Employer of Record (EOR) Services in Japan
EoR. Few employers seems to fully understand how it works, and even fewer working professionals have ever heard of it. So, what is this three-letter mystery acronym, and how can it help us swing the doors wide open on business building in Japan? Let’s have a look.
What exactly is an employer of record (EoR) and what can it do for business?
An employer of record streamlines the hiring of employees in a country where the hiring firm has not established a legal entity. In other words, as Jeffrey Swartz, Country Manager for Japan at G-P puts it, “An EoR helps a business expand overseas by allowing the company to hire in a different country immediately, in a compliant manner, without the need to set up an overseas entity or subsidiary.”
Swartz works at one of four firms we spoke with to help shed light on this relatively new hiring tool. Each firm (Deel, G-P, Papaya Global, and Velocity Global) works in conjunction with businesses in need of cross border HR and payroll solutions, and all provide EoR services.
How new is the idea of an EoR provider?
Expanding a business by using talent not domiciled within an employer’s home country is hardly new—even in a modern sense. Companies have been sending workers abroad for centuries, and outsourcing work to talent overseas for just as long.
What is relatively new, however, is how the EoR model allows for an employee/employer relationship that is more akin to borderless insourcing, than outsourcing. It’s an inventive model first established in 2012 when G-P Founder and Executive Chair, Nicole Sahin coalesced years of experience into a process that helped firms quickly and compliantly hire employees regardless of their physical location.
Prior to the advent of EoRs, professional employer organizations (PEOs) were the go to solution for hiring beyond one’s borders. Today, however, the use of EoRs is fast supplanting the PEO for many firms given its inherent flexibility, reduced cost and rapid ability to scale.
With the EoR model, employees perform work for one business while technically employed by another. This means the employee’s legal relationship falls within the domain of the EoR, whereas the management of work is handled as if the employee was right there in the home office. It’s a situation not unlike the proverbial “man behind the curtain”; taxes, payroll and a host of other HR-related formalities are all taken care of by the EoR, but your “boss,” (or bosses) are those people you report to day in and day out.
International Hiring at Mach Ten Speeds
The speed with which this sort of remote hiring can be accomplished is nothing short of stunning, and many operators in the space state they can clear through onboarding hurdles in hours, instead of the weeks and months typical when hiring for overseas assignments.
Despite the phenomenally nimble nature of EoR firms, and their ability to help with global expansion and employee mobility, the need for their services hasn’t been widely apparent until recently. The awareness of that need, however, is set to skyrocket. According to recent research, the global EoR market is projected to reach $6602.64 million USD by 2028, up from $4299.12 million USD in 2021, a steady rise firms in the EoR space are equally excited about as they band together to capitalize on the burgeoning remote work environment.
What’s driving the adoption of EoRs?
Economics
With a premium being placed on attracting and retaining tech talent the world over, globally-aware, opportunistic firms are on the lookout for experienced tech talent they can bring into their talent ecosystem at different price points so more can get done with less. And one way to accomplish this is with the help of an EoR.
In Japan, where the government statistics portal puts the mean at around ¥5.5 million for software developers, opportunity abounds for recruitment-savvy firms looking to tap into a tech population here in Japan eager to see higher wages—higher wages that, for many employers outside Japan, would remain incredibly affordable. Even those in our own community who report their salary coming in at a median of ¥9.5 million, devs here could be quite attractive to employers overseas.
Median salary numbers for U.S. developers, for example, were around $120,730 in 2021, and $111,225 AUD (as of 2/27/2023) for engineering talent in Australia according to Talent.com.
Despite this opportunity for firms outside Japan to tap into Japan’s developer market, Swartz at G-P says the bulk of his effort is focusing on Japanese companies wanting to find overseas talent. “We have over 50 foreign companies coming into Japan to hire here but for outbound business from Japan, we are focusing on Japanese companies,” he says.
Clearly, even the weakened yen remains competitive when the talent pool is as wide as it can be when working with EoRs.
The Search for Talent
Talent acquisition is another big reason firms in Japan are seeking out the services of EoRs.
“Certain talent shortages can drive Japanese firms to look to EoRs for help,” says Deel’s Country Leader for Japan, Takayuki Nakajima.
And G-P’s Swartz says the use of EoRs in Japan, “echoes use cases in other countries,” and that “many companies are looking to hire skilled staff outside of Japan due to the dearth of talent in the country.”
Additionally, he says, “Some companies also want to create a follow-the-sun customer service model by hiring in several time zones.”
Market Expansion
The desire to expand into one or more multiple markets is an additional reason, and Japanese firms seeking a flexible and efficient way to pull that off might appreciate the advantage of working with an EoR.
Again, G-P’s Swartz: “Once a firm has traction in a market, it may indeed decide to set up an entity, which will often be 12-18 months later. Some companies may wish to send one of their own staff on a longer-term assignment to launch their presence in a new market as well,” he says.
Deel’s Nakajima tells us that in the past, given the complexity of setting up a legal entity in a new market, some companies would simply ask friends at firms already doing business in a new destination country to bring in expansion employees under that firm’s HR umbrella.
Since the arrival of EoRs, however, this sort of loophole-diving is hardly necessary.
He says it’s common to see companies “use an EoR to bring in business development talent at the outset of opening an overseas operation,” and also shares an interesting flip side to this equation.
“Sometimes companies may wish to withdraw a legal entity in a particular country, but retain the employees working there. Or, an employee may wish to relocate outside of Japan, but remain working for their firm established in Japan.”
Covid-19
Yet another reason we’re seeing a rise in the use of EoRs is rather obvious—the forced openness to remote work brought on during the coronavirus pandemic.
“Pre-pandemic, EoR services were predominantly used to enable global expansion for a certain set of companies, although we could already see a trend toward true global employment,” says Greg Brauner, chief revenue and marketing officer at Velocity Global. But, Covid-19 has accelerated this trend, and we now see employers actively looking to deploy a globally distributed workforce.”
Actively looking, doesn’t necessarily mean actively willing, of course, and the upswing in experimentation with a distributed workforce is hardly without its lumps. Research suggesting the potential of remote work, though, has been piling up, causing even staunch opponents to be more open to the idea.
G-P’s Swartz: “More companies are using EoR in their global and remote hiring strategies, and these days our target customers are mainly at SMEs across a myriad of industries. Generally speaking, we are selling our service to companies who wish to expand to new markets or access talent regardless of location.”
What are EoR concerns for employers?
Concerns surrounding establishing an employer of record relationship, and working with talent outside one’s own country borders may seem intimidating, but trusting in the process can yield quick and positive results.
Typical hesitations revolve around understanding local employment agreements, compliance, local labor laws, IP protection, and visa sponsorship assistance. But with all the HR specialists and legal teams EoR providers tend to have on the ground, there is little to be fearful of, says G-P’s Swartz. “We’re always on top of privacy and labor regulations all over the world.”
Casey Abel, Co-founder of Japan’s HCCR and ZooKeep, who has more than once hired outside Japan using EoR providers Deel and Multiplier, had positive things to say about his experience working with EoRs.
“They allow you to tap into markets you couldn’t tap into before, and for the amount you might spend on salary for a single engineer in U.S. dollars, you can work with three engineers if you widen your hiring net just a bit more. Also, our costs for starting a firm used to be double given the relative salary differences in places like the U.S. and Japan, and then the costs for incorporation and the setup of a legal entity and administration would just add to that. Now, using an EoR allows us to unlock web devs anywhere.”
Abel brought up the idea of IP as well. “Some firms will need, and want to control IP as you certainly don’t want your code-base going elsewhere.” He added that “having legal remedies is important” for when dicey situations might arise—something Amazon’s IT and legal teams were dealing with in recent weeks when it was discovered employees were running code through Open AI’s ChatGPT.
What does all this cost?
Given the behind-the-scenes complexities of an EoR agreement, it is by nature a bespoke service, so what things cost tend to remain equally bespoke. As such, most EoR firms charge their clients monthly. A variety of additional fees might then be folded into this operational expense depending on what other services are required. Visa fees, in particular, vary from country to country and from person to person depending on circumstance.
“If the employee requires a work permit, we can assist with that as well and charge a one-time visa processing fee. Renewal fees can also be covered if needed at a later point due to local requirements,” say Velocity Global’s Brauner. “The total amount a company will pay us per month also includes the employee’s compensation, any allowances or supplemental benefits (if applicable) as well as the employer burden—as we handle all payroll items as well as benefits and more. Employers cover 100% of the cost and there is no cost-splitting with employees.”
At Deel, the fee for an EoR is $599 per month in any country according to Nakajima. “However the employer cost (which includes social security) depends on the country. Some countries are 5% but some countries are more than 30% against employee compensation,” he says. Deel also offers a useful employee cost calculator in this regard to help with some initial planning.
Papaya Global publishes their rates online.
What are EoR concerns for employees?
Concerns from employees tend to center on the employee experience. Providers tell us employees want expert support in their own language, payroll that is accurate and timely, and an assurance that all their benefits (health insurance, pension, taxes, etc.) are taken care of.
“It’s as if the talent were working for a Japanese company,” says G-P’s Swartz. “EoR providers can also arrange for expense reimbursements and confirmations of an annual salary, should a credit card company or potential landlord inquire regarding income.” Swartz adds: “And for non-Japanese, we offer visa sponsorship.”
Over at Papaya Global, their Center of Excellence team says they generally see few concerns raised from workers on the EoR model. “What is important is that they understand the EoR Partner is the legal employer, whilst the hiring company is the day-to-day supervisor of tasks and performance.” This simple understanding, keeps things flowing in the right direction, just as if an employee were engaged in a typical remote relationship with an employer.
Velocity Global’s Brauner puts a final bow on this aspect of things: “Employees will be fully integrated with the company who engaged them and all topics related to their day-to-day work will be managed by that company. The EoR provider, on the other hand, is there to ensure that the work engagement is compliant in the local market and that all tax remittances and payroll are on time and accurate.”
Equity
What about equity? The firms we spoke with had a different take on the temperature of this particular benefit, and given the complexity of providing equity to a distributed, international workforce, it’s not a surprise.
Regulatory frameworks vary, and a firm’s patience in dealing with such offerings has as much to do with the personality of those at the hiring firm, as it does the desire to hire a particular candidate. Still, with increasing pressure to ferret out talent and keep talent onboard, there are indeed possibilities. For Velocity’s Brauner, an “increased demand from employers and employees—especially in fast-growing, competitive industries” seems to be afoot. And, to meet that apparent demand, in January of 2023, the firm unveiled a “global equity program” that has Velocity partnering with legal advisory firms “to offer compliant, locally tailored equity plans in countries across the globe.”
According to Brauner, Velocity handles “the full lifecycle of equity issuance including assisting with withholding rates, payroll processing, supplemental reporting, plan registrations, etc.”
G-P’s Swartz on the other hand, says that because of how unwieldy offering equity can be to a distributed workforce, he sees a number of companies preferring to avoid it altogether. Alternatively, Swartz says he sees a two growing trends: one where companies try to avoid giving stock options to international employees altogether, instead “tying a cash bonus to the value of the company” or offering to “give cash compensation based on shadow stock schemes.”
“We can’t put stock options in our platform,” says Swartz. “But many customers choose to give options through a side agreement between them and the professional.” Gains, if there are any, he says, “can be run through our payroll, and in general, are not taxed until the employee actually generates revenue from them—typically far into the future.”
What can go wrong in working with an EoR provider?
According to everyone we spoke with, what can go wrong is running afoul of compliance issues—and that comes from not working with an experienced and reputable firm.
A good way to ensure you are working with a reputable firm is to follow the activities of measurement organizations like NelsonHall and Everest Group. Both of which conduct regular research on EoR providers and provide rankings based on a wide variety of metrics.
Deel’s Nakajima zeroed in on what’s known as permanent establishment risk—a situation where a government could decide business dealings in a foreign country qualify as taxable because the business appears to be operating a permanent establishment in that country.
“This risk is dependent on the tax office in each country as well as the employee’s job description,” says Nakajima. “so clients need to consider the risk of PE (Permanent Establishment). There are a number of variables to consider when it comes to PE, so speaking with your accounting team, can help you plan in advance.
Outside of compliance, Velocity Global’s Brauner says there can be potential pitfalls when it comes to communication. “Poor communications strategy between the employer and the employee, and failing to integrate the employee properly into the corporate structure and culture” can cause issues.
“This is not unlike some of the challenges companies faced when they first embraced remote work and had to develop strategies to ensure employees felt engaged as isolation from headquarters or team members can result in low employee morale.”
To the Center of Excellence team at Papaya Global, communication is also a key element to a successful integration. “We have not come across many pitfalls. What is crucial is that workers ensure to keep Papaya, the EoR partner and the hiring company up to date on life cycle events so that correct actions are taken when need be.”
How involved does the employee get in the EoR process?
If you’re wondering how much work there is to do on the employee end of things, you may be happy to know, that like the role of the hiring firm, your involvement in the hiring process is minimal, and in fact, your experience will likely feel similar to onboarding at any company with which you’ve worked before.
“Employees don’t need to do anything out of the ordinary with regard to taxes, etc. We take care of all the benefits and conduct the year-end tax adjustment on their behalf, as is standard here in Japan,” says G-P’s Swartz.
Velocity Global’s Brauner agrees. “The beauty of working with an EoR provider is that what usually could create a huge headache for an individual will be taken care of for them. Under an EoR relationship, talent is being hired as a legal employee of the EoR’s local entity, and the EoR provides immigration services and work-visa processing if needed, and all payroll taxes will be remitted to the local authorities as required.”
Should talent be the driver of more EoR opportunities?
At this point, you may be wondering: given the lack of awareness of EoRs, should there be a championing of the idea from the talent side of the equation?
After all, CFOs are still suggesting money should be spent on IT infrastructure and talent despite a questionable 2023-2024 market, and if firms don’t know how an EoR can help them gain access to that recommended line item, wouldn’t it make sense for tech talent in places where currencies are weak to proactively ring HR departments and ask, “Hey, we can work for less, and…, did you know there’s this thing called an EoR that makes it easy to hire me?”
Not exactly, says G-P’s Swartz. “EoR falls under the category of enterprise HR solutions, and it’s not so much for individual talent or job seekers. We do get approached by candidates themselves occasionally—the more in-demand their talent is, the greater chance the potential employer will engage with us to hire them through our model.”
Velocity Global’s Brauner says, “It depends. It could be as simple as a notification of employer change to the authorities, or as involved as the new employer having to apply for a new work visa entirely. An EoR who has in-depth knowledge and local expertise can advise on the best path forward, though.”
In general, providers we spoke with dampened any enthusiasm that employees stood a chance at leading the charge to increase the adoption of EoRs. Given that EoR providers work with businesses as opposed to individuals and that the entire process, for now at least, flows in that direction, the answer we got was that it’s possible, but difficult to plan for.
If our own research for this article could serve as any sort of guide, finding employers, attorneys, and HR leaders who were even familiar with EoRs stood as a bit of a challenge. For the individual candidate randomly calling into HR departments with a wish to work for a company and pitching the idea to an HR person or hiring manager not so much in the know, (in 2023, at least) you would likely be better off spending that effort elsewhere.
Deel’s Nakajima offered a little ray of hope, though: “Have them place a call to Deel, and a Deel sales rep may help resolve things by citing a few customer use cases.”
Could networking help you work with an EoR?
So, while cold outreach might not be your best bet, networking your way into an appealing position could prove to be more fruitful—particularly if you are currently on a work visa and wish to onboard at a future date with another company open to the idea of using an EoR.
Recruiters work with EoR providers on all sides of the hiring spectrum, and G-P’s Swartz tells us: “knowing some recruiters that place candidates in your focus area, can’t hurt.” And that, “additionally, networking with organizations that assist overseas companies in your industry with market entry into Japan, might yield results, as well, because many companies partner with EoR firms and refer clients entering Japan to those firms.”
Papaya Global’s Center of Excellence team commented as to what that switch from being on a work visa in Japan to being employed via an EoR might look like: “It might be possible for a worker to leave their current employer in Japan and onboard with one of our EoR providers if they are a non-Japanese national. But how easy it is to onboard that worker with our EoR provider is going to be dependent upon what immigration/visa status they hold. In many cases, they are often able to transfer to our EoR provider without additional immigration assistance, but not always.”
So, there are options for the fortunate and the brave, but for the most part, the vast majority of these arrangements are going to be driven by the hiring firm. As with everything, though, being aware of the possibilities will place you ahead of most of the competition.
What about moving to Japan to code?
For programmers working outside Japan, but at a firm with Japanese roots, or a firm simply open to the idea of doing what it takes to retain talent, fulfilling a dream to live and work in Japan might now be closer than ever.
“We do occasionally see companies using EoR as a talent retention strategy,” says G-P’s Swartz, “where an existing employee wants or needs to live in another country and their company uses us to compliantly employ that employee fairly long-term in that new country. It could be that they’ve been away from their family for 2-3 years due to the pandemic or perhaps they need to be close to older parents, etc. Occasionally, they may want to be a digital nomad.”
How to negotiate an EoR with an employer considering hiring you
Velocity Global’s Brauner suggests “If you find yourself in a situation where you think the only thing standing between you and your potential employer [is an awareness of EoRs], it could be worth mentioning this option in a conversation.” In doing so, he says, you’ll want to “acknowledge and highlight the opportunity and key benefits for the employer,” perhaps mentioning how using an EoR allows a firm to hire the right talent for the job instead of one just physically near, and that using an employer of record can allow them to “employ talent wherever they might be or want to be.”
Clearly, putting your sales hat on here would be beneficial. And, if you can help hiring managers visualize a clear path to recruiting you, despite unfamiliar pathways, it could open doors for you much in the way it did for Scott Rothrock, a senior backend engineer living outside Tokyo hired by a U.S. firm in July of 2022. Before hopping on a call with the company, Rothrock went to work beefing up on how a company outside Japan might hire a software developer inside Japan, and landed on the idea of EoRs.
Fresh off this research, Rothrock was able to bring up the idea of working with an EoR as a way to hire him despite the fact that he lived in Japan. Reassuring the CTO of the ease involved in working with an EoR was instrumental in him getting the job.
Rothrock tells us how the relationship started: “I had a post on HackerNews stating I was open to work and got an email from a firm in America interested in my background. The CTO was proactive and positive, and the CEO was already aware of remote.com, so the suggestion struck a chord. In the end, the monthly EoR support fee was minimal, and so they thought… why not do it?”
Comfort is the big key with all of this for employees and employers. “The realization that things are not as difficult as they seem was a big selling point for both me and the hiring company,” says Rothrock. “There’s something to be said for the psychological confidence you get in knowing an experienced firm is setting things up for you.”
A foreboding future for business in Japan, or a tremendous boon?
In an article entitled, Low IT pay stifles Japan’s digital transformation, Nikkei Asia reported a 10 to 1 job application ratio for IT professionals in Japan this year. It’s a statistic that hardly bodes well for industry powerhouses and startups in Japan hungry for IT talent and unable to find people who can help. But while Japan is certainly struggling to fill this need, it isn’t alone. Others in our backyard like Singapore, Hong Kong and Vietnam are also having a difficult time—the problem is global, and EoRs appear to be a somewhat democratizing fix.
I asked Dieter Haberl of EAW k.k., who works with experienced professionals offering their services as fractional talent, if he sees experienced talent looking outside Japan these days to secure work not readily available or accessible in Japan.
“Yes, because the pandemic has taught us how to work-from-home. And, work-from-home effectively means work-from-anywhere. Where work gets done is now much more flexible and, equally, when work actually gets done has become almost as flexible, which then suggests that physical borders for work are now much less relevant. It’s of course a two-way street, if experienced Japanese can look at remotely working in other countries, the same is true in reverse. The only thing missing in the equation is an efficient marketplace for those types of positions.”
One must wonder though, as Haberl hints, that as an awareness of EoRs spreads throughout the international business community, and more firms take advantage of the model, how long might it be before a firm’s openness to pay higher wages swings in the opposite direction given greater access to a larger talent pool?
These hiring advantages may very well bring with them a bevy of complications for those interested in creating a thriving entrepreneurial ecosystem within Japan, and the talent ecosystem to help support that effort. Being able to access talent from anywhere in the world is nice, but what happens when talent residing inside Japan remains here, but is attracted by employers outside the country for one reason or another. What becomes of business growth and innovation with Japan at that point?
The longer the yen remains disadvantaged against the U.S. and Australian dollar (to just name two strong currency states), the more important this question becomes, and the greater the risk to Japan’s ability to grow resident talent from within—regardless of nationality. Such a scenario may prove precarious for those employers inside Japan that remain unable to find ways to remain competitive when it comes to wages, nor open to welcoming (for whatever reason) non-Japanese talent into their workplaces.
Stress usually works to induce change. And, perhaps such a threat might act as a clarion call for government, education, and industry in Japan to work together to combat wage discrepancies, and the historical lack of attention to encouraging work in the software industry, so as to reduce the talent drain that is quite likely to result given the sort of conveniences EoR arrangements make possible.
Individual spending may remain in Japan due to increased wages that could come from overseas work, which could be good for the economy—but what about business building? It’s a question worth considering.
Recruiting and Retention’s Best Kept Secret?
Probably not for long. Companies need talent—of all kinds. In exchange, people ask for challenging work, a total rewards compensation package that pays respect to that talent, mobility, agency, and a diverse and inclusive environment—even if it means there is no physical office. EoRs make the granting of this wish for employees easier than ever before, and for firms in need of talent and willing to expand their reach to areas they would have never before considered, that reach is almost endless.
“Indeed, EoR providers still seem to be one of the best kept secrets that can have a real impact globally,” says Velocity Global’s Brauner. And we are here to change that.