Employer of Record (EOR) Explained: How It Works, Costs, Risks and Alternatives

Employers of Record have transformed international hiring. A company in Istanbul, London or Austin can now employ a developer in Portugal or a sales manager in Singapore within weeks, without setting up a local entity. This guide explains how an EOR works, how it differs from a PEO and from hiring contractors, what it costs, the risks that remain with you, how to choose a provider and when to move to your own entity.

What is an Employer of Record?

An Employer of Record is an organisation that becomes the legal employer of a worker for employment, payroll and tax purposes, while the client company directs the worker’s day-to-day activities. The EOR signs the employment contract, pays salary through local payroll, files taxes and contributions and provides mandatory benefits under local law.

The arrangement separates the legal employment relationship from the working relationship. From the employee’s perspective, they work in your team, use your tools and report to your managers; their contract and payslip come from the EOR. From a legal perspective, the EOR carries the employer obligations in that country. This makes it possible to hire in countries where you have no subsidiary, as described in our country guides in the Expat HR section.

What is the difference between an EOR, a PEO and a contractor?

An EOR is the legal employer, used where you have no local entity. A PEO (Professional Employer Organisation), common in the United States, co-employs staff alongside your own entity, sharing HR and payroll administration. A contractor is self-employed and not your employee at all, which is cheaper but carries misclassification risk if the relationship looks like employment.

For more detail, see our comparisons of PEO services, contractor management platforms and freelance platforms.

What does an EOR handle, and what stays with you?

The EOR typically handles the employment contract, onboarding paperwork, payroll, tax withholding, social-security registration and payments, statutory benefits, leave administration, expense processing and termination paperwork in line with local law. You remain responsible for selecting the employee, setting their work and goals, managing performance and providing tools.

Some responsibilities are shared. Decisions about pay increases, bonuses and terminations are made by you but executed by the EOR within local legal requirements. Health and safety for home-based workers, intellectual-property assignment and confidentiality need careful drafting, because the employee’s contract is with the EOR. Make sure the EOR contract assigns IP to your company and reflects your policies.

How much does an Employer of Record cost?

EOR pricing usually combines the employee’s gross salary, mandatory employer costs such as social-security contributions and statutory benefits, and the EOR’s service fee — commonly a flat monthly fee per employee, sometimes a percentage of salary. Fees vary by provider, country and service level, so compare total employment cost, not the headline fee.

Employer costs differ dramatically between countries. In some, employer social-security contributions add a modest percentage on top of salary; in others they add a large share, plus mandatory extra salary payments such as 13th-month pay. Ask each provider for a full cost estimate for the specific salary and country, including onboarding fees, deposits, foreign-exchange margins, termination costs and optional benefits. Our Deel vs Rippling comparison illustrates how pricing models differ between major platforms.

What risks remain when you use an EOR?

An EOR reduces but does not remove risk. Remaining risks include permanent establishment for tax purposes if employees conclude contracts or create a fixed place of business, co-employment or misclassification challenges in some countries, data protection, IP ownership, service failures by the provider and limits on how long EOR arrangements are allowed in certain jurisdictions.

Permanent establishment is the most significant. If an employee habitually negotiates and concludes contracts on your behalf — for example a senior salesperson — tax authorities may conclude that your company has a taxable presence in that country, regardless of the EOR. Some countries also restrict labour leasing or temporary staffing arrangements, which can affect long-term EOR use. Discuss these issues with tax advisers before hiring senior commercial roles through an EOR.

How do you choose an EOR provider?

Evaluate country coverage and whether entities are owned or partnered, compliance expertise, total cost transparency, onboarding speed, benefits quality, employee experience, data security, integration with your HRIS and payroll, contract terms and support quality. Request references from clients hiring in your target countries.

• Coverage: does the provider operate in every country you need, with its own entity?
• Compliance: how does it keep contracts and payroll current with local law changes?
• Cost: are fees, deposits, FX margins and termination costs clear?
• Experience: how easy is onboarding, payslip access and support for employees?
• Integration: can it connect to your HR, payroll and accounting systems?
• Exit: can employees transfer to your own entity later without disruption?

When should you set up your own entity instead?

Consider your own entity when headcount in a country grows beyond a handful of employees, when you need to sign contracts or invoice locally, when permanent-establishment risk is significant, or when EOR fees exceed the cost of running a local company. Many organisations use an EOR to test a market and then transition employees to their own entity.

The breakeven point varies, but many companies start evaluating an entity once they have roughly 10–20 employees in a country, or earlier if they need a local commercial presence. Plan the transition carefully: employees move from the EOR’s contract to yours, so continuity of service, benefits and accrued rights must be handled properly. Our guides to the payroll process and choosing payroll software help when you bring payroll in-house.

What is the employee experience like under an EOR?

Done well, the employee experience is similar to direct employment: a local contract in the right language, accurate and timely pay, statutory and supplementary benefits, and responsive support for questions about payslips, leave or documents. Done badly, employees feel like second-class team members, confused about who their employer really is.

You can protect the experience by explaining the arrangement clearly during recruitment, including EOR-employed staff fully in team rituals, recognition and development, and offering supplementary benefits that bring their package closer to that of colleagues employed directly. Check the EOR’s support channels, languages and response times, and ask employees for feedback after onboarding. Remote onboarding practices, described in our remote onboarding guide, matter even more when the employee may never visit a company office.

How do terminations work with an EOR?

You decide to end the working relationship, but the EOR carries out the termination as legal employer, following local requirements for notice, justification, consultation and severance. Termination protections vary widely: in some countries dismissal requires a valid reason and procedure, and costs can be significant.

Discuss termination scenarios with the provider before hiring, including probation rules, notice periods, typical severance levels and documentation requirements. Make sure performance issues are documented consistently, since local law may require evidence and warnings. Some EOR contracts include termination fees or require deposits to cover potential severance — include these in total cost comparisons. Good providers guide you through the process to minimise legal risk and treat the employee fairly.

How do EOR fees compare with the cost of setting up an entity?

Setting up a subsidiary involves incorporation, registration with tax and social-security authorities, a local bank account, accounting, payroll, legal advice and sometimes a local director or minimum capital, plus ongoing annual compliance costs. An EOR replaces most of these with a per-employee fee, which is cheaper for small numbers of employees and more expensive as headcount grows.

To compare, estimate the annual cost of running the entity — accounting, audit where required, payroll provider, legal and tax compliance, registered office, internal management time — and compare it with the annual EOR fees for your planned headcount. Include one-off set-up and closure costs, and the time each option takes. Many companies find an EOR clearly cheaper for the first few employees and an entity cheaper beyond a certain size, but the crossover depends heavily on the country and on whether you need a legal presence for commercial reasons anyway.

Whichever route you choose, revisit the decision annually as headcount, commercial plans and local regulations change, and keep an exit plan from your EOR so that moving employees to your own entity is smooth when the time comes.

Document the rationale for each country decision. A short record of headcount, costs, risks and commercial needs makes future reviews faster and helps finance and leadership understand why each model was chosen.

Keep employees informed throughout, since changes of employer, even when roles stay the same, can create uncertainty.

Frequently Asked Questions