What is an Employer of Record?
In this installment of Ask OOTB, we’re making things a little more personal. We’re talking about ourselves and what we do as an employer of record. Many people aren’t clear on what an employer of record is or how a client might partner with one to handle the responsibilities that come with being an employer. This is for good reason! What we do is complicated. But knowing how an employer of record like OOTB works will help you understand how partnering with one can make your life easier. We’re going to answer the following questions:
What are the differences between using a payroll software and using an employer of record?
What are the responsibilities of a client when they are working with an employer of record?
But first, some quick housekeeping:
Ask OOTB is an ongoing series in which we share some of the most commonly asked questions that we receive, along with relevant information that can help you better understand all things payroll. If you have a question that you would like us to tackle, please submit it to us via our Ask OOTB online form.
And an important note: The information provided in this article does not, and is not intended to, constitute legal, tax, or financial advice. All information, content, and materials available in this article are for general informational purposes only. Information in this article may not constitute the most up-to-date legal or other information. We highly recommend that you seek the advice of an attorney or tax professional rather than relying solely on the information provided herein.
What is OOTB?
OOTB Solutions is an HR, payroll, and financial services company. Although OOTB can act as an employer of record, the scope and breadth of what we do goes beyond what many EOR companies offer.
OOTB partners with businesses to manage the many responsibilities and concerns that come with paying people for work. Our coordinated systems allow clients to bring their HR, payroll, vendor payments, and financial management together as one holistic process supported by an expert team. Clients can choose the services that fit their needs, and our experience in the commercial photography industry gives us a particular affinity for industries that are project-based or otherwise too complex for a traditional payroll company.
OOTB can provide any of the following services:
Payroll management
Vendor payments
Budget management and reporting
Employer of record (EOR)
What is an employer of record?
An employer of record (EOR) is a company that handles payroll, taxes, and benefits for employees of another entity. EOR’s are responsible for:
Onboarding new hires
Issuing contracts
Doing background checks and drug screenings
Issuing 1099s, W-2s, I-9s, and other important tax forms
Calculating appropriate tax withholding
Managing time tracking and payroll compliance
Paying the client’s employees/independent contractors
Administering the workers’ compensation policy and claims
Managing unemployment insurance claims
Terminating employees
Why might a company choose to use an employer of record?
There are five main reasons why a company might choose to use an EOR:
Better workers’ compensation rates: Companies that use EORs can often benefit from lower workers’ comp rates because the EOR has a competitive advantage in the workers’ compensation marketplace due to volume discounts from the larger number of employees managed by the EOR. The more employees, generally speaking, the lower the workers’ compensation rate.
You work in an industry with high turnover: Industries with high turnover do more hiring and termination. This is time consuming and requires a lot of expertise. The more turnover, the more time is spent on onboarding and termination.
You engage workers for a short amount of time: If you only need workers for a short amount of time, a EOR service might be a good solution. The EOR manages the engagement process and you just benefit from the labor.
You want to hire employees in another state or country: If someone has employees that are geographically spread out around the country or world, a local EOR can act as their employer. EORs are experts in their local rules and regulations. They keep you compliant and allow your workers to be paid compliantly wherever they work.
The rules for hiring, paying, and/or terminating have recently changed in your industry, or are difficult to comprehend: Engaging an EOR allows you to avoid most of the liability and compliance requirements of employing workers. The EOR takes on most of the liability and ensures that your workers are paid according to current regulations.
What is the difference between payroll software and an employer of record?
Payroll software is a TOOL that calculates the elements of your payroll. An EOR acts as the EMPLOYER of your workers. Payroll software, provided that it is set up correctly and properly utilized, can help pay your employees, issue W-2s and 1099s, and determine appropriate tax withholding from paychecks. Some also help track and handle benefits like PTO, health insurance, and retirement savings. With payroll software, you remain the legal employer of your own workers.
An EOR manages payroll, but also acts as the legal employer of your workers. An EOR is contractually responsible for making sure payroll is done legally. If you work with an EOR, they handle your payroll AND maintain most of the responsibilities and liability associated with being an employer.
What are the responsibilities of a client when they are working with an EOR?
Every EOR/client relationship is different based on the contract they have with each other, however, the following chart shows a general breakdown of responsibilities:
|
EOR |
CLIENT |
|
Onboarding new hires |
Determining who to hire |
|
Issuing contracts |
Determining contract terms such as hours, pay, and the nature of work |
|
Maintaining various insurance coverages related to employment, including EPLI and workers’ compensation |
— |
|
Doing background checks and drug screenings |
Deciding whether or not to do background checks and/or drug screenings |
|
Issuing 1099s, W-2s, I-9s, and other important tax forms |
— |
|
Calculating appropriate tax withholding |
— |
|
Issuing 1099s, W-2s, I-9s, and other important tax forms |
— |
|
Calculating appropriate tax withholding |
— |
|
Tracking time worked and rest periods |
— |
|
Paying employees/independent contractors |
Determining pay rates |
|
Handling workers' compensation claims |
Ensuring a safe workplace |
|
Handling unemployment insurance claims |
— |
|
Terminating employees |
Determining who to terminate |
We hope we’ve answered some of your more pressing questions about what OOTB does as an employer of record. To recap, an employer of record acts as the employer of your workers for tax and liability purposes, so you can focus on the day-to-day business of your company. EORs handle most issues related to payroll, HR, and compliance. They can save you both time and money.
If you have any other questions about how employers of record work, don’t hesitate to ask. OOTB is here to help make payroll, HR, and compliance easier to navigate!