Balancing compliance with business priorities gets more complex as you grow into new markets and expand your team. Employers of record (EORs) and umbrella companies can simplify workforce management, but each has its own use case and advantages.
This guide will explain the differences between EORs and umbrella companies, so you can find the right approach for your business.
What is an EOR?
An EOR acts as the legal employer on behalf of another company. An EOR lets you hire employees worldwide without establishing a local entity in each country.
While you retain control over the employees' day-to-day work, the EOR handles compliance, payroll, taxes, benefits, and other HR functions. Partnering with an EOR helps you:
Hire employees anywhere in the world.
Streamline payroll processes, tax withholdings, and benefits administration.
Minimize compliance risks by entrusting regulatory adherence to an expert partner.
What is an umbrella company?
The meaning of umbrella company refers to an entity that facilitates contract work. Umbrella companies are also known as pay-as-you-earn (PAYE) umbrellas, meaning they use the PAYE system for deducting taxes. They're intermediary entities between companies and temporary employees or contractors.
An umbrella company is a legal employer, but only manages deductions and contributions and disperses payments from the company or agency to the contractor. Meanwhile, the company or agency remains responsible for overseeing work direction, managing expectations and deliverables, and ensuring compliance.
Key differences between EORs vs. umbrella companies
EORs and umbrella companies act as legal employers and intermediaries between companies and workers. Both can help with payroll, support compliance, and assume some employer responsibility. However, the scope of support and responsibility each approach offers is different:
Scope of services: EORs streamline a full range of HR tasks, including onboarding, contracts, pay, and benefits. Umbrella companies focus on payroll processing and basic administrative tasks.
Employment type: EORs focus on long-term employment, though some providers like G-Pâ„¢ also support contractors and temporary employees. Umbrella companies work with contractors and temporary employees.
Compliance support: EORs provide comprehensive support for compliance with local employment laws. Umbrella companies support compliance in payroll, including taxes and contributions, but don't necessarily provide other legal support or services.
Reach: EORs have global subsidiaries and in-country expertise to support compliant scaling to new locations. Umbrella companies have a narrower focus and limited international expertise, typically operating within a single country. They're common in the U.K. and France. In France, temporary employment contracts and the companies that facilitate them are regulated under the entreprise de portage salarial model.
Control and flexibility: EORs offer access to global talent pools and hire the candidate you choose. Umbrella companies, often tied to recruitment firms, can limit access to talent and create a more distanced relationship.
Risk mitigation: EORs manage all aspects of compliance. Umbrella companies leave more of a compliance burden on customers and give a narrower scope of support.
Fee structure: Leading EORs have a clear and predictable fee structure. Umbrella companies sometimes have more complex fees, which can impact the businesses and contractors that work with them.
Choosing between an EOR and an umbrella company
Given the differences between EORs and umbrella companies, the right choice for your company depends on your needs and priorities.
If you want to expand into a new market or build a distributed team, choose an EOR. EORs have the entity infrastructure and expertise to support compliant global hiring. An EOR lets you quickly access new markets and talent without the time and cost of establishing a local entity. You can also enjoy flexibility and compliance assurance while hiring and managing full-time employees, part-time employees, or contractors.
If you only want help with contractor payment in a location where you already have an entity, an umbrella company may meet your needs.
The growing demand for EORs
The World Economic Forum predicts that by 2030, digital jobs that can be performed remotely are expected to grow to over 90 million roles. As more work happens in digital spaces, distributed workforces are more feasible and common. At the same time, companies of all sizes are using EORs to scale their business to new global locations, without the cost and complexity of entity setup.Â
These factors drive the growing demand for EORs, which provide fast, flexible, and compliant solutions for global hiring and expansion.
Hire globally with G-P
As the recognized leader in global employment, G-P helps companies of all sizes hire, onboard, and manage global teams in 180+ countries. Our industry-leading global employment products and EOR solutions are backed by the largest team of in-country experts.
Contact us today to discover how we can help you hire anywhere, quickly and compliantly.
FAQs
What’s the difference between an umbrella company and a limited company?An umbrella company engages contractors who take on temporary work, often through recruitment agencies. The umbrella company handles taxes and compliance in the payment process.Â
A limited company is a separate legal entity owned by at least one shareholder. A company or contractor can establish a limited company, giving them more control over their finances and business operations. They're responsible for managing their own taxes, accounting, and compliance with legal regulations. This structure is tax-efficient, but requires more administrative responsibility.
How do EORs and umbrella companies ensure worker classification?An EOR acts as the legal employer and ensures compliance with local labor laws, including tax obligations and worker entitlements. Whether you're hiring an employee or a contractor, EORs mitigate worker misclassification risks.Â
Umbrella companies streamline payroll and tax deductions. Contractors engaged by an umbrella company work on a temporary or project basis for customer companies. This can simplify tax obligations for contractors and help keep distinctions between employees and contractors clear. But umbrella companies lack the expertise EORs have in worker classification regulations for employees and contractors, and can't offer the same level of guidance.
Does an EOR offer more benefits than an umbrella company?Yes, an EOR can be more beneficial than an umbrella company if you want to scale globally without establishing a local entity. EORs ensure compliance with local labor laws and manage payroll, tax obligations, and employee benefits.Â
An EOR offers more stability and oversight than an umbrella company, which is for short-term contractor arrangements. Additionally, an EOR can be a strategic partner in jurisdictions with complex regulatory environments, reducing legal and financial risks.
How do EORs and umbrella companies streamline contract termination?As the legal employer, EORs manage termination in strict compliance with local labor laws. This includes giving proper notice, managing severance pay, and meeting all legal requirements. Terminations are conducted fairly to protect both you and the worker.Â
Working with umbrella companies is often temporary or project-based, so termination and severance depend on the contract terms and local regulations.
What are the disadvantages of an umbrella company?While umbrella companies help streamline relationships between businesses and contractors, they have significant limitations, such as:
HR support is mainly limited to payroll processing.
Businesses partnering with umbrella companies may be held accountable for the provider’s compliance errors.
Working with an umbrella company is less tax-efficient for the contractor than operating their own limited company.
Some umbrella companies are slow to pay or make excessive deductions from contractor payments.