What is an Employer of Record (EOR)? A full guide

An employer of record (EOR) is an entity that legally employs workers on behalf of another business, a model that has become increasingly relevant as more companies build distributed teams. In fact, among adults with jobs that can be done from home, 75% are working remotely at least some of the time. An EOR takes full responsibility for all aspects of employment including compliance, payroll, taxes, and benefits.

Employers of record can be located within the same country as the business it employs workers for or in another country with different employment laws.

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What does an EOR do?

So, what exactly does an EOR handle for your business? An EOR takes care of the legal and administrative side of employment, so you can focus on managing your team. Here's what most EORs do:

Compliance with local employment laws

An EOR will guide and support a business to ensure employees are hired in accordance with local laws in every country or jurisdiction and provide them with compliant employment contracts. As the EOR is the employer, the business can rest easy knowing that the legal ins and outs are taken care of.

Onboarding new team members

Once a business has found a new hire the EOR will onboard them, managing the employment agreement and setting up all the necessary processes necessary for the new team member to start at the company.

Running payroll internationally

Payroll and local taxes for both the employee and the employer will be fully managed by the EOR. The business's team members will be paid by and receive payslips from the EOR.

Managing compensation and benefits

EORs often offer a variety of benefits but these vary from service to service. Benefits can include health insurance, time-off policies, parental leave, etc.

Processing contract terminations

When an employee's contract is terminated, the EOR will handle all the necessary details.

Benefits of using an EOR

1. People operations compliance

An EOR handles all the paperwork and red tape that comes with hiring employees globally. The specific services vary by provider, so you'll want to confirm they offer what you need:

• Payroll processing: Managing payments in local currencies
• Compliance support: Ensuring adherence to local employment laws
• Administrative tasks: Handling onboarding, contracts, and documentation

2. Compliance with local employment laws

An EOR can also help with local regulatory compliance, with local experts handling all aspects of employment within the bounds of the local jurisdiction.

3. Flexibility in staffing

An EOR can increase a company's flexibility when it comes to staffing, a perk that employees highly value. Global surveys show that workers value the option to work from home a few days a week at an equivalent of 5 percent of their pay. This flexibility allows businesses to use EOR services to hire international contractors on a temporary or project basis, which can be particularly beneficial for startup companies.

4. Cost savings

Here's where EORs really shine financially:

• Entity setup savings: No need to establish legal entities in each country
• Global scaling: One provider can handle multiple countries instead of separate setups
• Competitive salaries: Access to talent in markets with different cost expectations

5. Faster expansion

The ease with which the right EOR can enable businesses to onboard team members, and the enormous pool of talent global hiring opens, means that teams can expand faster.

6. A more diverse talent pool

Research backs the idea that a diverse workforce is a better workforce, showing that companies in the top quartile for ethnic representation have a 39 percent increased likelihood of outperformance compared to their peers. Building a global team will naturally make your business more diverse, adding a range of team members with different cultures and perspectives.

In summary, there are many advantages to using an EOR, and you should carefully weigh all the pros and cons before making a decision.

When to use an EOR

Deciding if an EOR is the right fit comes down to your company's goals for global expansion. An EOR is often the best choice when you need to:

• Enter new markets quickly without the time and expense of setting up a local legal entity.
• Ensure compliance for a distributed team by relying on local employment experts.
• Hire top talent anywhere, regardless of where your business has an office. This is critical in a competitive market, as 46% of remote-capable workers say they would be unlikely to stay at their job if they could no longer work from home.
• Test a new region for market viability before making a long-term investment.

If your business is facing one of these scenarios, an EOR provides a fast, compliant, and scalable solution.

What's an example of an EOR?

Here's how it works in practice: Let's say you're a U.S. company that wants to hire a developer in Spain. An Spanish EOR becomes the legal employer, handling the employment contract, local taxes, and compliance with Spanish labor laws. Your new team member works for your business day-to-day, but the EOR takes care of all the legal employment responsibilities.

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“Both the PEO and the client company will be responsible for certain obligations of employment, while both parties might share responsibility for other obligations and be “an” employer, but neither party is “the” employer for all purposes.”

Employer of Record vs. PEO: What's the difference?

The key difference? With an EOR, employees are not 'co-employed' like they are with a Professional Employer Organization (PEO).

PEOs create a co-employment arrangement where they share HR responsibilities like payroll and benefits with your company. The National Association of Professional Employer Organizations defines this as:

Both the PEO and the client company will be responsible for certain obligations of employment, while both parties might share responsibility for other obligations and be "an" employer, but neither party is "the" employer for all purposes.

Under this arrangement, the company and the PEO both contractually share the employer responsibilities.

The disadvantage of co-employment

Because the employee risk is split between the client company and the PEO, neither party is fully responsible. This sharing of risk and employee responsibilities can be challenging and, in some cases, has led to legal exposure, such as in the Stephanie Perez vs. Dermatology Group, PC, vs. ADP case, in which the employee sued the company and their PEOs for claims discrimination. It was the legal and compliance challenges of the PEO model led to the creation of employer of record services as an alternative.

The advantage of EORs over PEOs

While both services are employment solutions, that's where the similarity ends. Unlike a PEO an EOR goes further than "general" HR outsourcing by taking on the risk of hiring employees overseas while the client company focuses on its day-to-day operations.

Employer of Record vs. staffing agency: What's the difference?

A staffing agency acts as an intermediary between talent and the hiring company. Their main goal is to support the client company in hiring the right candidate that matches the role they're trying to fill.

Some staffing agencies offer additional services such as:

• Advertising the role on job boards.
• Running background checks.
• Reviewing applicants and filtering for role-fit.
• Filing paperwork.

On the other hand, an employer of record service only kicks in once an employee has completed the recruitment process. EOR services don't participate in the talent search and vetting process.

Is it easier to open an entity in another country or use an EOR?

It depends on your expansion plans and team size. Here's when each option typically makes sense:

Setting up your own entity works best when you're:

• Planning to hire 10+ employees in that country
• Making a long-term commitment to the market
• Ready to handle local legal, accounting, and HR requirements

If a business's expansion plans in a country are uncertain or projected to be limited in scope, it can be far easier, more cost effective, and less complicated to use the services of an EOR. Check out our guide on opening your own subsidiary vs. partnering with an employer of record.

How to choose the right employer of record?

Choosing the right EOR can feel overwhelming with so many options out there. Here's what to prioritize in your search:

1. Are they present in the right countries?

If there are prospective team members in one or two countries the business should check in each location that there are EORs present that you feel happy to work with. If prospective team members are located in several countries you would either need to find multiple EORs, which would cause a lot of administrative work, or you can look to the services of a global employment platform, like Oyster.

At Oyster we own or partner with local entities in over 180 countries worldwide to save you the headache of finding multiple individual services. We also handle high value employment functions, like benefits, onboarding, and off-boarding, all through our easy to use global employment platform.

2. What support is on offer?

Cross-border employment can be complicated. Businesses that choose this option will want to partner with an EOR that provides adequate support for your needs.

It's a good check out the support materials the EOR has on their website and whether it will be easy to self-serve. Why not kick off your search by speaking to a member of the team at Oyster to explore our solution further?

3. Does the EOR have a platform and what features does it include?

It's important to try before you buy. Many EORs don't have a software platform, but Oyster has a comprehensive, easy-to-use platform that you can demo before you commit.

to learn more.

How much does an EOR typically cost?

EOR costs vary based on several factors, but most charge per employee per month. Here's what affects pricing:

• Country location: Some regions cost more due to local regulations
• Services included: Basic vs. comprehensive benefit packages
• Team size: Many providers offer volume discounts

Check out our pricing page to learn more about the cost of hiring globally.

Can you onboard contractors through an EOR?

Yes! EORs can usually help companies onboard contractors in many countries around the world, which is crucial for avoiding misclassification risks. According to the IRS, companies that incorrectly classify an employee as a contractor may be liable for employment taxes for that worker. Find out more about working with international contractors using Oyster.

What are the alternatives to an EOR?

Some alternatives to using EORs for international hiring include:

Opening a foreign entity

If a business opens its own entity in the country or countries in which it wants to hire, it can handle all the aspects of employment that an EOR would handle. The compliance burden of this approach makes it appeal mainly to larger companies that are looking to take on a large number of staff in a particular location. For more on this subject, check out our webinar on entities vs. EORs.

Helping an international employee obtain a visa

Many countries have visa programs that enable employers to sponsor employees to work legally for them. However, these visas are often time-limited and following this process for each employee would be burdensome.

Simplify global hiring with Oyster

An Employer of Record removes the biggest barriers to building a global team, turning a complex process into a simple, compliant, and human-centered one. By handling the legal and administrative burdens of international employment, an EOR allows you to focus on what matters most: finding and supporting the best talent, wherever they are.

Oyster's global employment platform makes it easy to hire, pay, and care for your team in over 180 countries. Ready to see how it works? Start hiring globally and unlock a world of opportunity.

FAQs

What are the risks of using an EOR?

The main risks involve partnering with an EOR that lacks local expertise, which can lead to compliance issues or incorrect tax filings. Choose a reputable provider that owns local entities and guarantees compliance.

How does EOR work in practice?

You provide candidate details to the EOR, who creates a compliant contract and handles payroll, taxes, and benefits. You manage the employee's daily work while the EOR handles legal employment responsibilities.

What is the best employer of record?

The best EOR aligns with your specific needs regarding country coverage, pricing transparency, platform quality, and local benefits. Prioritize providers that ensure both compliance and positive employee experiences.