Decoding EOR Meaning: What is an Employer of Record and Why it Matters?

An Employer of Record lets you quickly and compliantly hire global talents without a legal entity. Explore the EOR meaning, how it works, and best use cases
Wendy Ng
Wendy Ng
Content and Operations Strategy Manager, FlexOS
4+ experience with Employee Experience background in Human Resources industry, Wendy is dedicating to share invaluable strategies, empowering managers to boost team productivity and engagement.
April 12, 2024
min read

Remote work brings convenience and joy to everyone practicing it!

Hundreds of remote work statistics showcase the increasing adoption and real-world advantages of this flexible working model.

One of its prominent benefits is letting companies break away from transcending geographical boundaries that once limited their reach of talents - simpler than ever.

Employees can find themselves better opportunities for their expertise and career goals without being constrained by location.

But, there's a critical "behind-the-scene" process to make all of these happen: compliant global recruitment or contractor conversion.

If you want to move beyond the gig economy and freelance services to build a strong remote team, you'll need to consider either setting up a legal entity in the targeted countries to process employment-related paperwork or partnering with a third-party service like an Employer of Record (EOR).

Understanding what employer of record services are could be the breakthrough your business needs in the modern workforce landscape. And that's what I'm covering in this article.

In the following sections, I'll dive into the meaning of employer of record, how it works, and when it makes sense for companies to partner with one.

From a Demand for Highly Skilled Workers...

Let's start with the truth: our talent needs.

As an HR leader, you're likely too familiar with the fiercer-than-ever "talent war" across industries.

71% of over 40,000 fellow HR professionals from companies globally report struggling with skilled talent shortages, according to a 2024 Manpower Group Survey.

Global Talent Shortage
Global Talent Shortage (Source: Manpower Group)
"It is clearer than ever that organizations are well on their way to making skills the currency of work." - said Ravin Jesuthasan, Future of Work Futurist, Senior Partner and Global Leader for Transformation Services

The pursuit goes beyond filling vacancies to securing the innovative edge and competitive advantage that truly exceptional talent can provide.

And they might not be in your home country!

The next problem arises: Venturing into international hiring landscapes introduces a complex web of regulatory, legal, and logistical hurdles that can seem insurmountable, even for well-established enterprises.

...To a Hassle-Free and Risk-Free Solution for Your Talent Needs

An EOR is a specialized organization that steps in to handle the full legal employment for employees in a different country.

An EOR company acts as the legal employer for the international skilled workers you want to hire, taking on all the risks, responsibilities, and liabilities that come with employment.

Yes, we're talking about full compliance with local employment laws, handling compensation packages aligned with local norms, managing every aspect of payroll, taxation, and benefits—the whole nine yards of HR admin.

For you and your team, it means rapidly scaling with the precise expertise you need, without the nightmare of setting up entire legal entities abroad or getting buried in complex international regulations.

Understanding Employer of Record

But what exactly is an Employer of Record?

At its core, an EOR is a third-party organization that legally hires and pays employees on your company's behalf. It essentially becomes their official employer for tax, legal, and compliance purposes across different countries.

More than payroll services, EOR providers often offer a full-service HR solution custom-tailored to support your international workforce across multiple jurisdictions.

They ensure full tax compliance by handling issues like tax withholding, reporting, and payments aligned with each country's regulations.

They also manage strict adherence to local labor laws covering areas such as minimum wages, termination rules, statutory benefits like paid time off or maternity leave, anti-discrimination policies, and more.

EORs structure competitive benefits packages as well, making sure components like health insurance, retirement plans, and supplemental benefits are provided at levels that meet or exceed local norms and expectations for that specific location. Things like medical plan coverage, 401k/pension allocation rules, paid leave policies etc. are all accounted for.

In essence, EORs take on the daunting task of ensuring your distributed workforce is fully compliant and properly supported according to each jurisdiction's unique employment requirements - handling everything employment-related with total expertise, so you don't have to!

EOR's Roles and Responsibilities
EOR's Roles and Responsibilities

It's no surprise this solution is rapidly gaining traction worldwide.

The global EOR market is projected to reach a whopping $8 billion valuation by 2031, growing at 6.8% annual rate from 2021 onwards, according to industry forecasts.

As globalization and the widespread adoption of flexible working models like hybrid work and remote work accelerates, more companies are turning to EOR services to navigate HR and employee compliance for their global teams. This solution also helps reduce risks when they're not yet ready to establish legal entities in other countries or can't spare the time and resources to develop in-house international HR knowlegde.

How an EOR Works

How an EOR Works
How an EOR works (Source: Shelter)

They are your team members, but on paper, they're employees of another company. This can be confusing, so let me explain how an EOR works in simple terms!

Please note that it can differ from vendor to vendor, but generally, here's how it usually goes:

The Employer-Employee Relationship

When you partner with an EOR, firstly, they will legally employ workers on behalf of your company, making them the official employer for tax and legal purposes.

Although these employees carry out tasks for your company, they are technically hired by the EOR.

This arrangement requires a detailed contract between your company and the EOR, specifying each party's responsibilities and expectations.

While the EOR handles the formal aspects of employment, you can maintain day-to-day management of the employees as usual, including directing their work, setting employee performance goals, and overseeing all professional activities.

Compliance and Legal Responsibilities

The EOR takes on all legal responsibilities linked to employment, including adherence to local labor laws, tax regulations, and employment standards.

This comprehensive coverage includes managing payroll and ensuring compliance with laws regarding minimum wage, overtime, holidays, and benefits.

Also, the EOR remains vigilant about changes in legislation to mitigate risks and maintain compliance.

As a client company, you can keep the line of communication and let their team of well-versed experts guide you through any industry-specific compliance requirements in local areas along the way.

Payroll Administration and Benefits Management

The EOR manages all aspects of payroll and benefits administration: processing paychecks, handling tax withholdings, and administering benefits such as health insurance, pension plans, and other employment perks.

This frees your team from the administrative burden and complexities of managing payroll across different regions.

You can still provide additional top-up benefits or performance-based incentives.

And it's also your responsibility to relay any payroll adjustments, such as bonuses or raises, to the EOR so that they can make appropriate adjustments to the employment contracts.

Onboarding and Offboarding

EORs facilitate the onboarding process for new hires by handling the official paperwork, including contract signing and collection of personal data for payroll.

They also introduce new employees to your company policies and necessary preliminary training.

You, however, are stills responsible for the cultural and role-specific onboarding, ensuring new employees grasp your company’s values and understand their specific job roles.

When employment needs to be terminated, you need to communicate this to your EOR and manage the personal and team communication aspects to ensure the process aligns with your company culture.

The EOR will then handle the legal and procedural aspects of offboarding, issuing final paychecks, and managing severance or termination benefits if applicable, thereby reducing legal risks and facilitating a smooth transition for departing employees.

When to Consider an Employer of Record for Your Business

As we talked a lot about how an EOR can help with paperwork and administration, thanks to their expertise and experience in established countries, you might wonder in which situations your company should consider this solution.

Here are some popular scenarios where partnering with an EOR becomes invaluable:

EOR best use cases

You Need to Onboard Talents Quickly

Let's say you've found a very promising candidate for the role, and you want to secure them. Unfortunately, they are not located in the same country as you.

Establishing a legal entity in a new country can involve significant upfront expenses and take many months to complete.

An EOR bypasses these upfront costs and allows you to hire within days or weeks, ensuring a smooth and efficient onboarding process.

By partnering with an EOR, you can onboard international team members compliantly while ensuring they receive the bare minimum benefits they deserve, without the hassle of setting up a legal entity.

You Want to Test a New Market

Using an EOR is a low-risk way to test hiring employees in a new country or region before committing to establishing a legal entity there.

It allows you to gauge hiring needs and success before making larger investments.

Additionally, some EORs provide enhanced intellectual property protections, which are crucial when entering markets where you lack expertise in legal frameworks and jurisdictions.

This safeguards your company's valuable assets and proprietary information.

Your Remote Team Members are Scattered Worldwide

Yes, it can be the case in the remote work world: Your team spans multiple countries and continents, with just one or two of them in each area.

No way you should establish subsidiaries in every country!

Unless you have local HR professionals in these countries, using an EOR is more practical and cost-effective to compliantly employ talents across multiple countries without the administrative burden and financial overhead of setting up legal entities in each location.

Once the number of employees in a particular country grows, incorporating may make more sense, when the resources spent on an EOR become relatively equivalent or higher than establishing a legal entity.

Your Team Members Relocate

You know how valuable your top talents are.

But what if your star engineer must fly back to their home country to care for an ailing family member? Or your brilliant marketer accepts an exciting career opportunity for their spouse in another country.

Relocating employees internationally involves a maze of immigration, tax, and labor law compliance. Trying to navigate that on your own risks costly penalties and the loss of an invaluable team member.

This is where an Employer of Record shines.

With their deep local expertise and established infrastructure, an EOR partner seamlessly transitions your relocating employee.

An EOR provides peace of mind that your relocation is handled compliantly and your employee remains engaged and productive, no matter where their journey takes them next.

You Need to Convert Contractors to Full-time Employees

Most EORs provide an integrated global payroll service or dedicated contractor management software that allows you to hire contractors and freelancers globally. If you have a mixed workforce worldwide, these combined services of an EOR are incredibly useful, as you can manage and pay all international talent in one "global hiring" system.

But that's not all! EORs shine even more in helping you avoid employee misclassification when converting project-based employees to full-time ones.

As your business grows and evolves, you may find that some of your contractors have become integral to your operations, and you see an opportunity to make them official team members.

Employee misclassification often occurs during this process, which can lead to future legal and financial consequences if you fail to determine the correct employee status at the right time, provide mandatory benefits they're entitled to, and comply with required tax and labor regulations.

In fact, a misclassified worker can lose almost $17 million a year in income and job benefits—and that's what you have to pay back once investigated, along with fines and damaged reputation.

Either in consulting sessions or through their automation technology, an EOR will alert you if your contractors should be classified as full-time employees based on what they are doing and how they're doing it, adhering to local regulations to mitigate misclassification risks.

Also, with their team of experts and pre-existing infrastructure, an EOR partner can advise you on what to offer your new full-time employees and let you opt for it since the beginning, such as health insurance packages, paid time off, and pension contributions.

Deel Shield
Deel EOR's worker misclassification tool.

What are the Costs and Fees of an EOR Service?

The costs and fees associated with using an EOR service can vary widely depending on several factors, including the geographical location of the employees, the services required, the size of the employee base, and specific local compliance requirements.

The common pricing models of an EOR are:

  • Percentage of Payroll: Often, EORs charge a percentage of the total payroll they manage. This rate typically ranges from 5% to 20% of the payroll. The percentage can be higher in countries with more complex labor and tax laws or for smaller numbers of employees, where fixed costs are spread over a smaller base.
  • Flat Fee Per Employee: Some EORs opt for a flat fee per employee per month. This fee can range from $500 to $700 per employee, depending on the level of services included. This model is straightforward and makes costs predictable for businesses.
  • Service Tier Pricing: EORs may offer different service tiers, each with a set of included services at different price points. Lower tiers might include basic payroll processing and tax administration, while higher tiers could include comprehensive HR services, benefits administration, and legal compliance.

In general, the cost of an EOR is not little!

However, when you consider the time, resources, and risks involved in setting up legal entities abroad, this can be a small price to pay for hassle-free global hiring.

For example, Deel's EOR pricing is just 10% compared to the estimated costs of setting up an entity in the UK for the same purpose.

The key is ensuring you understand clearly what is included in the vendors' quotes, so you can select an EOR partner that fits your budget while still handling compliance robustly. After all, risking penalties and fines tends to cost much more in the long run!

Check out Best Employer of Record Services in 2024 with a detailed look at their offerings, unique features, and cost

EOR vs. PEO and GEO: What are the differences?

EOR and PEO (Professional Employer Organization) are often compared when it comes to managing a global workforce.

It's because they share some similarities in providing employment services, including HR operations and employee benefits management.

Understand their distinct differences will make it easier to navigate your choice:

PEOs operate solely within a single country, entering into a co-employment relationship to manage payroll, benefits, and regulatory compliance with that nation's laws.

While helpful for domestic hiring, they lack the global market expertise and infrastructure to support a multinational workforce across borders as an EOR can.

And if you come to a PEO because you don't have your own entities, a PEO just can't help with that!

Another international employment solution that you might have heard is the Global Employment Organization (GEO).

GEOs are global companies that establish legal entities in multiple countries to directly employ talent as their own employees.

While also facilitating global expansion, GEOs require higher costs and greater commitment to maintaining multiple international entities compared to partnering with an agile EOR

In other words, EORs fill a strategic niche and flexible option for businesses looking to explore growth opportunities overseas or meet specialized hiring needs abroad without committing to permanent foreign entities initially.

More Read: Understanding EOR vs PEO: Which is the Right Choice for Your Company?

Selecting the Right EOR Partner

If you're ready to explore a few EOR solutions to help with global expansion and operational efficiency, here are key considerations to guide you through this process:

Global Presence and Expertise:

  • Ensure the EOR has a strong presence in the countries where you plan to hire or expand. This includes knowledge of local employment laws, regulations, and cultural nuances.
  • Verify the EOR's experience with clients in similar industries and sizes to yours, ensuring they can handle your specific needs.

Technology and Support:

  • EORs usually offer an online portal for client companies (you) and your employees to ensure everyone is on the same page and streamline the management process.
  • Given a similar price range and service included, an EOR with scalable software solutions that integrate seamlessly with your existing HR tools is a big plus!
  • Prioritize EORs that provide dedicated account managers and support in your and your employees' time zones and languages for efficient communication.

Compliance, Security, and Transparency:

  • Data security protocols are non-negotiable. Ensure the EOR has robust measures to protect sensitive information and employee data.
  • Transparency in pricing, including all potential fees (setup, taxes, termination), is crucial to avoid unexpected costs.
  • Confirm the EOR's commitment to compliance with local employment law and tax legislation, ensuring legal and financial safety for your business.
More Read: In this guide on Employer of Record Benefits and Challenges, I discussed what leaders should know about EOR services and how to choose the right one in details. Make sure to check it out before putting down money!

The Bottom Line

In today's global marketplace, access to top talent knows no borders! But navigating the complex web of employment laws, tax regulations and labor compliance when hiring internationally remains a huge challenge.

The exploration of EOR meaning and its roles, from ensuring compliance with local and international laws to simplifying HR tasks, underscores its significance in operational efficiency and risk mitigation.

Through an EOR partner, you can quickly hire the skilled professionals you need anywhere in the world, with the assurance that all payroll, benefits, and legal requirements are being properly handled.

I hope this guide provides you with informative insights toward your path of remote work excellence!

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