In brief
- Employer of record (EOR) offer a quick, flexible solution for international businesses in today's increasingly global world, but they come with unique limitations and challenges.
- Rather than a permanent tool, EORs are best used in the short-to-medium term, with proper and careful planning.
- Below, we consider what an EOR is and when to use one, along with key legal and commercial considerations for businesses exploring or using the EOR model.
At a glance
Our world is increasingly global. Chasing business means placing talent in new jurisdictions quickly, as does retaining talent when that talent wants to relocate and there is no choice but to accommodate that. Increasingly businesses look to an Employer of Record (EOR) organisation or a Professional Employment Organisation (PEO) to help.
An EOR is a third-party organisation that acts as the legal employer of your workers in a foreign jurisdiction. It handles contracts, payroll, tax, and compliance, while the business retains full control over day-to-day work. It is an increasingly popular structure for businesses that want to either move quickly by hiring staff in country or those who want to test the commercial opportunity in the jurisdiction without the cost and admin involved in establishing a local entity. EORs market themselves as the solution in these situations and they certainly do offer a solution. However, the commercial appeal must be weighed against several practical considerations: cost can escalate quickly, not all countries permit EOR arrangements, and risks around misclassification, permanent establishment, intellectual property, and data protection must be carefully managed. Without careful management, it can expose your business to material legal, tax, and operational risk. With the help of advisers who are experienced in the nuances involved in hiring via EORs, an EOR can support international growth effectively, although they are best used as a short to medium term tactical tool rather than a permanent solution.
What is an EOR and is it the same as a PEO?
Firstly, it is a regular occurrence to hear the terms EOR and PEO used interchangeably and for them to have slightly different meanings depending on where in the world you are.
However, broadly speaking, an EOR is a third-party organisation that becomes the legal employer of workers on behalf of another company, taking on all formal employment responsibilities, including contracts, payroll, tax compliance, and benefits administration, while the client company retains full control over the employees' day-to-day work. The EOR is the employer on paper; the client company directs the work. This model has become essential for companies expanding internationally without establishing legal entities in every country. Rather than setting up a subsidiary or branch office, which can take months and require significant investment, businesses can engage workers through an EOR and begin operations quickly.
A PEO tends to operate under a co-employment model, with shared co-employer responsibilities. A PEO is more typically used by organisations that already have a legal presence in the relevant jurisdiction (perhaps because that is a legal requirement), but wish to outsource some of the other pieces that sit around that – e.g. HR administration, payroll processing, and compliance support.
The rest of this article focuses on EORs.
When to use an EOR: key advantages
EORs are most valuable where speed, flexibility, or cost efficiency are the priority. When exploring a new market, an EOR allows you to hire local talent without committing to entity establishment, which is useful for assessing whether a market justifies longer-term investment. For small teams, the cost of setting up and maintaining a legal entity is often disproportionate, and an EOR can be a more cost-effective structure. They are also well suited to short-term projects or jurisdictions with complex regulatory requirements where local compliance expertise is needed. We see businesses set a threshold (e.g. 10 employees) after which it becomes cost ineffective, longer term, to hire people via an EOR because of the expense of the EOR charging model.
Reputable EORs bring detailed knowledge of local employment laws and tax regulations, which reduces compliance risk, and offer the flexibility to adjust headcount and exit a market, if needed, without the complications of winding down a legal entity (although note that, from a pure staff cost perspective, exiting a jurisdiction via an EOR is likely to be more expensive than if the business had its own entity for a number of reasons).
Limitations and risks
Despite their advantages, EORs have significant limitations and challenges. EOR charging models will vary, and fees are typically calculated as a percentage of the salary, plus additional charges for setup, terminations, and currency conversion. We have seen some EORs also pass through the cost of day-to-day legal advice and legal advice on termination. As headcount grows, cumulative costs frequently exceed the expense of operating your own entity. When an employee is exited, the EOR will practically do this (and will often want to control the process) but will seek full recompense for the end user business for the severance costs (including any enhanced payments to obtain settlement agreements – which it will normally seek to obtain).
Geographic restrictions are a major consideration. EORs cannot operate in all countries. China requires formal entity establishment and does not recognise the standard EOR model. India restricts foreign employment without proper establishment, and certain European countries have stringent regulations that restrict or prohibit EOR arrangements entirely. Many countries still haven't caught up with the boom of EORs since COVID and have not yet regulated this area of law.
If structured incorrectly, authorities may determine that workers are actually the end user business' employees, triggering tax penalties, social security liabilities, employment law violations and audits. Using an EOR also does not automatically eliminate permanent establishment risk. If your activities in a country fit within the relevant definitions, the business may still create a taxable presence regardless of the EOR arrangement. Tax advice should be obtained before proceeding.
Essential legal protections
The contractual framework requires careful attention. Clear liability allocation is fundamental: define precisely who bears responsibility for employment claims and compliance failures, and include robust indemnities from the EOR for their own compliance failures. Define what decisions the EOR can make autonomously versus what requires your approval or input, as ambiguity creates operational and compliance risk, and cost – for example the end user business will be on the hook for the cost of a termination, regardless of whether it has provided input into the approach. In Works Council countries, employee thresholds may technically be triggered by the number of employees employed (for multiple end users) by the EOR; the same may apply in respect of collective redundancy thresholds.
Intellectual property requires particular attention. Because the EOR is the legal employer, IP created by employees technically vests with the EOR (as employer) unless properly assigned. The service agreement must include comprehensive IP assignment provisions ensuring all IP automatically vests with the end user business, mirrored by equivalent clauses in the EOR's employment contracts with workers. Post termination restrictions are a difficult area for obvious reasons – the party to the employment contract (the EOR) is not the party that requires the protection.
Data protection compliance is also a very important consideration. Verify GDPR or equivalent compliance, appropriate security measures and proper data processing agreements. Failure to address this properly can result in significant regulatory penalties.
EORs typically provide supporting employment documentation but are not immigration advisers, and some jurisdictions restrict or prohibit EOR work permit sponsorship entirely.
Commercial considerations
What about when a decision is taken to move EOR providers or to bring employees "in-house" to the business' own entity?
Clear transition criteria help avoid costly delays and compliance risks.
Transition planning requires a minimum of three to six months of lead time. Employers should understand local transfer of undertakings regulations protecting employee rights, have a communication plan around affected employees about timing and any changes to terms, and ensure continuity of service is recognised for leave accrual, notice periods, and redundancy entitlements. Where there is no applicable transfer law and the mechanism is fire/re-hire, a careful budgeting process needs to be undertaken – remember that the EOR may (depending on the commercial terms) be largely in control of how the termination is effected and how much is paid to the individual.
Conclusion
The EOR model represents one of the most significant shifts in how businesses structure their international workforces, and its use continues to grow. When used carefully, it offers speed, flexibility, and compliance expertise that would otherwise take considerable time and resource to develop. When used without sufficient care, it can give rise to misclassification risk, tax exposure, intellectual property vulnerabilities, and regulatory penalties that outweigh the convenience it was intended to provide, as well as a potentially costly exit exercise.
An EOR is a useful tool, not a substitute for proper planning. Businesses that take the time to select the right provider, negotiate robust contractual protections, and plan ahead for the transition to entity establishment will be well placed to make full use of what the model offers. Those that treat it as a permanent solution without proper legal and tax advice may find the consequences difficult and costly to unwind.
How can we help
For further information, advice, or any questions relating to the above, please contact Jo Edgley, Head of MDR ONE who provides centralised employment and privacy support to multinational businesses.
If you are considering an EOR arrangement or are already using one and want to ensure your position is properly protected, taking early advice is the single most important step you can take.