Employer Of Record (EOR): What Is It And How Does It Work?

Expanding a business internationally or working for a foreign employer can seem daunting, especially with all the complexities of payroll, taxes, and compliance. That’s where Employer of Record (EOR) services come in.

Whether you’re a company looking to hire overseas talent or an expat wondering how employment works in another country, this guide will walk you through everything you need to know about EOR services.

What is an Employer of Record and what does it mean for expats?

Employer of Record (or EOR for short) is a service that helps companies hire employees and contractors overseas, without becoming their official employer.

Essentially, the EOR becomes the legal employer for HR purposes, handling payroll, taxes, and compliance while the client company directs the employee’s day-to-day work.

Key benefits of Employer of Record for businesses

• Simplifies international hiring by managing local compliance and payroll
• Reduces legal and administrative burdens for growing companies
• Provides access to global talent pools without the need for establishing a local entity

The Employer of Record will take a fee from the client company in return for their services, either as a flat monthly subscription fee or a percentage of the revenue processed.

How does Employer of Record work for expats?

If you are an expat, or if you’re thinking of becoming one, you may be offered a job working for a company based in a different country.

In these cases, don’t be surprised if you end up being employed by an Employer of Record. For employees working abroad, being hired through an EOR means that your paychecks, taxes, and HR administration are managed by the EOR. You still report to and work directly with the client company.

This setup provides security and compliance for both parties, making it easier for expats to work internationally.

How does an Employer of Record (EOR) work?

Let’s say that Company X is a real company based in the UK. Company X wants to grow into new markets, in order to acquire more customers, establish new revenue streams and access a global talent pool. There may also be an opportunity to take advantage of government incentives, which offer favourable terms to businesses growing into those countries.

The first thing Company X needs is to hire employees in its target countries, who can manage business operations in those regions.

However, Company X has no experience in the regions it wants to grow into. If Company X were to hire all of its employees directly, it would find the ordeal time-consuming and costly. This is because Company X would need to understand, and become compliant with the local employment, payroll and tax laws in all of the countries it was hiring new employees. It would then need to administer paychecks every month to these employees, while also paying these employees’ shares of personal income tax.

But Company X needn’t hire and manage its employees directly. Instead, Company X can employ the services of an Employer of Record (EOR).

The Employer of Record is a company based in the same country as the employee. The EOR recruits and onboards the employee, then takes on responsibility for their employment administration, payroll, benefits and other HR responsibilities.

This frees up considerable time, effort and expense for Company X. Meanwhile, Company X can manage the employee freely and set them to work. The whole process is streamlined and easy for everyone involved.

Of course, Company X will have to pay for the services of using an EOR – but it will be a small price compared to the cost of becoming compliant across multiple geographies!

What are the benefits of using an Employer of Record?

Using an Employer of Record (EOR) can offer significant advantages to both businesses and employees. Some key benefits that make EOR services an attractive option for businesses and expats include:

For businesses:

• Simplifies compliance: The Employer for Record navigates complex local employment, payroll, and tax laws, ensuring full compliance in every region where you operate.
• Reduces costs and effort: Avoids the need to establish legal entities in new countries, saving on administrative overheads and regulatory setup costs.
• Quick market entry: Enables businesses to hire employees and start operations in new markets swiftly, bypassing lengthy entity establishment processes.
• Access to global talent: Expands access to skilled professionals worldwide without the administrative challenges of direct hiring.
• Flexibility and scalability: Offers scalable solutions, ideal for temporary projects, market testing, or long-term business growth.
• Risk mitigation: Reduces legal exposure by ensuring all employment practices adhere to local regulations.
• Recruitment assistance: Some EORs offer end-to-end hiring support, helping businesses identify and onboard top talent.

For employees:

• Secure employment contracts: Ensures employees receive legally compliant contracts that protect their rights and provide stability.
• Streamlined payroll: Guarantees accurate and timely paychecks, with the Employer of Record managing tax deductions and filings on the employee’s behalf.
• Professional HR support: Provides access to localised HR expertise for handling queries about contracts, benefits, and employment rights.
• Access to benefits: Employees can receive comparable benefits to working with a local employer, including health insurance, retirement plans, and leave entitlements.
• Simplifies remote work and expat employment: Makes it possible for employees to work for international companies while living in their home countries or relocating as expats or digital nomads.
• Cultural and legal guidance: Offers insights into local workplace practices, ensuring smoother integration into the new work environment.

What are the risks of using an Employer of Record?

While EORs are generally low-risk, it’s important to be aware of potential issues to ensure you select a reliable provider. Here’s what to consider:

• Varied service quality: Not all Employer of Records offer the same level of support. Some may lack comprehensiveness or experience in specific regions.
• Legal entity concerns: Ensure the EOR is a fully registered and legal entity in the target country, not subcontracting services to another company.
• Compliance standards: Verify that the EOR adheres to the highest legal and regulatory standards to avoid potential compliance breaches.
• Intellectual property risks: Carefully review contracts to ensure your business retains full ownership of any intellectual property created by employees hired through the Employer of Record.
• Limited customisation: Some EORs may not provide tailored solutions for specific needs, such as employee stock options or benefits packages.
• Reputation and reviews: Research the EOR’s reputation by reading client reviews and testimonials or speaking directly with current clients.
• Potential costs: While generally cost-effective, the subscription fees or revenue-sharing models of EORs should be weighed against your long-term goals.

Employer of Record vs. Foreign Entity: What’s the difference?

An Employer of Record offers a quick, flexible solution for businesses entering new markets, but it’s not the only option. Establishing a foreign entity provides a more permanent presence.

• Employer of Record: Ideal for short-term or scalable operations, offering fast entry and minimal setup costs
• Foreign Entity: Suitable for long-term expansion, involving higher initial investment but full operational control

For companies who want to build a solid footprint in other countries, hiring an Employer of Record may represent only a short-term solution. These companies might instead consider setting up a foreign entity – a permanent subsidiary or branch in another country.

This is a longer and more complex process that may also come with higher up-front costs. Building a foreign entity will require that business to operate within the legal and regulatory frameworks of a new country. This will usually involve acquiring any licences or permits, getting acquainted with local tax systems, and building a legal and compliance model that works within that country’s systems.

This can be a complicated process, but once it’s done, the business can operate freely within the new territory and won’t have to pay a subscription fee to an Employer of Record.

If your business is thinking of establishing a footprint in a foreign country, it’s good to know there are multiple options available. These include:

Virtual Office

Like an Employer of Record, this is another short-term option – but a good first step for businesses looking to grow their operations in a foreign country. It involves hiring a managed office facility, which includes an address, phone number and possibly even a receptionist. Once these have been established, the business is free to register as a legitimate company within that territory.

Local Representative Office

This is a simple, but restricted way to open an office overseas. It involves setting up a small office, which can be staffed with employees and registered with the government. However, this office will be limited in terms of how much profit it can generate.

Branch Office

A branch is a legitimate business headquarters overseas, which is able to conduct business freely. However, since it is not a separate legal entity, its overseas parent company remains liable for its activities. This is one of the most popular long-term ways to grow a business into new territories.

Subsidiary

A subsidiary company is a wholly separate legal entity to its parent company. For this reason, it can operate independently, allowing it to become fully compliant with the local laws, tax and employment framework of a foreign country. The parent company usually retains major shareholder ownership. In cases where the parent or holding company retains 100% ownership, the company is known as a Wholly Owned Subsidiary.

Acquisition

Another way a company may think about expanding overseas is to purchase a business already established in that territory. This is known as an acquisition. This can be costly, but the result is that the acquiring business also buys the company’s workforce and ongoing business operations, giving them a much easier route into global expansion.

What are the tax implications of using an Employer of Record?

As with all things, the tax implications of setting up an Employer of Record (EOR) will depend on multiple factors, including:

• The nature of the business
• The territory in which the business is establishing an EOR
• Local and national tax laws, which may be subject to change

An Employer of Record will typically handle the client’s tax accounting, especially when it comes to the personal income tax of employees.

The EOR will withhold the portion of an employee’s paycheck intended for income tax, then pay this on the employee’s behalf. This frees the business from handling tax responsibilities in a foreign country, and allows the employee to get on with their work without having to worry about filing their own income tax.

In situations where the business has employed contractors, freelancers or digital nomads, these employees may be responsible for handling their own taxes. In these cases, the employees will need to understand the local tax laws of the country they are living in (including whether a double taxation law agreement exists between that country and their home country), and file their tax returns themselves.

There may also be complications around the handling of extraordinary remuneration, and the tax laws around these, such as in the case of granting options to foreign employees. It’s best to speak to your Employer of Record to understand what choices are available if you intend to offer shares or other benefits to overseas employees.

How can an Employer of Record help expand your business?

There are many key benefits to using an Employer of Record for both employers and employees. These include:

1/ Launch quickly

An Employer of Record will already be established in the country it operates in, and ready to start administering HR responsibilities right away. This means a foreign business can hire the services of an Employer of Record quickly and easily, then begin hiring and paying employees right away. This is useful for businesses that need to expand quickly. It’s also useful if you have employees who intend to become expats or digital nomads.

2/ Local expertise

An Employer of Record knows and understands local tax and employment laws, making them a good consultant for a growing business. Hiring an Employer of Record gives you access to local knowledge and expertise, which can help you to grow your business overseas. For employees, the Employer of Record can help you to understand your legal rights.

3/ Remove bureaucracy

Expanding into some foreign markets can be notoriously tricky owing to complicated tax and employment laws. Many countries will not allow a business to conduct business operations unless they have a representative business in that territory. An Employer of Record offers exactly that – meaning a business can start conducting operations without first having to struggle through lengthy paperwork.

4/ Flexible terms

Since an Employer of Record is a third-party business service, the client can use their services as and when they need. This makes it easy to both employ, and cease operations with an Employer of Record. If your business needs to gain a temporary foothold in a foreign country, or employ staff on a short-term basis, an Employer of Record offers a cost-effective way to do this.

5/ Benefits employees

Ultimately, an Employer of Record is there to help your employees. The Employer of Record makes sure your staff get paid accurately and on time, and many EORs pride themselves on delivering with 100% accuracy. The Employer of Record can also fulfil other HR responsibilities, such as writing employment contracts, delivering benefits, paying taxes, handling shares and options, and more. This means an employee can get on with their work, safe in the knowledge that their employment status and payroll administration are managed by professionals with local expertise.

Thinking about growing your business overseas?

Whether you’re growing your business overseas with an Employer of Record, or moving abroad to work for a foreign business, we wish you the best of luck in your journey.

One thing you may want to consider as part of that journey is protecting the people you work with. That’s where international health insurance comes in. Our international employee benefits package includes group international health insurance and group international life insurance, to ensure your employees stay protected, wherever they are. And for individuals, we offer international health insurance with flexible plans to suit your and your family’s needs.

Speak to William Russell today to find out how international health insurance can help you and your employees get the most out of life overseas.