Choosing between an Employer of Record (EOR) and a payroll service can significantly impact how your business manages employees, especially when expanding into new markets, hiring employees in a foreign country, or handling international payments. It’s true: both options will address employee payments. However, they differ significantly in scope and the level of support they offer.
An EOR is a third-party organization that acts as the legal employer for your company’s professionals. It uses a distinct legal entity and manages compliance with local laws, tax filings, benefits, and other essential HR functions. This makes it ideal for businesses looking to establish a presence in new countries without setting up a legal entity or dealing with the complexities of labor regulations.
On the other hand, payroll services focus specifically on compensation (which can be a salary or a paid-out invoice), tax deductions, and contributions. Compared to an EOR, they’re a good fit for companies lacking a foreign legal entity but still want to bring contractors on board. Payroll service providers are much simpler in scope but also in reach.
In this article, we’ll break down the key differences between EORs and payroll services and help you decide which option best aligns with your business needs.
What is an Employer of Record (EOR)?
An Employer of Record (EOR) is a third-party organization that legally employs your international workers on your behalf. Even if you manage your recruiting, the EOR handles the complexities of hiring abroad. It acts as the official employer and assumes essential HR functions, including local payroll, tax filings, and compliance with country-specific labor laws. This arrangement allows companies to hire internationally without establishing a legal entity in each country. In many cases, EOR can make global expansion much quicker, more streamlined, and considerably cost-effective, at least in the short run.
When a business partners with an EOR, they’ll be working with a full-service HR provider specifically adapted to international employment.
Does the EOR Also Handle Payroll?
The EOR manages payroll processes in accordance with local tax requirements, so it’s accurate to say it includes payroll services. In addition to payroll, the EOR oversees compliance to stay up-to-date on each country’s labor laws, such as minimum wage standards, working hours, and termination rules.
They also handle benefits administration, setting up packages that align with local expectations and statutory requirements. Another critical function EORs perform is tax filing, which can help comply with taxes such as the local VAT. From onboarding to offboarding, the EOR simplifies the entire employment lifecycle, specifically if a company needs to hire abroad and doesn’t have a legal entity.
Who Uses EOR services?
EOR services are practical for companies that need to hire workers in an international market. An EOR for handling domestic employees is feasible but sounds too contrived to work out. Potentially, an EOR can also handle international contractors, not just employees. Still, if a company wants to work with international freelancers, they won’t need an EOR. Contractors can invoice the legal entity instead.
What is a Payroll Service?
A payroll service focuses on managing employee payments, including salary or invoice payouts, tax deductions, and contributions. Unlike an Employer of Record, payroll services don’t act as the legal employer or handle broader HR functions, compliance, or legal responsibilities. Instead, they offer support to companies with legal entities in place and need assistance processing payroll. Some companies with only one legal entity—for example, in the US—can even rely on a payroll service to pay out invoices to international contractors.
Payroll services are a straightforward solution for companies operating within their home country or in locations where they’ve already established a legal presence. These services ensure that employees are paid on time and that the correct tax deductions and contributions are made while staying aligned with local tax laws.
Still, payroll services don’t specialize in offering HR support for the hiring process and benefits. Their primary focus is to simplify the salary payment process for domestic employees or, in international cases, for contractors or employees in regions where the company already meets local legal requirements.
For example, a US-based company with a legal entity in the U.K. might use a payroll service to handle salary payments and tax deductions for UK-based employees. The company remains responsible for complying with local labor laws, providing benefits, and managing employee relationships.
Who Uses Payroll Services and How Necessary They Are?
Payroll services are suited for companies with hundreds of employees in different jurisdictions. The bigger the company, the more locations it has, and the more complicated the deductions, so it needs an outsourced service to process its payrolls.
Specialized employees know that payroll is more than just filling out employee timesheets and inputting them into software. Some taxes require a deposit slip with a check, while others require electronic ACH payments. Keeping track of these details is easier with a payroll service or software.
Another use case of payroll services is to pay out international contractors who invoice for their compensation. The invoice might be in many currencies, and the payroll service will handle that conversion.
EOR vs Payroll: The Core Differences
While the EOR and payroll solutions involve employee payments, they vary significantly regarding legal responsibility, compliance, scope of services, and suitability for global versus domestic use. Let’s take a more in-depth look:
Legal Employer Status
An EOR acts as the legal employer for your international employees and assumes responsibility for compliance with local laws, payroll, benefits, and any associated legal liabilities. This setup is particularly beneficial for companies hiring in foreign countries where they lack an official legal presence. By employing workers through the EOR, companies can avoid setting up a local entity and the associated legal costs.
In contrast, with a payroll service, the company remains the legal employer or the invoiced entity. While the payroll service may handle salary payouts and tax deductions, the responsibility for compliance, legal liabilities, and HR functions stays with the company. This approach is typically suited to companies with a legal entity in place and are equipped to manage these aspects of employment directly.
Regarding working with international professionals, EOR is a better choice if the company wants to hire the staff as employees. However, payroll services are better if the company wishes to work with the professionals under a freelance or contractor agreement, in which the contractor invoices for their services.
Compliance Management
One primary distinction between an EOR and a payroll service is the level of compliance support they provide. An EOR complies with local labor laws, taxes, and employee benefits across multiple regions. The EOR handles all the compliance-related aspects of employment, including termination policies.
A payroll service, on the other hand, is limited to handling payroll tax calculations and filings. It doesn’t extend to the legal side of labor compliance. For companies that choose a payroll service, compliance with labor laws, benefits administration, and other regulatory obligations must be handled internally, even if the solution is outsourced.
Service Scope
The scope of services provided by an EOR is much wider than that of a payroll solution because the employees working under that legal entity will still be corporate members. In fact, the EOR will include payroll services. For international employees, it manages paying their salaries or tax deductions.
A payroll service, on the other hand, focuses exclusively on salary payments, tax deductions, and payroll-related contributions. It doesn’t offer additional HR support, such as benefits management or onboarding, which means that companies using a payroll service will need to handle these functions independently. This narrower focus can work well for businesses that only need assistance with payroll processing rather than a complete HR solution.
Global vs. Domestic Use
EORs are particularly well-suited for businesses that want to expand globally and hire employees across multiple countries. Since an EOR takes on legal and compliance responsibilities, companies can grow their international workforce without setting up a physical or legal entity in each country. This method helps companies hire new workers straight away in virtually every market.
In contrast, payroll services are generally best suited for domestic use or companies that have already established legal entities in their target countries or need to work with contractors in any country. For businesses requiring assistance with payroll processing in a single country or regions with a legal presence, payroll services offer a simple solution focused on salary and tax-related functions without the added complexity or cost of a full HR service.
When to Choose an EOR
Below are the factors to be taken into consideration when choosing an EOR.
Global Expansion
An Employer of Record is ideal for companies looking to expand their workforce internationally without the expense and administrative burden of setting up legal entities in each new market. For businesses looking to expand into unfamiliar regions, an EOR offers a more economical way to hire and manage employees globally. It also makes it possible to tap into new talent pools and markets quickly.
Compliance Management
An EOR is also a good choice for businesses expected to work in international markets while complying with complicated legal frameworks. Compliance with regulations is a must for every company in every sector, even if some industries have far stricter regulations. However, every company hiring overseas is taking a chance with the risk of not knowing what the labor market has in store.
For example, some countries have overly strict severance regulations or will fine—or start investigating—a company that fails to comply with certain tax returns, even accidentally. With an EOR, companies are safe in knowing that they are meeting local employment regulations and avoiding penalties. For a public company that can’t afford a public relations crisis, an EOR seems like a good fit.
Full-Service HR Support
An EOR can also be worth considering for companies that need a full-service HR solution for their international workers. Beyond payroll and compliance, an EOR supports various HR functions, like drafting employment contracts or handling onboarding and offboarding. An EOR offers a great solution for international hiring, as it covers all the essential HR, legal, and payroll needs to support a quick, compliant expansion.
When to Choose a Payroll Service
Below are the factors to consider when choosing a payroll service.
Domestic Payroll Needs
Payroll services are best suited for medium-sized businesses that need to pay out to local—-domestic—employees. For companies only looking to manage payroll processing within their home country or in markets where they already have a legal presence, payroll service is a practical and cost-effective solution, especially when dealing with a spreadsheet. This approach simplifies salary payments, tax deductions, and contributions for local employees without the need for the broader HR and compliance services provided by an EOR. Also, a company that needs to pay out international contractors who invoice the main legal entity can work the process out with a payroll provider. This is because the payments are handled domestically, which can take place because the professionals are not employees.
Limited HR Support
Businesses that prefer to handle their HR and compliance but need extra help with their bookkeeping often find payroll services to be the right fit. If a company already takes care of hiring new employees, giving them benefits, and sticking to regulations, a payroll service can just handle the part of paying them. This is helpful for companies who want to have full control over their HR processes and legal obligations.
Final Words
Choosing between an Employer of Record and a payroll service depends on the level of HR support your business requires, especially if that support should become available overseas. EORs are a viable option for businesses that want to enter new markets without having a legal entity in each location.
In contrast, a payroll service focuses solely on processing payments to employees or contractors, including paying their salaries or handling their tax deductions. For businesses with a legal entity in their operating regions or those with most of their employees working locally, payroll services act as a simple and cost-effective way to handle payroll without hiring more HR personnel.