When you hire employees, you’re not only bringing on new staff members but also taking on a host of new administrative responsibilities that come with hiring.
Points To Remember
- There are three types of contracts: Permanent Employee Contract, Employer of Record (EOR), Contractor/Freelance.
- ESOP is one of the top benefits for remote employees to attract and retain top talent.
- Providing all remote employees the equal benefits will help to promote loyalty.
Chief among these responsibilities is managing payroll and benefits as an employer. These tasks are not straightforward, but they are necessary to keep your employees happy and your business profitable.
These tasks can seem complicated at first glance, but when broken down into smaller pieces they become much simpler to manage.
Understanding the Type of Contracts and Benefits for Remote Employees
In this article, we will explore the ins and outs of managing payroll and benefits as an employer so that it’s no longer a source of stress in your business.
The 3-Tier Payroll Stack
When it comes to hiring employees, both physically and remotely, there are several factors that companies need to take into account. While there are various employment contracts available, the one you choose will have a direct impact on your company moving forward.
The type of employment contract you pick will determine the responsibilities the employee has and how much control the company has over them throughout the course of the agreement.
These contracts also have an impact on things like benefits, tax implications, and what rights the employee has when it comes to termination.
Before you dive into the types of contracts, it’s also important to understand the compensation divide so that you can decide the best compensation strategy for your employees.
There are three types of contractual possibilities that businesses can offer their employees and it’s crucial for employers to understand which one is best suited for their business so they know what their responsibilities are as an employer.
This is the 3-tier payroll stack you need to know:
Permanent Employment Contract
A permanent employment contract establishes a direct relationship between an employer and an employee. This type of contract typically offers a full-time position, making the employee an official member of your team.
Most companies use this type of contract to recruit employees who live in the same country as the company’s headquarters. In fact, this contractual relationship has long been the default for full time employment. It complies with local employment laws of the country where the company is incorporated and employees must live in that same country.
Also, in many cases, employers prefer to use a permanent employment contract for employees that are vital to the company’s success. Since those contracts come with legal boundaries that prevent them from leaving, such as long notice periods.
For employees, the primary benefits of a permanent employment contract is the possibility of receiving benefits specific to the country, such as retirement plan, leave subsidies, health benefits, etc. And more broadly, be protected by the country’s employment laws, which can be seen by many employees as an added security to their job.
In contrast, the need for complying with the local laws of the company limits the possibility for the employee to move to another country, and can come with a higher tax burden.
These are some of the pros and cons:
Advantages of Permanent Employment Contract
- No middleman, commission, or fees
- Direct relationship between employer and employee
- Other benefits of local permanent employment contract, both for company and for employee
Disadvantages of Permanent Employment Contract
- The employee usually pays higher taxes
- Not a flexible option for the employee in case they want to move to another country
- Not flexible for employer in case of a team re-organization
Employer of Record (EOR)
An EOR contract is when a company uses an outside organization to hire workers on their behalf. This means an EOR contract creates a middleman, where the company and the employee will be connected through an agency, and not directly.
The main difference between this type of contract and a permanent employment contract is who is listed as the employer. With an EOR contract, the contracting agency is listed as the employer of the employee, and the one that needs to comply with local employment laws.
This means the company that hired the workers isn’t legally responsible for their employees. If a worker for a logistics company is injured on the job, for example, the contracting agency is accountable for their medical costs, not the company that hired them.
Ultimately, for a company, the contract is signed with the agency and not directly with the employee. An EOR contract is a great option for outsourcing.
With the growth of remote work, many businesses prefer EOR to hire remote employees, especially when they can’t extend a permanent employment contract to them (eg: when the employee lives in a different country).
Some of the pros and cons of using an Employer of Record:
Advantages of Employer of Record (EOR) Contract
- Benefits of a local permanent employment contract for the employee
- No hassle for the employee in terms of taxes
- No hassle for the employer to handle employment related bureaucracies
Advantages of Employer of Record (EOR) Contract
- Lack of a direct connection with the employee
- A middle man who’s taking a fee, which represents either higher cost to the company or lower net salary for the employee
Contractor / Freelance
The third type of employment contract that employers should know is a direct freelancing contract. These contracts are done directly between the company and the employee, but the employee usually has a personal company that is used for the contracts and for invoices.
This is a great contract for businesses looking for remote employees with a specific talent for a short period. These contracts typically stay under a year, but agreements for more than a year also rarely happen. A company can also opt for this contract when they need to ramp up a new team quickly, since freelancers are usually much faster to hire and onboard.
For employees, this is usually the only option to work for a foreign company. They’d setup a personal company in their own country (100% owned by themselves), and use that personal company in all contracts and invoices.
An employee is fully responsible to take care of legal and tax related issues of their personal company. In some countries can be a significant overhead, in some countries it has fixed costs, and in some countries it’s even mandatory to hire staff (eg: accountant). An employee is responsible for all that, and should seek professional advice to setup the right entity for their needs.
Advantages of Contractor / Freelance
- Offers great flexibility for employers (that’s why it’s called a “mobile workforce”)
- Direct relationship between employer and employee
- Best for short-term contracts
- Can be tax advantageous for employees
Disadvantages of Contractor/Freelance
- Adds significant overhead to employees
- Adds vulnerability to employers that want to retain these employees long term, since it lack the typical guardrails of full time employment
Other Incentives and Benefits
Nowadays, the job market is extremely competitive. This means that in order to hire the best people, businesses need to come up with new and creative ways to attract and retain employees.
Whether you’re looking to hire new people or keep your existing employees happy, there are various benefits and incentives for employers available. In addition to utilizing remote employee engagement ideas and motivating them, these can be an excellent way of encouraging employees to stay with your organization, resulting in reduced turnover and greater employee loyalty.
Efficiency, cost-effectiveness, and employee morale are three key areas where benefits and incentives can have a positive impact on your company.
Benefits are something that an employee receives as part of their compensation package. It can be any non-monetary item that helps improve the quality of life of those working for a particular organization.
Incentives, on the other hand, are rewards used to encourage an action. It can be offered in the form of tangible items like gifts, cash, and/or travel vouchers, or it can be given as a non-tangible reward like a company recognition event.
Employee Stock Option Plan (ESOP)
An ESOP is a type of employee stock ownership plan that allows you to give your employees a share of your company’s stock.
ESOP is usually offered on certain conditions. Some companies mandate that an employee should stay in the company for at least 10 years in order to be able to sell their shares.
Such conditions help to retain key employees, attract quality talent, increase employee morale, and can provide your employees with a valuable source of retirement income.
Health insurance is one of the major perks of employment for many people, which provides anything from partial to full coverage for medical services.
This is a benefit that most employers will offer their employees. If you own a business, you can offer a contribution towards health insurance premiums to your employees.
If your employees spend a lot of time at the office, they might appreciate a membership to a nearby gym.
Not only is this a great health incentive, but it can help provide a good work-life balance.
Ultimately, healthy employees mean healthy business, so why not offer them a gym membership?
Home Office Budget
A home office budget provides remote employees the funds needed to set up an office inside their homes.
When working remotely, it’s easy for employees to lose track of work, get distracted, and even show a lack of productivity after some time. One way to tackle this is to have a proper workplace in place at home.
Businesses usually provide a home office budget in the range of $500-800. However, this ultimately depends on the location of the remote employee, cost of living, etc. So always research before deciding the amount of budget you want to spare.
Providing a coworking stipend for a nearby coworking space can be a great benefit for remote employees.
Remote workers often work hard for businesses in isolation, so it’s always a great idea to encourage them to meet and work together with their colleagues. This also contributes to preventing remote work burnout.
If your organization is remote, help your remote employees with a coworking stipend so that they can physically work together in local space and still enjoy the benefits of working remotely!
If your employees want to expand their skill sets, providing them with a budget to enroll in classes or attend conferences can be a great benefit.
Making All Employees Equal, Regardless of Type of Contract
When offering incentives and benefits, it is critical that companies make it equal for all employees regardless of their contract type.
Showing such fairness promotes loyalty among employees to their company, and most importantly, nurtures equality within the organization.
As a business, you must make sure the employees don’t feel left out. If that happens, the productivity of your team will be heavily impacted, and employees will soon start developing a grudge toward the organization.
Unhealthy emotions among your workforce will threaten the growth of the business big time! And it starts with the organization itself to introduce and nurture the act of fairness and equality.
Managing the payroll and benefits of employees are two hefty pieces of work as an employer. However, with the right awareness of what you’re dealing with, this management part can become quite interesting.
Start by understanding the 3-tier payroll stack. The foundation for managing the payroll of your employees is to understand the different contractual possibilities.
Then, employers must acknowledge the different types of benefits and incentives that businesses from all over the world use. This helps you get a better idea of how you can reward your hardworking employees.
The final note is to provide benefits and incentives equally to all employees, regardless of their contract type. Treating with such fairness helps you to nurture equality and loyalty among your workforce, which can drastically help in the company’s growth!
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