EOR (Employer of Record)
Last updated
Definition
An EOR (employer of record) is a company that becomes the legal employer of workers on behalf of a client, usually in a country where the client has no legal entity. The EOR issues the employment contract, runs local payroll, withholds taxes, and provides mandatory benefits, while the client directs the employee's daily work.
This entry defines the term. For the full guide to how EOR services run, read What is an employer of record?. To compare providers, see employer of record services.
How an EOR works
- 1Contract. The EOR signs a local employment contract with the worker that meets that country's labor law, and a separate service agreement with the client.
- 2Payroll and taxes. The EOR pays the worker in local currency, withholds income tax and social contributions, and pays the employer's statutory costs.
- 3Benefits. The EOR provides the benefits local law requires, such as paid leave and statutory insurance, plus any extras the client pays for.
- 4Compliance. The EOR handles local registrations, filings and termination rules.
- 5Billing. The client pays the EOR the employee's full cost plus a service fee, usually monthly.
The EOR is the sole legal employer, which is the main difference from a PEO, where the client and PEO co-employ staff and the client usually has its own entity in the country. Hiring someone as an independent contractor instead avoids the EOR fee but carries misclassification risk if the person works like an employee; see contractor classification and EOR vs contractor.
Example
Illustration with made-up figures: a U.S. company hires one engineer abroad at a salary equivalent to $70,000 a year. Suppose local employer social contributions and mandatory benefits add 20% to salary, and the EOR charges $600 a month.
| Cost line | Calculation | Annual cost |
|---|---|---|
| Salary | Agreed in contract | $70,000 |
| Employer statutory costs | $70,000 x 20% (assumed) | $14,000 |
| EOR service fee | $600 x 12 | $7,200 |
| Total | $91,200 |
The total is 130% of salary, and the EOR fee is about 8% of it. Employer contribution rates differ a lot by country, so replace the 20% with the real local figure. With several employees in one country, the fixed cost of opening an entity can become cheaper than paying the fee for each person; the guide EOR vs setting up a local entity covers that break-even.
Related terms
- PEO: co-employment, mainly for domestic employees.
- Contractor classification: the test that decides whether a foreign worker can stay a contractor.
- PEPM: the pricing unit behind most EOR fees.
- Employer of record pricing: guide to what EOR services cost.
- How to hire internationally without opening an entity: guide to the options.
Common mistakes
- Budgeting the fee but not the statutory costs. The service fee is usually the smallest part of the bill.
- Offering at-will terms. Many countries require notice periods and severance. The EOR contract must follow local rules, and the client pays for them.
- Assuming the EOR handles permanent establishment risk. An employee doing sales for the client abroad can still create tax exposure for the client in that country. Get local advice.
- Keeping someone on EOR too long. At higher headcount, a local entity is often cheaper.
- Not checking how the EOR delivers in each country. Some providers use partner companies in certain countries. Ask who the legal employer is.
Is an employer of record the same as a PEO?
No. An EOR is the sole legal employer, usually in a country where the client has no entity. A PEO co-employs staff with a client that already has its own entity, mostly for domestic employees.
Can an EOR hire contractors?
Many EOR providers also offer contractor payment services, but that is a separate arrangement. The point of an EOR is to employ someone properly when contractor status would not hold up.
Related