How an EOR Differs from a Payroll Company


Payroll administration is a complex process. For payroll accuracy, HR reps should demonstrate an understanding of tax laws, meticulous bookkeeping, and attention to detail. This is especially true when dealing with an multi-national workforce.

Fortunately, you don’t have to shoulder the payroll burden alone.

You can hire an external provider to simplify your payroll—so you can focus on the business’s core functions. As an international employer seeking payroll efficiency, you could opt for an employer of record (EOR) or payroll company.

What’s the Difference Between an EOR and Payroll Company?

Although both engage foreign workers, employers of record and payroll companies aren’t the same. While EORs provide HR assistance to international employees, payroll companies primarily focus on payroll solutions.

Another difference is their liability. The payroll company’s mandate ends with streamlining payment processes. Conversely, EORs take responsibility for administrative compliance, taxes, and benefits. Still, you have the final say in hiring decisions (such as promotions and terminations).

Note that payroll companies differ from payroll software. While you can hand over payment duties to a payroll company, payroll software requires manual data input. Payroll software may be cheaper than payroll companies, but they require some accounting experience.

What Are the Roles of an EOR?

An EOR assists with the following:


Employers of record minimize regulatory risk by ensuring compliance with immigration, payroll, and hiring laws. Proceeding without an EOR requires employers to study new laws and comply with various governing bodies.

It gets more complicated when the employees come from different jurisdictions, and you must keep up with each country’s laws. One wrong move could result in litigation and reputational damage.

International Expansion

International recruitment increases brand reach, expanding your revenue streams and customer base. You also get to experience fresh ideas from a culturally-diverse team. 

However, you need a local entity to hire from new countries. The cost and legal challenges of setting up multiple international subsidiaries could even make you abandon your recruitment plans altogether.

But with an EOR as the legal employer, you don’t need HR infrastructure in each of your workers’ countries. This allows you to upscale or downscale your workforce according to seasonal needs.

Recruitment Support

In addition to their administrative functions, EORs vet candidates with various background checks. The first one is identity verification. Confirming an individual’s birthdate, legal name, and social security number ensures you have the right information to proceed with other checks.

Moreover, EORs verify applicants’ skills examining their academic qualifications and certifications.

Criminal checks are also necessary—you don’t want to hire someone who will endanger your customers or employees. By looking into court records, sex offender registries, and federal, local, and state criminal databases, EORs can tell whether a candidate is a former convicted criminal.

Background checks might also include social media activity, credit history, and drug screening.

Employee Classification

EORs ensure proper employee classification by engaging HR, financial, and legal experts. Besides determining staff responsibilities and work hours, classification influences wage assessments and eligibility for benefits and worker protections.

For example, independent contractors lack entitlement to minimum wage protections, maternity leaves, or sick leaves like their employed counterparts. Misclassification attracts legal action from insurers, government regulators, and employees; this could cost you your best talents and invite fines, attorney fees, and back payments.

Benefits Administration

From attracting talents to improving your employee’s quality of life—benefits go a long way in building a healthy workforce. Benefits such as paid time off, pension, sick leave, and health insurance are legally mandated.

In contrast, non-statutory benefits boost workplace morale (although they aren’t a legal requirement). They include gas allowances, housing plans, gym memberships, and tuition reimbursement.

An employer of record knows different countries’ standards, making them perfect for global benefits management. They also distinguish statutory from non-statutory benefits to avoid trouble with the law.

What Are the Roles of a Payroll Company?

Payroll companies don’t just calculate salaries; they also:

Track Work Hours

Time tracking is important for various reasons. 

For starters, it aids compliance by keeping records of minimum work hours and paid time off. Time tracking protects you from time theft while ensuring employees receive payments in full. When it comes to billing, tracking ensures you don’t overcharge clients or sell yourself short.

Your payroll provider is responsible for providing efficient and easy-to-use tracking solutions. Instead of relying on manual timesheets, payroll companies utilize automated systems to reduce costly errors. 

In addition to tracking attendance in real-time, some programs send alerts to remind employees to clock in or out. Other systems also allow time-off requests without having to pass through managers.

File Taxes

Payroll companies help with various tax duties. They verify documents and calculate taxes according to local, federal, and state regulations. That way, they prevent any errors that could resulting in underpayments or overpayments.

Payroll companies also save you tax penalties by adhering to deadlines. If an employee wants to change their withholding status, you can count on your payment provider to make the necessary updates.

Payroll Record Keeping

Payroll companies keep records of employee salaries, tax forms, deductions, evaluations, terminations, and company policies. These documents serve various purposes. While government agencies require them for tax audits, payroll records are useful when reviewing labor expenses and company budgets.

Employees could also use the information to enter rental agreements and secure loans. The role of a payroll company is to provide accurate records for transparency and smooth reporting. They also utilize digital systems to save time and minimize errors.

Prevent Payment Delays

Payroll companies boast advanced payment systems to deliver wages on time and in the correct amounts. They also advise employers on the best payment providers to prevent waiting periods.

Delayed salaries could cause employees to miss their loan, mortgage, utility, and rent payments, causing financial stress and low productivity and output. Additionally, delayed payments strain employer-employee relationships, causing top talents to quit. Jobseekers are also likely to avoid your company.

Which Is Better?

The decision between an EOR or payroll company depends on your business needs. You’re better off with a payroll provider if you only require payroll services. But if you want to upgrade your HR functions, contact nextSource today for specialized EOR solutions.

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