mirrors the way you oversee employees in your headquarters and includes:

Search and Recruitment

You're actively involved in the search and recruitment process, identifying talent that aligns with your company's vision and goals. It is ultimately up to the employer to find the right person for each open position. 

Company Onboarding and Training

You lead the company onboarding and training initiatives, ensuring that new hires integrate seamlessly into the organizational culture. This allows companies to communicate the organization’s goals and values to each employee. 

Team Management and Day-to-Day Communications

Daily team management and communication fall under your purview, fostering collaboration and ensuring a cohesive work environment. This can help foster a healthier company culture, which can lead to higher levels of employee engagement and improved performance.

Progress Tracking

Tracking progress and performance is integral to your role, ensuring that the team is aligned with company objectives. This will allow you to actively monitor progress to achieve the organization’s long-term goals. 

Learning and Development

You spearhead learning and development initiatives, nurturing the professional growth of your employees. Investing in learning and development programs can help companies address skills gaps and improve employee retention. 

EOR Responsibilities

Local Employment Law Compliance

Your EOR will stay abreast of and ensure compliance with the intricate nuances of local employment laws in the United States and ensure all practices are met, such as minimum wage requirements, health and safety, and more. This includes navigating federal and state regulations to guarantee that your workforce operates within the legal framework, helping you mitigate operational risks. 

Global Payroll Management

Efficiently managing global payroll is a complex task, but your EOR takes charge of this responsibility. They handle the intricate calculations, ensuring accurate and timely payroll processing in alignment with US tax regulations, along with maintaining accurate records.

Contracts and Benefits Administration

From preparing and administering employment contracts to managing employee benefits, your EOR handles the administration of employment contracts and employee benefits. It streamlines the collection of information as well as ensuring compliance with local laws while administering benefits.  

Taxation and Social Security Contributions

Navigating the intricacies of US taxation and social security contributions is a key aspect managed by your EOR. They will ensure that your payroll accurately reflects tax obligations and social security contributions in compliance with US laws and will provide essential documentation such as pay slips.

Legally Onboarding and Offboarding Employees

Your EOR facilitates the seamless onboarding and offboarding of employees, ensuring that these critical processes remain compliant with all legal obligations. This includes executing employment agreements with all the necessary terms and overseeing legal terminations.

Severance Payment

Handling severance pay is another responsibility shouldered by your EOR. They navigate the complexities of US labor laws, ensuring that your payroll includes the necessary considerations for overtime and severance. 

Overtime Payment

Additionally, your EOR may also help you track employee hours, allowing you to discern which employees are eligible for overtime premiums.

While the relationship with your employees remains consistent, whether hiring through an EOR or independently, the major distinction lies in the division of legal and HR responsibilities. It's crucial to ensure that employees understand all terms of employment to actively promote retention and set your US team up for success.

How To Select The Right EOR For My Business?

As you embark on the journey of expanding your business in the US, the choice of the right Employer of Record (EOR) can make all the difference in ensuring a seamless and compliant transition. Here's why Borderless stands out as the ideal partner for your international hiring needs:

Expertise in Global Employment

Our team at Borderless AI boasts a wealth of expertise in global employment, ensuring that your expansion into the US market aligns with local regulations and compliance requirements. With a proven track record in supporting growing businesses, we navigate the complexities of international hiring on your behalf, providing you with peace of mind.

Innovative and AI-Driven Global HR Solutions

Borderless AI redefines global HR and payroll services through the first-ever AI-powered HR agent Alberni. It offers comprehensive support without upfront costs by answering global employment questions, generating employment contracts, and analyzing your current employment agreements across 170 international markets. 

Comprehensive Legal and HR Support

We seamlessly handle legal and HR processes, from local employment law compliance to global payroll management. With Borderless AI as your EOR, you can focus on daily tasks and employee management, confident that the intricacies of contracts, benefits administration, taxation, and more are expertly managed.

As an Employer of Record with vast experience in helping companies hire compliantly in the US, Borderless AI is your partner in simplifying your expansion. Talk to our global workforce experts today to discover how to accelerate and streamline your global hiring.

_Disclaimer

_{Borderless does not provide legal services or legal advice to customers, contractors, employees, partners, or the general public. We are not lawyers or paralegals. Please read our full disclaimer here.}

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