EOR Meaning: Employer of Record Model Explained in Detail

While the EOR meaning might be unclear to some, for businesses seeking global growth, the Employer of Record model is a well-known solution — and for good reason.

When it comes to global expansion, the complexities of setting up local entities have impacted even some of the most successful global companies:

• Google settled with the French government for €965 million after the tax authorities demanded over €1 billion in back taxes due to improper labor law compliance;
• Apple faced a €13 billion back tax claim from the EU as a result of its inability to adhere to evolving local entity management and tax laws;
• Uber had to revamp its operational model entirely in the UK and reclassify drivers as employees, resulting in high operational costs and requiring a local entity.

As demonstrated, businesses set for global expansion or international hiring face numerous challenges — but that’s where the Employer of Record (EOR acronym) steps in.

So, what is an EOR? Check out this comprehensive guide on all the EOR essentials.

EOR Definition: Core Concept and Differentiators

The core goal of the Employer of Record is to simplify and streamline the employment process for businesses looking to expand their operations internationally.

Unlike the traditional process, where companies must set up a legal entity in the country, an EOR alleviates the burden of navigating complex local labor laws and administration.

To explore what makes the EOR model unique, see the table describing what is an Employer of Record approach and how it differs from the traditional expansion process.

Aspect	Hiring through EOR	Traditional Hiring Process
Entity Setup	No need for local entities	Usually requires setting up local entities (depending on the location)
Employee Onboarding	2-3 weeks	2-6 months due to legal setup
Setup Costs	$6,000 – $25,000, including fees	$20,000 – $35,000+
Scaling	– Immediate payroll setup – Pre-established compliance and contracts – Near-instant scalability within 2-4 weeks	– 4-12 weeks for payroll setup – 1-3 months for compliance and contract management – 6-12 months for scaling due to entity setup

Why Use Employer of Record Services: Key Functions 

The portfolio of EOR services spans multiple operations, from compliance to HR tasks and beyond. Let’s review them in more detail.

Hiring and Onboarding

Scope of EOR work:

• The client company selects the employee they want to hire. Once the decision is made, the EOR hiring starts.
• As a part of the EOR staffing services, the Employer of Record takes care of employment contracts, ensuring they comply with the local labor laws and regulations.
• The EOR also manages the onboarding process, including employee registration with relevant authorities and tax bodies.

Why it matters:

The cost of a bad hire can be up to 30% of that employee’s annual salary, which EORs help mitigate by streamlining onboarding and legal compliance.

EOR Payroll and Benefits Management

Scope of EOR work:

• The Employer of Record payroll services include calculating salaries, deductions, and taxes according to local laws. Payments are made directly to the employee from the EOR.
• Apart from the Employer of Record payrolling, it also administers benefits such as health insurance, pension contributions, paid time off, and any other benefits required by local regulations or agreed upon with the client.

Why it matters:

Payroll errors affect 53% of US employees at least once in their careers, which EORs help reduce.

Health Insurance Coverage

Scope of EOR work:

• The EOR handles health insurance coverage as per the country’s labor laws.
• EOR compliance includes thorough research to adhere to various regional healthcare differences and ensure proper compensation for employees.

Why it matters:

With the average healthcare cost per employee in the USA around $15,000 per year, an EOR relieves a considerable burden of health insurance management by ensuring employees receive legally mandated benefits.

Compliance and Legal Responsibility

Scope of EOR work:

• The EOR verifies whether the employment complies with local labor laws about minimum wage, working hours, leave policies, and termination requirements.
• They also manage tax reporting, submit required documents to tax authorities, and address Employer of Record tax implications.

Why it matters:

EOR reduces the risk of costly compliance-related fines and lawsuits that cost businesses up to $100,000 per violation.

Risk Mitigation

Scope of EOR work:

• The EOR takes on the legal risks associated with employment, such as non-compliance with labor laws, tax regulations, or employee lawsuits.

Why it matters:

With a strong focus on risk mitigation, EORs can help companies avoid costly legal disputes with an average of $75,000 per employee lawsuit in settlements.

Tax Management and Reporting

Scope of EOR work:

• The EOR’s knowledge of local laws guarantees that income taxes, social security contributions, and other statutory withholdings are properly deducted from employee paychecks.
• Thanks to the Employer of Record tax implications are made easy: EORs manage tax reporting, submit required documents to tax authorities, and ensure the client company remains compliant with local tax obligations.

Why it matters:

While the average business spends about 60 hours per year on tax-related tasks, EORs can significantly streamline this process.

Employment Contract Management

Scope of EOR work:

• The EOR employment contract management settles all employment terms: compensation, benefits, working conditions, etc.
• The EOR also handles any Employer of Record contract renewals or amendments for the client.

Why it matters:

In many countries, failure to comply with employment contract laws can result in fines of up to $20,000 per infraction.

Human Resource Management

Scope of EOR work:

• The EOR takes over all HR administration workload, from employee contracts to worker classification to essential local documentation.
• EOR HR support is also provided whenever there are any employee disputes or legal consultations needed.

Why it matters:

EORs can reduce the time it takes to hire globally by 50%, compared to managing international hires in-house.

Termination and Offboarding

Scope of EOR work:

• Whenever the company decides to terminate an employee, EORs handle the process. They ensure compliance with local laws while considering important factors such as notice periods, severance pay, and legal protections.
• The EOR also manages the entire offboarding process, ensuring all final payments, benefits, and legal requirements are met.

Why it matters:

Improper employee termination can result in wrongful termination lawsuits, averaging $40,000 in settlement costs.

Employer of Record Pros and Cons, Impact, Use Cases

Typical EOR Use Cases

To better understand why use an Employer of Record services and assess the Employer of Record benefits and impact, let’s imagine and review common expansion scenarios:

EOR Benefits

Opting for the Employer of Record provider, businesses across any industry or region can witness game-changing EOR benefits, such as:

Quick Hiring and Onboarding

Since EOR manages local hiring and all employment regulations, it speeds up the commonly tedious market entry to a matter of weeks.

Employee Mobility

The EOR takes care of work permits and visas for the relocated employees as per immigration laws, streamlining the expansion and saving the company from potential fines.

Risk Mitigation

The Employer of Record risk mitigation strategy covers everything from potential compliance pitfalls to risk management strategy and monitoring.

Scalability

With EOR-powered remote team management, the workforce can be scaled up easily whenever needed and without administrative hurdles.

Cost Efficiency

Due to the EOR’s efficiency and the actions mentioned above, businesses can fully avoid the costly expenses otherwise spent on establishing a local subsidiary.

The benefits of EOR are numerous; however, there are also potential pitfalls associated with the EOR model. How valid are these concerns, and if so, how can they be minimized? Let’s review them in detail.

EOR Considerations

Must-know considerations when hiring an EOR include: 

Complex Communication Workflows

Due to the fact that EOR serves as a middleman between the company and the employee, there is a belief their communication might become more layered and slower. 

How to solve: To minimize this, companies can establish clear communication protocols and regular check-ins with the EOR to ensure efficient and transparent workflows.

Less Cultural Alignment

Since the EOR is the legal employer, employees may feel less connected to the company’s culture, which might create a gap in fostering strong team bonds and shared goals.

How to solve: With the EOR handling administrative tasks, companies can focus on fostering culture by integrating EOR-hired employees through team-building activities, virtual meetings, and inclusive communication.

Potential Over-Reliance on the EOR

Companies that do not oversee the level of control they pass to the EOR may become overly dependent on its services, thus facing some challenges if they decide to switch EOR providers or transition to a local entity.

How to solve: While the majority of tasks are passed to the EOR, businesses still need to keep an eye on their HR processes and stay in the loop with the most important updates. Plus, contingency plans can help ensure a smoother transition when needed.

Permanent Establishment Risks

For some business scenarios, associated Employer of Record risks imply that using an EOR in certain jurisdictions could trigger “permanent establishment” (PE) status, resulting in additional tax liabilities for the company.

How to solve: Regularly reviewing operations and local laws, along with working closely with tax advisors and legal experts, can help avoid potential tax liabilities.

Potential Difficulties in EOR Termination

Ending an EOR relationship might be complicated, especially when transferring employees to direct contracts and navigating local laws for termination or transfer procedures.

How to solve: Working with legal teams, setting clear timelines, and understanding local employment laws will help ensure a smooth termination process and avoid legal issues.

Higher Upfront Costs, Service Fees

Some EOR services are charged by the employee, which increases upfront costs. Over time, these fees can accumulate, making the EOR model more expensive than setting up a local entity.

How to solve: Compare EOR fees with the cost of establishing a local entity and choose the most cost-effective option based on your long-term goals. For short-term or smaller teams, EOR may still be more efficient.

Limited Control

Since the EOR handles HR, legal, and compliance work, companies may find themselves with quite limited direct control over these processes.

How to solve: Set clear expectations with the EOR provider upfront, outlining key policies and processes. Maintain regular communication and conduct periodic reviews to ensure alignment on HR compliance policies. 

Greater Expenses for Long-Term Commitments

EOR services are often considered more suited for short- to mid-term solutions. Over time, EOR fees may become cost-prohibitive for companies with a permanent regional presence.

How to solve: Conducting a thorough, regular cost-benefit analysis can help identify the tipping point where setting up a local entity becomes more financially viable.

Role of Employer of Record in Fueling Global Expansion

The EOR hiring process is designed to be a smooth collaboration between your business and the EOR provider, with the shared goal of streamlining international hiring. So, how does EOR work? Let’s review the process step by step.

1. Defining hiring requirements. The company identifies the position, qualifications, and the country where the employee will be hired.
2. EOR consultation. The EOR discusses the client’s needs, local employment laws, and necessary compliance factors.
3. EOR agreement. At the Employer of Record agreement stage, the company opts for an EOR provider, reviews service packages, and finalizes the contract outlining responsibilities, fees, and services.
4. Legal setup. The EOR sets up the framework for managing employment in the desired country.
5. Selecting employees. The company recruits and selects the candidate(s) they want to hire.
6. Compliance check. The EOR ensures that the offer and contract comply with local labor laws and regulations.
7. Employment contract generation. The EOR prepares employment contracts that adhere to the country’s labor laws, including compensation, benefits, and working conditions.
8. Employee onboarding. The EOR manages the onboarding process, including registering employees with relevant tax and social security authorities.
9. Payroll, HR, administration, and compliance management. The EOR oversees payroll, manages day-to-day HR tasks, and ensures adherence to local compliance.
10. Employee performance feedback. The company provides regular feedback on the employee’s performance, while the EOR manages the administrative side of employment.
11. Regular reviews. The EOR conducts regular check-ins with the client to ensure satisfaction and compliance, offering adjustments as necessary to accommodate business changes.
12. Scaling the team. The EOR can scale up or down the workforce as needed, offering flexible solutions based on business demands.

Employer of Record Pricing Models

Employer of Record services come with different EOR pricing models, each designed to accommodate varying business needs and make the EOR cost viable for both small startups and large-scale enterprises.

EOR Pricing Models

Per Employee per Month (PEPM)	Percentage of Employee Salary	Flat Fee	One-Time Setup Fee
Flexibility: High Scalability: High Cost: Medium	Flexibility: Medium Scalability: High Cost: High	Flexibility: Low Scalability: Medium Cost: High	Flexibility: Low Scalability: Low Cost: Low
Tiered Pricing Model	Pay-as-You-Go	Customized Pricing
Flexibility: High Scalability: High Cost: Medium	Flexibility: High Scalability: High Cost: High	Flexibility: High Scalability: Medium Cost: Medium

Per Employee per Month (PEPM)

With this model, you’ll pay a consistent, flat monthly fee per employee. This way, it’s great for its predictable and straightforward billing that makes financial planning easier for companies. 

However, the model has its downside: as the number of employees grows, it can become less cost-efficient.

• Ideal for: companies looking for predictable, recurring billing.
• Downside: the risk of becoming expensive for large teams.

Percentage of Employee Salary

Under this model, the EOR cost is based on employee compensation and is calculated as a percentage of each employee’s gross salary. 

The option is great for those seeking flexibility. However, note this: if you’re looking for highly skilled or niche employees who have to be highly compensated, your EOR costs will go up significantly.

• Ideal for: organizations with a fluctuating payroll cost structure that require flexibility.
• Downside: not efficient for hiring high-skilled workers.

Flat Fee

The flat fee model charges a fixed amount per month, regardless of any other factors. Constant and predictable costs are the key benefits, but they come at the expense of flexibility.

• Ideal for: small teams or short-term projects.
• Downside: lack of flexibility makes it inefficient when scaling the workforce.

One-Time Setup Fee

With this model, you pay a one-time fee for onboarding each new employee. This cost covers payment for tasks like legal compliance, contracts, and payroll setup. 

The one-time setup fee is ideal for businesses with short-term projects or minimal hiring, as they only pay for onboarding once. However, upfront costs can be significant, especially when scaling rapidly or hiring large numbers of employees.

• Ideal for: short-term projects or minimal hiring.
• Downside: upfront costs, including one-time setup fee and others.

Tiered Pricing Model

With this model, the cost per employee decreases as you hire more staff. For companies set for exponential growth, this allows them to save money as their workforce expands. Meantime, for those with fewer employees and limited hiring needs, the model will not be as advantageous.

• Ideal for: large teams or companies planning to scale.
• Downside: smaller companies may not benefit as much.

Pay-as-You-Go

This model charges companies based on the specific services used, which can be ideal for businesses that need certain services based on specific demand. 

However, note that this flexibility comes with unpredictability, and costs can fluctuate from month to month. Thus, companies often find it harder to budget for ongoing expenses.

• Ideal for:  companies needing flexibility for specific tasks.
• Downside: monthly expenses may be hard to predict.

Customized Pricing

This model is tailored to fit the unique business requirements. While highly flexible, it requires more commitment to discussing and managing contractual arrangements, which adds time and complexity to the setup process.

• Ideal for: companies with complex or unique hiring needs.
• Downside: requires negotiation and more detailed arrangements.

EOR Cost: An Investment That Pays Off

Because EORs provide a cost-effective, efficient, and low-risk way for companies to expand globally and manage international employees, it has become the choice for many renowned companies like Deloitte, Microsoft, Revolut, OpenAI, TOYOTA, Asus, Rakuten, Zoom, and many others. So, is it worth the investment? While the answer depends on your company’s goals, market complexity, and other factors, EOR offers significant advantages in many scenarios.

Summing up, the EOR model is a good fit for numerous businesses, offering the benefits of quick, compliant global expansion without the need to set up a legal entity. For businesses that consider other expansion options, there are alternatives such as PEO, outsourcing, and subsidiaries — yet, when compared side-by-side, EOR excels in several key areas.

	EOR	PEO	Outsourcing	Subsidiary
No need for legal entity	✔	X	✔	X
Employment process management	✔	X	✔	✔
Employee management	✔	✔	X	✔
HR services	✔	✔	X	✔
High speed of hiring	✔	X	✔	X
Ease of scaling	✔	✔	✔	X
Compliance management	✔	✔	✔	✔
Level of control	Limited	Moderate	Low	No need for a legal entity

Frequently Asked Questions about EOR

Navigate your way to global growth with EOR: simplify the complexities of international hiring in a fraction of the time with near-zero effort!