If you have decided to outsource some or all of your recruitment firm’s back office to an employer of record (“EOR”), you have many options. How do you decide which EOR to use? In this guide, we will look at different types of EORs and the advantages and disadvantages for staffing firms that work in the US market.

Defining an Employer of Record

An Employer of Record (“EOR”) is a company that becomes the legal employer of your workers, handling and ultimately being responsible for payroll, taxes, and other compliance matters. A common example is this: a UK-based firm wants to hire a full-time employee in California but does not have a legal entity in the US. The UK firm can use an employer of record to legally employ the person, ensuring all taxes are paid and compliance procedures are followed while the worker performs work for the UK-based firm.

After this core functionality, the breadth of services can vary dramatically between EORs. Some EORs focus on particular countries (e.g. US and Canada only), while others focus on global reach (e.g. enabling hiring in 150 countries). Many EORs offer related services such as independent contractor payments and worker classification. So, what should you look for as a staffing company?

Enterprise EORs

The most important item to look for as a staffing firm is whether the Employer of Record is focused on the staffing industry. Most of the EORs you will find on search engines are structured to service end clients (“Enterprises”) directly and not intermediary firms like staffing agencies. We’ll call these EORs “Enterprise EORs.” Many of them will have words like “Global”, "Remote", or related terms in their names, and they will have slogans like “Hire talent in 150 countries easily and compliantly.”

These firms have excellent marketing materials and websites, and their salespeople will definitely speak to you. Nonetheless, they are typically not set up for contingent-style work generally and staffing firms specifically. There are several reasons why. First, they don’t do hourly work very well. Most of their platforms will not have the ability to service hourly work, which the US staffing industry uses, and will instead focus on employees with fixed salaries per month. Next, their funding requirements are onerous. Enterprise EORs will often require at least one month of employee salary deposited upfront for each person working at the EOR. For the capital-intensive staffing industry, this can be a nonstarter. Third, the Enterprise EOR fee structure is generally inappropriate for staffing firms. They will charge a fixed dollar amount for the entire month of work–$500 to $1200 per month–on top of payroll burdens (taxes and required insurance) regardless of how much you pay (and bill). While a fixed charge may make sense for full-time, highly-paid roles, variable-hour or medium-to-low-wage assignments (below $100,000/year) will incur exorbitantly high fees as a percentage of your staffing gross profit.

EORs Focused on Staffing

A Staffing EOR is an employer of record focused specifically on staffing firms. Compared to the Enterprise EORs, they will have features that are designed for recruitment companies. They will charge as a percentage of wages or billings instead of fixed fees. They will allow and have built capabilities for hourly time worked. They will also have agreements that accommodate the involvement of a third party, your end client. Nonetheless, among Staffing EORs, there are many flavors and some things to watch out for.

EORs that are also Staffing Firms

Some Staffing EORs are also staffing companies or have affiliated staffing entities. Although these firms understand the staffing industry, the tradeoff is that you are handing over your most sensitive data (your clients and your candidates) to a potential competitor. Sometimes, the conflict of interest is not obvious. The EOR may have a parent or affiliate company that is a staffing supplier. The giveaway is when there is an overlap in employees between the two entities, such as a shared sales or marketing team. Even with solid contracts between you and an EOR, the temptation to use the data inappropriately will be high within the staffing firm acting as an EOR. Luckily, there are many staffing EORs who are neutral and do not staff for clients that you can choose from.

EORs that Fund Payroll

We’ve narrowed down the field: you are looking for a staffing-focused EOR that’s not competing with you. You will run into two types of EORs in this space: some that fund payroll and others that do not. Why is this important? Staffing requires financing. Temporary worker payroll in the US is typically weekly or biweekly, and end clients pay in net 30 to 90 days. To run your staffing firm, you will likely need a financing source to match your growth of invoices and payroll. If your EOR doesn’t offer payroll funding, you will need to source invoice financing yourself, most likely through an invoice factoring company.

While invoice factoring will work for your needs, there are disadvantages. The factoring company will require you to sign a personal guarantee, which means that if your clients don’t pay and your company can’t cover the amounts, they will come after your personal assets. While this outcome is unlikely, it’s a theoretical risk worth understanding, given the stakes. You will also have operational challenges, such as uploading invoices weekly to your factoring company and managing weekly liquidity for payroll.

A funding Staffing EOR, on the other hand, will provide funding along with the EOR service. Ascen is an example of an Employer of Record that offers payroll funding. Practically, this works by the EOR covering all the costs for weekly payroll and then collecting money from your clients when they pay in 30-90 days, transferring you the gross profit once the client pays. Some EORs that don’t offer funding will “partner” with invoice factoring companies, but this is not the same as a funding EOR. Even if the EOR refers you to the factoring company, you will still be required to have a personal guarantee and have the operational complexities of having an external funder. If you already have funding already sorted out, you may still want to work with an EOR who offers funding since the funding EOR will likely have invoicing or other functionality that you can leverage.

None of this means you should always use EOR funding. If you are large enough to qualify for an asset-based lending facility (“ABL”), that will be your best option. ABLs become available for firms with around $3M in receivables, and the interest rates will be substantially cheaper than an EOR or factoring company funding rate.

Professional Employer Organizations (PEO)

Without going deep into the differences, we need to address PEOs. A PEO is a “Professional Employer Organization” that acts as a co-employer to your workers, usually handling payroll, taxes, and workers’ compensation for you. While PEOs are technically the employer of record, they are not the full employer and instead share employment responsibilities with your firm. Most PEOs are only for permanent employees, service end clients (like the Enterprise EORs), and virtually never fund payroll. PEOs are generally cheaper, but you will still be required to carry insurance, do state registrations, and handle most of the HR compliance associated with your contractor employees. Generally, PEOs will have the same deficiencies for staffing firms as the global enterprise employers of record but with substantially more risk and operational burden on your staffing company.

EORs with Limited Workers' Compensation Coverage

Some EORs will do a very good job pitching to help you expand to a country, but you will soon find out that they only cover office-type work, such as IT engineers or other knowledge workers. If your client needs to place a warehouse worker, you will need to turn down the assignment. Many staffing EORs will not cover healthcare, light industrial, or other higher-risk jobs. On a volume basis, this may not matter much for your recruitment firm, but clients often choose vendors on an all-or-nothing basis, meaning if you can’t staff all of their jobs, they will give you none of the jobs. In the US, this is driven by workers' compensation insurance coverage. Some EORs do not have the coverage or appetite to service these higher-risk jobs.

Tech-enabled Staffing EORs

Make sure to evaluate the tech platform of an employer of record. Some firms will meet all of your needs on paper, but they may be using third-party tools to facilitate the service (typically a third-party payroll system or a third-party back office platform). While this will functionally work, the experience of your candidates and clients will not be ideal. Some symptoms of low-tech EORs will include dealing with multiple platforms, mixed branding, and limited flexibility to what your clients need. Ideally, your EOR will have a white-label platform that highlights your brand, not the EOR’s brand, which could confuse your candidates and clients. The EOR should be as in the background as possible.

Time to Decide

To recap, as a recruitment firm growing in the US staffing market, you will likely want an EOR that is focused on staffing firms, covers a wide range of jobs (clerical, healthcare, and light industrial), offers payroll funding, and has its own technology platform. Hopefully, this guide will help you narrow down the options. If you are considering these items, you are already ahead. A quality EOR can unlock your staffing firm’s growth in the US market, especially if you know what to look (out) for.

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