What is an Employer of Record (EOR)?

An Employer of Record (EOR) is a third-party organization that becomes the legal employer of your workers in countries where you don't have a legal entity. You direct the work and manage day-to-day activities, but the EOR handles all the employment paperwork, payroll, taxes, benefits, and compliance with local labor laws.

Think of it as outsourced employment infrastructure. Instead of setting up a subsidiary in Germany to hire a developer, you use an EOR. They become the legal employer under German law, handle German payroll taxes and social contributions, provide mandatory benefits, and ensure compliance with German employment regulations. You pay the EOR, they pay the employee, and everyone stays compliant.

How it works

The EOR model is straightforward. You identify someone you want to hire in a foreign country. Instead of setting up a legal entity there, you engage an EOR that operates in that country. The EOR signs the employment contract with the worker, making them the legal employer. You sign a service agreement with the EOR, giving you the right to direct the worker's activities.

Every month, you tell the EOR what to pay the employee (salary, bonuses, commissions). The EOR processes payroll, withholds income tax and social contributions, remits them to local authorities, provides mandatory benefits (health insurance, pension contributions, paid leave), and ensures compliance with local employment laws. You pay the EOR a monthly fee plus the employee's total compensation and benefits costs.

The employee works for you in practice—they follow your direction, use your tools, attend your meetings, and contribute to your projects. But on paper, they're employed by the EOR. This distinction matters for legal and tax purposes.

When it fits

EORs make sense in specific scenarios. You want to hire full-time employees in countries where you have no legal presence. You need to provide local benefits and comply with local employment laws. You're testing a new market before committing to a full entity setup. You have a small team (1-10 people) in a country and don't want the overhead of a subsidiary.

The classic use case: a US startup wants to hire a senior engineer in Poland. Setting up a Polish subsidiary requires legal fees ($5,000-15,000), ongoing accounting and compliance costs ($2,000-5,000/year), and significant administrative overhead. Using an EOR, they can hire the engineer in weeks for $99/month in platform fees, and the EOR handles everything.

EORs are also useful for short-term international assignments, hiring in countries with complex labor laws, or when you need to move quickly and can't wait months for entity setup.

Costs and lock-in

EOR pricing typically follows one of two models: per-employee monthly fees or percentage-based fees. The per-employee model is more common—platforms like Deel, Remote.com, and Oyster charge $49-99 per employee per month. For 10 employees, that's $490-990/month in platform fees alone, before salaries and benefits.

The percentage model charges 15-20% of the employee's gross salary. For a $60,000/year employee, that's $9,000-12,000/year in EOR fees, or $750-1,000/month. This model is less common but still used by some providers, especially for higher-paid roles.

Beyond platform fees, you pay the employee's salary, mandatory benefits (health insurance, pension contributions, social security), and any additional benefits you offer. In some countries, mandatory benefits can add 30-40% to the base salary cost.

Lock-in is a real consideration. Switching from an EOR to your own entity requires terminating employment with the EOR and rehiring under your new entity. Depending on local labor laws, this may trigger severance obligations, notice periods, or other complications. Some employees may be hesitant to go through the process. Plan your exit strategy before you start.

EOR vs contractor direct-pay

Here's where many businesses get confused. EORs are for hiring employees. If you're working with independent contractors—people who work for multiple clients, set their own schedules, use their own equipment, and handle their own taxes—you don't need an EOR.

Contractors don't need payroll processing, benefits administration, or employment contracts. They need clear project agreements, organized milestone tracking, payment coordination, and tax documentation. Using an EOR for contractors is like using a semi-truck to move a couch—massive overkill.

Many businesses use EOR platforms for contractors because they don't know there's a better option. They pay $49-99 per contractor per month for features contractors don't need. The contractor already has a Wise or PayPal account. They already handle their own taxes. They don't need benefits or payroll processing.

For contractors, you need contractor management software, not an EOR. Tools that help you organize contracts, track milestones, approve invoices, and coordinate payments through the contractor's existing payment accounts. No employment infrastructure. No per-contractor fees. Just the coordination tools you actually need.

Common questions

Can I use an EOR for contractors? Technically yes, but it's expensive and unnecessary. EORs charge employee rates for contractor services. You're paying for payroll, benefits, and compliance features that contractors don't need. Use contractor management software instead.

What's the difference between an EOR and a PEO? An EOR is the legal employer in countries where you have no entity. A PEO (Professional Employer Organization) co-employs workers where you already have an entity, sharing HR responsibilities. EORs enable international expansion; PEOs optimize existing operations.

How long does EOR setup take? Most EORs can onboard an employee in 1-3 weeks, depending on the country and how quickly the employee provides required documents. Some countries are faster (UK, Germany, Canada), others slower (Brazil, India, China).

What happens if I want to set up my own entity later? You'll need to terminate employment with the EOR and rehire under your new entity. This can trigger severance obligations or notice periods depending on local labor laws. Plan this transition carefully.

Are there risks with EORs? The main risks are misclassification (using an EOR for contractors when they should be employees, or vice versa), co-employment issues (if you exercise too much control, you might be considered a joint employer), and vendor dependency (you're reliant on the EOR's compliance and operations).

The bottom line

EORs are valuable for hiring full-time employees in countries where you have no legal entity. They handle complex employment compliance, payroll, and benefits administration. For 1-10 employees in a new market, they make sense.

But if you're working with independent contractors, you don't need an EOR. Contractors handle their own taxes, work for multiple clients, and don't need employment infrastructure. Using an EOR for contractors means paying $500-1,000/month for 10 people when you could pay $99/month for contractor management software.

Know the difference. Use EORs for employees. Use contractor management software for contractors. Don't overpay for infrastructure you don't need.