Introduction
Expanding a business into Canada provides access to a highly educated workforce, a stable economy, and proximity to key global markets, especially the United States. However, navigating Canada’s complex labor laws, tax requirements, and employment standards can be challenging for foreign companies. This is where Employer of Record (EOR) services come into play. An EOR in Canada allows companies to hire employees without the need to establish a local entity. The EOR takes on all employment-related responsibilities such as payroll, tax withholding, compliance with Canadian labor laws, and employee benefits, allowing businesses to focus on their core operations.
This guide provides an in-depth look at what an EOR is, how it works in Canada, the benefits of using EOR services, and how to hire employees in Canada through an EOR.
What is an Employer of Record (EOR) in Canada?
Definition and Role of an EOR
An Employer of Record (EOR) is a third-party service provider that assumes the role of the legal employer for a company’s workforce in a foreign country. In Canada, an EOR manages all the legal aspects of employment, including payroll, taxes, benefits, and compliance with Canadian labor laws. The EOR acts as the official employer while the client company retains control over the day-to-day work of the employees.
The EOR in Canada ensures that employees are hired legally and that all employment practices comply with the country’s complex labor laws and tax regulations. This service allows businesses to hire employees quickly without having to establish a local entity or navigate the complex hiring processes themselves.
Key Services Offered by an EOR in Canada
- Payroll Processing: The EOR manages payroll, ensuring employees are paid on time and that all taxes and deductions are correctly withheld according to Canadian tax laws.
- Employment Contracts: The EOR drafts legally compliant employment contracts that adhere to Canada’s federal and provincial labor laws.
- Tax and Social Security Compliance: The EOR ensures full compliance with the Canada Revenue Agency (CRA) for tax withholding, employee pension contributions, and other social insurance programs like EI (Employment Insurance) and CPP (Canada Pension Plan).
- Benefits Administration: The EOR administers employee benefits such as health insurance, paid time off, and retirement savings, including employer-matched RRSP contributions.
- Termination and Severance: The EOR handles employee termination procedures, including compliance with Canada’s Employment Standards Acts, and manages severance pay, notice periods, and disputes.
Why Choose an EOR in Canada?
Advantages of Using an EOR
- Quick Market Entry: Setting up a legal entity in Canada can be a lengthy and complex process, especially for businesses unfamiliar with local regulations. Using an EOR enables businesses to hire employees quickly, bypassing the need to establish a legal entity and minimizing administrative delays.
- Cost-Effective: Establishing a local entity in Canada comes with considerable costs, including business registration, office space, legal fees, and ongoing operational expenses. By partnering with an EOR, businesses can save significantly on setup and maintenance costs, making it a cost-effective way to hire employees in Canada.
- Legal and Tax Compliance: Canada’s employment laws, tax codes, and social security systems can be complex, especially when factoring in provincial variations. An EOR ensures that all legal and tax obligations are met, reducing the risk of fines, penalties, or other legal issues associated with non-compliance.
- Focus on Core Business: With the EOR handling all compliance, payroll, and legal responsibilities, businesses can focus their energy on growing their core operations, marketing, and product development instead of managing HR, taxes, and local employment law complexities.
EOR vs Legal Entity: Which Is Right for Your Business in Canada?
Benefits of EOR vs Setting Up a Legal Entity in Canada
- EOR Benefits:
- Speed: With an EOR, businesses can hire employees within weeks, avoiding the long wait times associated with setting up a legal entity.
- No Local Entity Required: An EOR allows businesses to enter the Canadian market without the need to establish a subsidiary or branch office, saving both time and costs.
- Reduced Legal Risks: The EOR takes on the responsibility for legal compliance, ensuring that businesses meet federal and provincial employment standards and tax regulations.
- Legal Entity Benefits:
- Complete Control: Setting up a local entity gives businesses full control over their operations, HR policies, and employee management.
- Long-Term Investment: For businesses planning on establishing a long-term presence in Canada, creating a local entity may make sense, though it involves a longer setup time, higher costs, and more administrative responsibilities.
Key Differences:
- EOR: Provides quick and affordable entry into the Canadian market with full compliance, while the business focuses on operations.
- Legal Entity: Offers full autonomy but comes with significant setup and operational costs, including registration, ongoing compliance, and local administration.
How to Hire Employees in Canada through an EOR
Hiring employees in Canada through an EOR is a simple process that can be broken down into a few clear steps.
Step 1: Choose an EOR Provider
The first step is to select an EOR provider with expertise in Canadian employment law and a proven track record of managing payroll, compliance, and employee benefits. Leading EOR providers include Velocity Global, Papaya Global, and Deel.
Step 2: Define Job Roles and Compensation
Work with the EOR to define the job roles, responsibilities, and compensation packages for the employees you wish to hire. This step ensures that the contracts align with both business needs and Canadian labor standards.
Step 3: Sign the EOR Agreement
Once the roles and terms are agreed upon, you will sign a formal agreement with the EOR provider. This contract will outline the responsibilities of the EOR (managing payroll, taxes, etc.) and the client company (managing employee work and performance).
Step 4: Employee Registration and Documentation
The EOR will handle the registration of employees with Canadian authorities, ensuring the correct processing of work permits, taxes, and compliance with Employment Insurance (EI) and Canada Pension Plan (CPP) regulations.
Step 5: Ongoing HR and Payroll Management
After the employees are onboarded, the EOR continues to manage payroll, benefits, tax filings, and compliance. The EOR ensures that everything is up to date with CRA regulations and relevant provincial laws.
EOR Services in Canada: What You Get
1. Payroll Processing
The EOR handles all aspects of payroll, ensuring that salaries are paid on time, tax deductions are made, and employer contributions to EI, CPP, and provincial benefits are accurate.
2. Benefits Administration
Employees are entitled to various statutory benefits, including health insurance (through the Canada Health Act), paid sick leave, and annual vacation. The EOR manages these benefits, ensuring full compliance with provincial and federal laws.
3. Tax and Compliance
The EOR handles all aspects of tax compliance, including withholding taxes, contributions to Canada Pension Plan (CPP), Employment Insurance (EI), and health insurance.
4. Termination and Severance
The EOR ensures that employee termination is handled correctly, including severance pay, notice periods, and compliance with Canadian employment standards for layoffs and redundancy.
Employee Benefits in Canada
Statutory Benefits
- Health Insurance: Employees are covered under the Canada Health Act, providing essential health services.
- Canada Pension Plan (CPP): Employers contribute to the CPP on behalf of employees, ensuring they receive retirement benefits.
- Employment Insurance (EI): Provides employees with financial support during periods of unemployment.
- Paid Time Off: Employees are entitled to paid sick leave, public holidays, and vacation time.
Optional Benefits
- Private Health Insurance: Some employers offer additional health insurance beyond the public health plan.
- Employee Stock Options: Some businesses offer stock options as an additional incentive to employees.
- Wellness Programs: Businesses often provide wellness programs, gym memberships, and mental health support as additional employee perks.
Taxes and Compliance in Canada
Employer Responsibilities:
- Tax Withholding: Employers are responsible for withholding taxes from employees’ wages and remitting them to the Canada Revenue Agency (CRA).
- CPP and EI Contributions: Employers must contribute to the Canada Pension Plan (CPP) and Employment Insurance (EI).
- Health Insurance: Employers may be required to contribute to additional health programs depending on the province.
Employee Responsibilities:
- Income Tax: Employees are subject to progressive income tax, which is withheld by the employer and submitted to the CRA.
- Pension and Insurance: Employees are required to contribute to their Canada Pension Plan (CPP) and Employment Insurance (EI).
FAQs – Employer of Record (EOR) Canada
1. How Does an Employer of Record Comply with Canadian Labor Laws?
An EOR in Canada ensures compliance with both federal and provincial labor laws, including wage regulations, employee rights, tax withholding, and statutory benefits. The EOR handles all the legal requirements, ensuring that businesses avoid legal risks.
2. What Benefits Come with Using an EOR in Canada?
An EOR offers quick and cost-effective employee hiring in Canada without the need to establish a legal entity. The EOR ensures compliance with all Canadian labor laws, manages payroll and benefits, and handles all employment-related tasks, so businesses can focus on their core operations.
3. Can an EOR Hire Remote Talent Across Canada?
Yes, an EOR can hire employees anywhere in Canada, from major cities like Toronto and Vancouver to remote areas in different provinces, ensuring that the business stays compliant with all federal and provincial regulations.
4. What’s the Difference Between EOR and PEO in Canada?
An EOR is the sole legal employer of the employees, assuming full responsibility for compliance, payroll, and benefits. A PEO (Professional Employer Organization) typically shares employment responsibilities with the client company, making the client a co-employer.
5. Is It Legal to Use EOR Services in Canada?
Yes, using an EOR in Canada is fully legal. EOR providers ensure that businesses comply with Canadian labor and tax laws, including the Canada Revenue Agency (CRA) and provincial regulations.
Conclusion
Partnering with an Employer of Record (EOR) in Canada provides businesses with an efficient, cost-effective, and compliant way to hire employees in the country. With an EOR managing all aspects of employment law, payroll, and benefits, businesses can focus on growth and operations while staying fully compliant with Canadian regulations.
Not to be considered as tax, legal, financial or HR advice. Regulations change over time so please consult a lawyer, accountant or Labour Law expert for specific guidance.