An Employer of Record (EOR) is a third-party organization that legally employs your international workers on your behalf and takes care of the local payroll, benefits, taxes, and compliance with country-specific labor laws.

EORs are especially noteworthy because hiring international talent is more common than it has ever been. An analysis of job postings on social media platforms showed a 10x increase in U.S. remote-friendly jobs between early 2020 and early 2022, many of which were open to international applicants. Growing a workforce across borders also comes with complex administrative and legal challenges—especially for companies that don’t already have an established presence in their target countries. An EOR simplifies this process for companies that want to expand globally without setting up local legal entities in every country they hire from.

For example, if a tech startup based in Canada wants to quickly onboard a team of software developers in Brazil, an EOR can deal with the essential administrative tasks—like staying in compliance with Brazilian VAT regulations and setting up benefits in line with local requirements—so the startup can focus on its core operations. With the support of an EOR, companies can have quick access to new markets with minimal overhead. This way, they make global hiring as simple as hiring in their home country.

In this article, we’ll take a look into how EORs work, the range of services they offer, the pros and cons of using one, and the alternatives if you’re considering other options for global hiring.

How Does an Employer of Record Work?

An EOR essentially becomes the legal employer for your international employees. It allows companies to employ workers in foreign markets without setting up a physical or legal presence there. While the company remains in charge of the day-to-day tasks and objectives, the EOR manages all the official employment responsibilities, including compliance with local labor laws, processing the payroll, and handling the benefits.

This legal arrangement allows companies to scale up quickly without being forced to deal with each country’s legal requirements. If a company employs workers under the EOR’s local entity, they sidestep the lengthy and costly process of establishing an entity and can hire international employees far more efficiently. The EOR essentially becomes a bridge between a business and their employees based abroad; It handles the nuances of local regulations so that companies can focus on their growth and commercial strategy.

What Services Does an EOR Provide?

An Employer of Record provides a suite of essential services designed to simplify and legally support international hiring. Below is a closer look at 6 key services an EOR typically offers.

1. Payroll Management

An EOR handles the entire payroll process for your international employees. It manages paying their salaries, tax deductions and even benefits processing. This means making sure your team gets paid on time in the local currency and the complicated taxes for each country are taken care of.

2. Compliance

Staying compliant with each country’s labor laws, tax codes, and employment policies can be exceedingly difficult, but it’s a must if you want to avoid legal issues and penalties. An EOR helps your business comply with local employment laws. It takes care of tax filings, keeps you updated on regulatory changes, and protects you from fines and legal issues related to non-compliance. This service is particularly useful in countries where labor laws are very strict, like in France, or frequently change, like in the case of Ecuador.

3. Employee Contracts

Drafting and executing employee contracts that meet local legal standards is another key function of an EOR. They provide legally compliant contracts for each employee, which take into account local employment terms, benefits requirements, and termination conditions. This protects the employee and safeguards your business from contract-related legal risks.

4. Onboarding and Offboarding

An EOR manages all aspects of onboarding and offboarding employees. It takes care of the necessary paperwork, legal documentation, and initial training on company policies. For offboarding, they make sure that all local legal requirements are followed, which is particularly important in countries with restrictive end-of-employment policies.

5. Benefits Administration

Offering benefits like healthcare, insurance, and retirement plans might require an encyclopedic understanding of local market standards and laws. An EOR sets up and manages these benefits. It makes sure that employees have access to the packages expected in their country. This service can be crucial for attracting talent in competitive international markets where wide-ranging benefits are a high priority among jobseekers.

6. HR Support

EORs provide ongoing HR support that cover a wide range of functions such as managing employee records, addressing HR-related queries, and offering guidance on local regulations. This support gives your business an accessible HR presence in each country, and helps manage everything like performance issues and even routine HR inquiries.

What Are the Types of Employer of Record?

When considering an EOR for international hiring, companies typically have 2 main types to choose from — third-party supported providers and fully owned provider, each with distinct advantages and considerations. Most aspects of this difference are invisible to business owners, since the EORs carry out their arrangements at their own expense and as part of their business. Let’s discuss these two options in detail.

1. Third-Party Supported EOR Providers

These EOR providers work by outsourcing services to local partners in each country where they operate. So, as a company owner, you’d be dealing with a third party—the EOR—that’s dealing with a third party—the local provider they’re allying up to. Rather than managing legal entities themselves, third-party supported providers collaborate with regional companies who handle day-to-day employment tasks on their behalf.

This approach, while effective, often means businesses have less control over costs and employee management, as pricing and practices can vary depending on the local partner. (Of course, your business won’t even notice that your EOR is partnering up, but you could be surprised by changing costs in neighboring countries, especially because your EOR has reached a great deal in one country and a costly agreement in the other one). Additionally, since these third-party providers handle sensitive employee data, companies may face higher data security risks as there are many entities at stake in charge of sensitive data. 

2. Fully Owned EOR Providers

We previously mentioned that EORs are always a third-party entity, as in, they’re managed by a different company that offers their legal structure as a service. Fully owned EORs, from the perspective of a business owner, are still a third party. But Fully owned EORs operate through their own legal entities in each country, which means they directly manage all services rather than working through a whole other set of third-party partners. This setup allows for more consistent control over employee experience and ensure predictable costs. So, a company that needs to sign up with an EOR provider and wants a similar rate for numerous locations would have a better time partnering up with a fully owned EOR provider.

Data security tends to be more dependable with the fully owned EOR model, as sensitive information is contained within the EOR’s network. This drastically decreases the need to share data outside their system and simplifies compliance across borders.

When Should You Use an EOR?

Here we’ll present 3 key situations when an EOR will be particularly useful to your business.

1. Global Expansion

Entering a new country typically involves hiring locally, which can be challenging if your business doesn’t have a legal presence in that region. With an EOR, companies can legally employ local talent without the need to set up a formal entity. This drives down costs and speeds up market entry. For example, a consultancy firm in the U.S. can use an EOR to quickly start a new hub in Munich to bring on industry experts in Germany. They’d avoid the administrative complexities of German employment laws and allow the firm to remain focused on client projects.

An EOR is an excellent alternative if a company is working in a bidding and tendering process and participating requires a local representative with a country-specific tax ID. Or it’s also a good path is a company has won a bidding and tendering process overseas—considering it didn’t require the tax ID—and now needs to start shop in that country to carry out the project and invoice.

2. Navigating Complex Compliance

When hiring internationally, businesses are often faced with regulations that can be difficult to cope with, especially where labor and tax laws are particularly detailed or frequently changing. An EOR keeps your business compliant with these local regulations as it can manage payroll, tax deductions, and employee benefits according to the standards in each region.

For instance, if a retail company based in Australia wants to employ workers in Italy, an EOR can manage the required benefits and legal obligations without the company needing deep familiarity with Italian employment laws.

3. Cost Efficiency and Workforce Scaling

For companies looking to test a new market or engage in project-based hiring, an EOR provides a cost-effective way to expand staffing without the long-term commitment of setting up an entity. An EOR can handle hiring for short-term roles or seasonal projects, in a way that scales teams up or down as needed.

Consider a software development company in Canada wanting to tap into the tech talent pool in Poland. With an EOR, they can bring on a team for a specific project timeline. This helps the business grow quickly based on projects without having to pay for a permanent location.

What Are the Pros and Cons of Using an EOR?

Like any business solution, an EOR comes with its own set of advantages and drawbacks. Let’s see the pros and cons of relying on an EOR to help you decide if it’s the right choice for your organization.

Pros of EOR

Simplified Global Hiring: One of the most significant benefits of using an EOR is the ease it brings to international hiring. When relying on an EOR, companies can recruit talent from various countries without the logistical headaches of establishing local legal entities. This means businesses can quickly tap into global talent pools and onboard employees in different regions, while sidestepping the lengthy and often complex processes involved in setting up a new business presence abroad.

Compliance Assurance: Finding one’s way through the labyrinth of local labor laws and regulations is frustrating, especially for businesses operating in multiple countries. EORs take on the responsibility of staying in compliance with these laws, which helps mitigate the risk of legal complications or penalties. They stay updated on changing regulations and make sure that employee contracts, tax obligations, and benefits are handled according to local standards. This promise of compliance is particularly advantageous in nations with stringent labor laws, such as France or Sweden.

Cost Savings: Setting up a local entity can also be a highly costly task, as it involves legal fees, operational expenses, and time investments. But, with an EOR, businesses can bypass these substantial startup costs. An EOR allows companies to hire employees on a flexible basis, whether for short-term projects or long-term positions, without the financial burden of establishing a legal presence. This way of saving money can be very helpful for businesses that want to explore new markets but are wary because their human resources policies fluctuate over time.

Cons of EOR

Limited Control: EORs can also lead to a lack of control over employee management. Companies may find it challenging to implement their own workplace policies or culture when relying on an external entity to handle HR functions. This can create gaps in communication and understanding between the business and its employees, and potentially affect employee engagement and satisfaction. For instance, a firm may have specific onboarding processes or performance evaluation criteria that an EOR might not fully align with, and this can lead to inconsistencies.

Long-Term Costs: Although EORs can save money upfront, their fees can accumulate over time. Depending on the services provided and the number of employees managed, costs can add up into a whopping invoice that may put into question if the operations in said country are worth it. This might make it a less financially viable option for businesses that plan to maintain a long-term workforce in a specific country. Companies should carefully assess their budget and weigh the potential ongoing costs of using an EOR against the benefits it provides. Then again, this is the accumulated premium companies are paying for setting up shop quickly.

Data Security Risks: Handling sensitive employee information across borders—and across organizations—introduces inevitable data security risks. EORs manage payroll, personal details, and compliance documentation, which can be vulnerable to breaches or mishandling. Companies must verify that the EOR they choose has adequate data protection measures in place to avoid exposing employee information (or your company’s information). This is very important in industries that have tight rules on information security, like healthcare or finance.

How Much Does an EOR Typically Cost?

EORs typically charge companies by employee. So the starting comparison point is how much an EOR service charges per each employee. Up-and-coming players start at $200 per employee, monthly. On the other hand, market-leading providers charge between $400 and $599 per employee per month with their starter plans. Their more advanced plans, which include features such as additional currencies, are slightly pricier.

Many EOR service providers offer custom pricing options. To get a more accurate notion of cost, companies should consider the following when asking for a price:

  • The number of employees they’ll want to hire: More employees typically mean higher costs.
  • The countries of operation: Labor costs, tax laws, and regulatory requirements differ significantly between countries, and a provider might have better rates in one but not the other.
  • The specific services required: The more services you need, such as payroll, benefits, HR, or the ability to pay in a different currency, the higher the cost.

Additionally, it’s important to be on the lookout for potential hidden fees, such as onboarding, offboarding, or compliance audit fees. But EORs are so in-demand that most offerings are seemingly very transparent.

What’s the Difference Between EOR and Staffing Agency?

Businesses need to know the difference between an employer of record and a staffing agency when they’re weighing up their options for bringing on staff. Each serves unique functions and does things in its own way.

Employment Relationship

The EOR acts as the legal employer of record for employees, meaning it directly hires individuals for long-term or permanent roles. In this arrangement, the company still has control over the employees’ day-to-day activities, such as managing work responsibilities and performance, while the EOR takes care of all legal and administrative employment tasks. This includes processing payroll, handling the benefits, and keeping compliance with local labor laws. Essentially, the EOR provides a direct employment method for companies looking to expand their workforce without needing to establish a legal presence in a new location.

In contrast, a staffing agency focuses primarily on recruiting and offering temporary or contract workers, often for specific projects that require short-term staffing. The staffing agency typically holds on to the employment relationship with the workers. This means they handle any and all matters related to the employees, including payroll and HR procedures. Companies that engage with staffing agencies generally seek flexibility and speed in filling gaps in their workforce, and they rely on the agency. The agency usually carries out their recruitment process even before doing business with their client company. 

One of the significant advantages of using an EOR is its in-depth responsibility for compliance with local labor laws, tax regulations, and employee benefits. The EOR secures that all legal obligations are met, reducing the risk of non-compliance for the company. This is really helpful for businesses that operate in different countries with different rules. It makes it easier to work through a complicated legal system.

While staffing agencies do handle some HR functions, their level of responsibility for legal compliance may vary. They typically manage basic HR tasks, such as payroll and worker classification, but they might not take full responsibility for compliance, especially concerning long-term employment relationships. Companies using staffing agencies may need to be sure that the agency complies with legal requirements.

Use Case

As must be already clear by now, EOR services are particularly useful for companies looking to expand into new international markets and hire permanent employees without establishing a local legal entity. Thus, this arrangement is perfect for companies aiming for long-term growth and stability in a new region.

Staffing agencies, on the other side, are ideal for businesses seeking temporary or contract workers to address short-term staffing needs. These agencies are well-suited for filling gaps in the workforce quickly, such as during peak seasons or for specialized projects requiring specific skills. Staffing agencies are a sourcing ally because they usually have ready-to-work employee on hold in their team. 

How Does an EOR Compare to a PEO?

When evaluating hiring solutions, it’s important to know the difference between an Employer of Record (EOR) and a Professional Employer Organization (PEO).

An EOR serves as the legal employer for international employees—it assumes all employment-related responsibilities. This includes handling everything, like payroll, benefits, and compliance with local labor laws.

A PEO, on the other hand, operates under a co-employment model, meaning it shares legal responsibilities with the client. While the PEO manages certain HR functions and compliance, the client continues to have significant oversight and control over their employees. This arrangement is particularly common in domestic operations.

Geographical Scope

While EORs are designed for businesses looking to hire globally, PEOs primarily focus on domestic operations, making them more suitable for companies looking to manage their workforce within a single country. They help businesses manage HR processes and stay in compliance with local laws, but do not typically support international hiring.

Compliance

EORs take on the full responsibility for international compliance—they guarantee that all local labor laws and regulations are followed. PEOs manage local compliance, but do so with a shared responsibility model. While they help clients stay compliant with employment laws, the ultimate responsibility still rests with the client company.

Payroll and Benefits

An EOR manages international payroll and employee benefits, and a PEO primarily focuses on domestic payroll and benefits. It provides support in managing employee compensation and benefits within a single country.

Expansion

For companies looking to expand globally, EORs are the optimal choice. They make it possible for businesses to quickly hire employees in new markets without first setting up a legal entity. PEOs are better suited for companies that want to manage local employees within their existing market. They provide support in handling HR functions but are not designed for businesses seeking to grow their footprint internationally.

What Are the Alternatives to an EOR?

For businesses considering alternatives to an EOR, the below are 3 options.

1. PEO (Professional Employer Organization)

Even if we just explained how different they are, PEOs are still an alternative to an EOR, especially if you’re wanting to scale up locally. PEOs offer a full-scale human resources outsourcing. As such, they share legal responsibilities with clients, which makes them an attractive option for businesses that want to automate their HR processes while still keeping some control over employee management. PEOs are best suited for domestic operations because they help companies stick to local regulations and manage payroll and benefits properly. So if your company needs to hire fast or take care of payroll or any administrative issue in your home market, a PEO could actually be a better ally than an EOR. 

2. Setting Up a Local Entity

Establishing a local entity provides businesses with full control over employee management and operations in a specific country. This option is ideal for companies looking for a long-term presence, as it allows them to directly hire employees and build a local workforce. The process can be time-consuming and requires a significant investment in legal and administrative resources. One viable scenario in which a company can start their local entity is after running with an EOR. The EOR might have, for example, proved fundamental to winning a bidding and tendering project. Now that the project can pay up for the expenses, a company can switch to its own local entity. In this case, the local entity and EOR are not alternatives that push each other out. Rather than that, they’re just two different steps in the same path of cross-border development.

3. Freelancers or Contractors

Hiring freelancers or contractors for specific projects can be a suitable short-term solution for businesses looking to fill skill gaps without committing to long-term employment. This approach provides flexibility and access to specialized talent, and it has become very common in remote-friendly businesses. Yet, keep in mind that compliance with local laws regarding contractors still is the responsibility of the company. As a preventative measure to this, some EOR providers also offer service plans for companies who want to onboard contractors rather than employees.

Conclusion: An EOR Helps Companies Hire Globally

Hiring globally is complex. EOR services know this, and they offer a practical solution so that businesses can expand their operations internationally quickly enough. Since they assume the role of the legal employer, EORs make sure you’re adhering to laws, running the payroll, and caring for the benefits in the new market you’re hiring in.

Remember, a successful global expansion plan is predicated on a strong foundation of regulatory compliance and effective use of resources. With the right EOR partner, you can achieve these goals and position your business for long-term success.