Employer of record services have transformed the ways that companies do global business. No longer is it the case that you need to establish expensive foreign subsidiaries and engage law firms, accountants, and other local human resources (HR) professionals in order to hire someone in a country where you do not have a local entity. By partnering with a company that offers employer of record services, you can achieve the same thing at around 80% lower cost, and you will save yourself hours upon hours of administrative work in the process.
Working with an employer of record provider can seem complicated at first, but we’ve put together this handy guide to help you understand what employer of record service providers are, how they work, what the benefits of using them are, and how to compare them.
This complete guide contains everything you need to get started with employer of record service companies, and it also links out to some of our other key resources that you might find helpful as you begin your globalization journey.
Employer of record companies are making waves in the global business world, but what exactly do they do?
An employer of record (EOR) is a special type of company that provides employment, payroll, human resources, and related services in a given country of operations for non-domiciled third-party companies.
The purpose of EOR services is to help companies hire abroad without the high cost and complexity of establishing subsidiaries, branch offices, or other complex legal entities in the intended country of operations, saving them between $25,000-80,000 on average (depending on the country).
The EOR is the entity that actually employs the individual, and then that individual is contracted to work exclusively for the EOR provider’s client company. In respect, EOR services are just one form of outsourcing that companies can take advantage of to facilitate global operations and reduce costs.
Note that while it is, formally, the EOR that employing the individual and overseeing all required HR functions, the client company retains the autonomy to manage the employee and their day-to-day workloads. This is usually a matter of great concern for EOR client companies: they need to ensure there is no loss of control over employees by hiring through an EOR.
Typically responsibilities of an EOR services company include:
Some EOR providers also offer additional related services, such as incorporations, recruitment, legal advisory, tax compliance, and other services to help the company with its expansion into the chosen country of operations.
Note that some people refer to EOR companies as ‘PEO’ companies, where PEO stands for Professional Employer Organization. While many of the functions of these companies are similar, there are some critical differences (see below and here for more detail).
If you own a US company and want to hire someone in China, for example, one option (the traditional one) was to go through the expensive and complex process of setting up a foreign subsidiary in China to hire that person yourself. This would likely be a Wholly Foreign-Owned Enterprise (WFOE). If you did so, you would be 100% responsible for the WFOE setup and running costs, as well as the wealth of company compliance and HR obligations you would face as soon as you hired your first staff member.
Or, much more time and cost efficiently, you could contract with a licensed employer of record in China to hire that person on your behalf, paying only a relatively small management fee and having none (or very few) of the compliance and HR obligations to handle yourself. On a day-to-day basis, you would control everything the employee does, but instead of paying them via your own payroll at the end of the month, you would instead receive an invoice or other payment request from your EOR provider outlining the salary, tax, social security, and other costs associated with that person’s employment for the month. You pay that charge just as you would pay any other service provider, and are thus free of all the usual obligations as an employer.
In practice, engaging an EOR to hire an individual in another country sounds like that individual will have two employers – one that formally employs them, and one that actually controls what they do in their employment.
This reality leads many to believe that employer of record services are actually co-employment setups.
With co-employment, two companies (typically) employ the same person simultaneously. There can be more companies involved, but that is rare. In most cases, those two companies both have employment obligations and day-to-day control over the employee. These employment obligations may not be the same; the companies can split them however they choose.
This is not the case with EOR providers, however. With EOR services, the EOR company itself has no discretion over the day-to-day workload of the employee; they simply register the employment and manage any ongoing HR obligations.
A related question is what is the difference between EOR and PEO companies?
As a reminder, PEO stands for Professional Employer Organization. On the surface, these companies look almost identical and many people use the terms interchangeably. There are, however, some key differences between the two types of employment services company:
‘Employer of Record’ is actually one highly specialized service that many PEO companies offer. To be an employer of record is to be the company that actually hires an employee (whether their own employees, like in most companies, or another company’s ‘employees’, like with EOR providers). To engage employer of record services, therefore, is to ask an EOR provider to be the official employer of an individual who you wish to then be contracted out to your company on an exclusive basis.
As you can now deduce, the term PEO refers to something much wider than the term EOR actually covers. EOR is just one of many services that a PEO company might provide to its clients (the others being recruitment, payroll, incorporation, market entry consulting, local legal compliance, and so on).
Note, on the flip side, that many PEO companies do not offer EOR services at all. In those cases, working with a PEO in a different country would require you to own an entity in that country of operations. Engaging a non-EOR providing PEO makes sense if you have a subsidiary in a foreign company and want to outsource some of your HR functions. But it does not make sense if you do not have, or do not intend to have, an actual entity there.
Here are some other differences that may be relevant, depending on the type of PEO company involved:
To find out more about the difference between EOR and PEO providers, check out our detailed article here.
In most countries, employer of record relationships are legal. In other words, in most countries it is legal to contract with another company to employ somebody on your behalf. That is, assuming that the employer of record services provider is appropriately licensed and carries out their operations in full compliance with local legal, tax, and employment regulations.
Note that due to legal restrictions, many employer of record services providers cannot operate in the following countries:
Employing international staff without an EOR can pose some legal, tax, and other regulatory problems. We’ve written a more detailed article about this here, but generally speaking, companies that try to hire abroad without an EOR and without their own entity risk the following:
If an employer tries to hire individuals abroad through the less formal arrangement of contracting, the employer could face fines and other penalties if the ‘contractor’ is found to be misclassified. In most countries, for example, employers cannot control the work hours, schedule, methods, or load of independent contractors without risking looking like an employer. Contractors do not typically enjoy the same benefits as full-time employees and there are fewer taxes on contractors, so local labor authorities are keen to ensure that employers who hire contractors are doing so genuinely and not as a ‘cheaper, easier way’ to hire an employee.
Sometimes shortened to ‘PE’, permanent establishment is an international tax concept relating to situations where a company is deemed to have a formal business presence in the country of operations, even if they don’t actually have an entity there. The consequence of a finding of PE is that the foreign company will be required to formalize its presence in the country (through company incorporation, for example), pay corporate taxes (including backdated taxes), and potentially pay fines and other penalties for non-compliance. In the worst cases, a company might be prohibited from operating in that country temporarily or permanently.
It is difficult to understand the full wealth of obligations that employers face in a new country of operations. The laws are complicated and it often takes years of experience hiring people in a country to really understand the nuances of the employment setup there. For foreign employers trying to navigate this by themselves, this poses a serious challenge. The consequences of getting this wrong, however, are not sympathetic to these difficulties. Fines, penalties, and bans from operating are all common consequences of failing to comply with local laws.
As with comparing any product or service, you might get an intuitive feel for an employer of record services company when you read through their websites and meet with their sales people.
There are, however, a number of critical points of comparison that you should bear in mind when looking at different employer of record companies. Make sure you ask questions about these points when comparing EOR service providers (we’ve published some starter questions for you here, if that’s helpful!)
The comparators may seem academic in some respects, but they can have a considerable practical impact on your experience with the company, such as whether you have to make a deposit to start the service, when and how you have to pay the EOR’s fees, and what local expertise you have access to as part of your service. This is why the important points listed here mirror the factors we consider at The Employer of Record when we provide detailed employer of record comparisons!
Important points of comparison include:
A considerable percentage of the global EOR providers out there outsource some of all of the actual back office work required to hire someone internationally to other local companies. While there is not necessarily anything wrong with this, it can create problems when it comes to employee contracting, tax compliance, and service control (among other things). Check whether the company you are interested in is actually hiring the employees on your behalf, or if they are contracting with other companies to do so.
Does the EOR cover the same types of employment benefits that you offer your existing local employees? Note that not all providers are able to offer important benefits such as health insurance, life insurance, work-from-home equipment, IT equipment perks, and pension contributions. You need to check individually with each provider to ensure they offer the benefits and perks you need.
This is likely to be top of mind already, but it helps to have a reminder of some of the fees that EOR providers might charge. Depending on the provider, you might pay an all-inclusive monthly fee or you might be charged a management fee plus ad hoc fees as certain tasks are completed (such as onboarding, contract issuance, expenses processing, and termination). You should also compare providers based on fee transparency, as not all of them are 100% clear on where your money is going every month. Curious about the different types of EOR fee structures? Check out this post.
You already know that managing cash flow in a business can be tough, and – believe us – it only gets harder when you add in regular international payments with their own payment deadlines, processing times, and compliance requirements. Before you contract with any provider, make sure you know when and how you are expected to pay (by check, international bank wire, credit card, etc.) and ensure that their payment timelines work with your existing financial commitments and procedures.
Does the provider offer any type of cloud-based platform or other software offerings that will help you to manage your global teams? If so, have you seen a demo and made sure the platform meets all your requirements? Don’t forget to check things like whether the platform offers the required integrations for your existing stack (applicant tracking software, accounting and bookkeeping software, etc.) If you need help with knowing what to look for in an EOR provider, we’ve got an article on that, too.
Some EOR companies offer extras, such as recruitment, incorporations, legal advice, accounting and bookkeeping, tax services, and contractor management. These services are certainly useful if you have plans to use your new country of operations as a launchpad for business in the area, but if you just need hiring and payroll services for one or a small team of people, you might find that all the additional services and upsells add to the cost and complexity of your project. (Check out this post on whether you should handle extra services yourself or ask your EOR provider to do it.)
Understanding the experience of working with a particular employer of record services company is critical prior to contracting with them. Ensure you understand that experience both from the perspective of you as a company, and from your hired individuals as (technical) employees of the company. You want to make sure that the company does not spend all of its efforts on impressing clients at the expense of support for employees with HR, legal, and tax matters.
For a full list of important EOR provider comparators, check out our detailed EOR comparisons.
If you want to learn more about how an employer of record could help you with your global hiring plans, check out our Resources page or dig straight into our detailed comparisons of employer of record providers.
Top EOR Providers |
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| Provider | Overall Company Rating | Overall Employee Rating | Overall EOR Rating |
| Horizons | 5 | 5 | 5 |
| Deel | 5 | 5 | 5 |
| Remote | 5 | 5 | 5 |
| GoGlobal | 5 | 5 | 5 |
| Globalization Partners | 5 | 5 | 5 |
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