This article compares Employer of Record (EOR) vs another hiring service. But, before that.
Do you want to enter the Indonesian market?
Sorry, you are not alone, there are many companies that want to enter Indonesia. This makes perfect sense because the number of consumers in Indonesia is very high.
If you look at the data from Enterprise Singapore it says that Indonesia is Southeast Asia’s largest economy.
This was caused by Most of Indonesia’s population is relatively young. And around 57% are urban consumers, it doesn’t stop there. The number will continue to increase until it will reach 71% of the total population (209 million) in 2030.
6 years since this article was written, not a long time. So, if you don’t log in now you might be left behind.
However, apart from the problem of competition from foreign companies wanting to enter Indonesia, there are other problems, namely regulations.
Indonesia itself has made it Omnibus Law form simplifies the investment process.
However, some foreign companies still find it difficult due to regulations, cultural differences, and challenges when looking for quality local talent for their companies.
To overcome this problem, many companies choose to use Employer of Record (EOR).
By reading this article you will:
- Understand how to use Employer of Record (EOR) to enter the Indonesian market quickly without problems with legal regulations in Indonesia.
- Comparison of Employer of Record (EOR) with other methods such as building a local entity, freelancer, or also a Professional Employer Organization (PEO)
- Suggestions for strategic decisions that follow your company’s budget, risks, and work timeline
What is an Employer of Record (EOR)
Employer of Record often abbreviated as EOR is the party when responsible for hiring employees on behalf of foreign companies.
They will hire employees, on behalf of your company.
Thus, this model will allow foreign companies to manage their workforce without the need to establish a local entity in Indonesia.
Not just hiring, the Employer of Record (EOR) will also be responsible for handling all aspects of employment, from salaries, taxes, and benefits, to compliance with local labor laws.
Learn Employer of Record (EOR) for more details here
Imagine there is a company from China that wants to open a company in Indonesia, they will need local talent to run their business because they understand better the conditions in Indonesia.
The company was very enthusiastic at first, considering the huge opportunities for business expansion.
When they started it turned out to be a little overwhelming inside the process of establishing a local entity such as a PT, labor regulations that are different from those of the country of origin, and understanding the work culture in Indonesia.
Of course, if you were the owner of a Chinese company, you would feel it would be a shame if you resigned just because of this problem, right?
What is the Chinese company doing?
He partners with the Employer of Record (EOR) and can immediately recruit employees who are fit for new companies in Indonesia and are guaranteed to comply with legal regulations. In fact, before the company had a business entity in Indonesia.
The Employer of Record (EOR) will be the legal employer, managing all HR functions, while the company focuses on its operations and business strategy.
If you are already interested in using Employer of Record (EOR) in Indonesia, please contact Abhitech here.
Let’s start comparing Employer of Record (EOR) vs another service:
Employer of Record (EOR) vs. Establishing a Legal Entity
When looking to expand business operations in Indonesia, foreign companies often consider establishing a local entity.
Directly establishing a local entity such as PT is not wrong at all, Abhtiech once wrote about legal requirements for establishing a business in Indonesia.
However, there are risk factors such as higher initial costs, an understanding of regulations and culture, to administrative costs.
Read more about Minimum Capital for Setting up Business in Indonesia.
Opening a legal entity in Indonesia is very good if you are sure that you can sustain it long-term in Indonesia.
Employer of Record (EOR) vs Legal Entity
| Aspect | Employer of Record (EOR) | Legal Entity |
| Legal Structure | Using an existing Employer of Record (EOR) legal entity | Establishing a new legal entity in Indonesia |
| Setup Time | 2-4 weeks | 2-6 months or more |
| Initial Costs | Lower, usually just a service fee | High, including paid-in capital, notary fees, etc. |
| Operational Complexity | Low, mostly handled by Employer of Record (EOR) | High, the company manages all aspects |
| Control | Limited to daily management of employees | Complete control over all aspects of the business |
| Compliance | Handled by Employer of Record (EOR) | Full company responsibility |
| Exit Market Flexibility | High, easy-to-end operation | Low, complex closing process |
| Branding | Employees are officially employed by the Employer of Record (EOR) | The company operates under its own brand |
If establishing a local entity is too many factors to consider, how about just using outsourcing services?
Interesting discussion to discuss, Employer of Record (EOR) or Outsourcing Services if you want to hire for expanding business in Indonesia.
Employer of Record (EOR) vs. Outsourcing Services
image: Freepik
If the Employer of Record (EOR) takes over HR activities, including payroll, social security (BPJS), and local employment regulations.
The outsourcing provider takes full responsibility for managing the process, including recruiting, operations, and performance results
In Indonesia, there are laws that regulate Outsourcing Services previously Law No.13 of 2003 concerning Employment. However, according to Hukumonline.com Law No.11 of 2020 concerning Job Creation which revises the Employment Law.
Employment Law includes regulations that limit the types of work agency workers can perform. These rules are designed to protect both the workers and the employer. For example, they may not work on primary tasks or those directly related to production; Outsourced workers may only handle additional work that is not directly related to production. However, in the Job Creation Law, this limitation is removed.
So, if you have to choose to use an Employer of Record (EOR) or Outsourcing in Indonesia, which is the best?
Outsourcing is more suitable for companies that want to delegate entire business functions or processes, such as customer service or manufacturing, to third-party providers.
This option is ideal for businesses looking to reduce operational costs, increase efficiency, and focus on their core competencies.
If made in table form it will look like this
Employer of Record (EOR) vs Outsourcing
| Aspect | Employer of Record (EOR) | Outsourcing |
| Function | Hiring employees on behalf of the company | Contracting specific business functions to third parties |
| Service Coverage | Comprehensive (payroll, HR, compliance) | Limited to outsourced functions |
| Control over Employees | High, hands-on management | Limited, managed by an outsourcing provider |
| Flexibility | High in adding/reducing staff | Depends on the outsourcing contract |
| Compliance | The Employer of Record (EOR) takes full responsibility | Can be divided between the company and the outsourcing provider (adjusting to the context of the cooperation contract) |
| Cost | Usually a percentage of the employee’s salary | Varies based on contracted services |
| Business Focus | Allows companies to focus on core business | Eliminates the burden of non-core functions |
Currently there are also lots of people recruiting freelancers in my business. That is enough to meet business needs.
Using freelancers is practical and sufficient for handling individual projects. However, for running a business, especially during the expansion stage, relying on freelancers can lead to problems
Let’s talk about Employer of Record (EOR) or Freelancer (Hiring Independent Contractors)
Employer of Record (EOR) vs. Hiring Independent Contractors
image: Freepik
Recruiting independent contractors is quite interesting. They are people who work for your company, but he is also not a permanent employee or more commonly referred to as a Freelance employee.
Learn more about Types of Employment Contracts in Indonesia.
Since he is not a permanent employee, he is not bound by the same rules as regular employees. This includes working hours, health benefits, and minimum wage requirements.
How do Independent Contractors work? Imagine, your company needs graphic design for social media needs in Indonesia. So, this designer will work when your company wants to post something only.
There are problems that Independent Contractors or Freelancers are not suitable in some cases.
If you recruit too many Your company’s Independent Contractors will be difficult to integrate.
Freelancers often have different working hours and styles, making it hard to integrate them into a company’s internal team. The result? It can lead to poor cooperation and communication
Employer of Record VS Independent Contractors
| Aspect | Employer of Record (EOR) | Independent Contractors |
| Employee Status | Permanent employees | Past employees |
| Duration of Employment Relationship | Usually long term | Often short-term or project-based |
| Benefits and Protection | Complete, in accordance with employment law | Limited, the contractor is responsible for himself |
| Control | High, hands-on management | Limited to the final result |
| Misclassification Risk | Low | High, risk of being considered a permanent employee |
| Tax Compliance | Handled by Employer of Record (EOR) | Contractor’s responsibility |
| Flexibility | High in employee management | Very high in engagement and termination |
OK, now I understand that using freelancers or independent contracts is not necessarily suitable.
When searching online, two services often mentioned alongside Employer of Record (EOR) are Professional Employer Organization (PEO) and others
So we discuss when to work with Employer of Record (EOR) and Professional Employer Organization (PEO) service providers for foreign business exploration to Indonesia.
Employer of Record (EOR) vs. Professional Employer Organization (PEO)
image: Freepik
Professional Employer Organization (PEO) and Employer of Record (EOR) are two popular services. Companies frequently use these services to expand their operations in Indonesia
These two services are very similar because they both help your company manage its workforce and take over HR functions.
However, there is a slight difference between the two,
If Employer of Record (EOR) employees are under the auspices of the Employer of Record (EOR) service provider and work for you. Therefore, if you use an Employer of Record (EOR) you do not have to have a business entity in Indonesia.
Professional Employer Organization (PEO) Employees are under the auspices of your company and also the Professional Employer Organization (PEO) itself. Therefore, you must already have a business entity in Indonesia.
Employer of Record (EOR) vs Professional Employer Organization (PEO)
| Aspect | Employer of Record (EOR) | Professional Employer Organization (PEO) |
| Legal Status | Become an official employer | Co-employment, the company shares responsibilities with a Professional Employer Organization (PEO) |
| Scope of Services | Comprehensive, including legal compliance | Focus on HR and administration |
| Legal Responsibilities | The Employer of Record (EOR) takes full responsibility | Shared between the Professional Employer Organization (PEO) and the client company |
| Geographic Flexibility | Usually more flexible for global expansion | Often limited to one country or region |
| Client Company Size | Suitable for companies of any size | Usually more suitable for medium-sized companies |
| Control over Employees | The client company manages daily operations | Client companies have more control |
| Branding Employer | Employees are officially employed by the Employer of Record (EOR) | Employed by client company |
Conclusion
When choosing a recruitment method in Indonesia, companies must consider many factors.
However, there are at least three main factors That should be your priority: budget, risk, and timeline.
- Budget: Each recruiting method has different costs. Employer of Record (EOR) is usually more affordable upfront but can be more expensive in the long run due to ongoing service fees. Establishing a local entity requires a large initial investment but can be more economical in the long run for large operations. Freelancer may be the cheapest option, but there are legal risks to consider.
- Risk: Legal and compliance risks are important factors. Employer of Record (EOR) offers higher risk protection as they manage compliance aspects, whereas local entity provides complete control but require an in-depth understanding of local laws. For freelancers, there can be a high risk of worker misclassification, which could result in legal issues.
- Timeline: If a company needs to enter the market quickly, an Employer of Record (EOR) or Professional Employer Organization (PEO) is the best choice as it allows operations to start in a short time. Establishing a local entity takes longer but provides maximum control in the long term.
If you want to learn more about Employer of Record (EOR) services in Indonesia, you can read further here.
And if you need Employer of Record services, you can contact Abhitech here.
