TL;DR: An Employee of Record (EOR) is a third party company that legally employs workers on another companies behalf. EORs are especially useful for employing workers abroad since it saves you the hassle of creating an entity in the worker’s country.
Picture this
You’ve found the perfect employee for your startup, but they happen to live in another country.
You decide you want to hire this person, but might get immediately discouraged by the obstacles that coming with international hires. Setting up an entity in the international country, paying their local taxes, providing benefits abroad, and complying with the local labor laws are all daunting tasks that come with hiring abroad.
What an EOR is
EORs solve this problem for you. An EOR is an external company that can act as the legal employer for your employees. While you can use an EOR for domestic employees as well, it is much more useful and practical to use one for international employees, because it solves the legal entity problem.
The Legal Entity Problem
In almost all countries, in order to hire and pay someone, you need a registered legal entity in that country for tax and labor law purposes. Setting one up typically involves:
Local legal counsel
Government registration processes (sometimes takes months)
Ongoing accounting, tax filings, and compliance in that jurisdiction
Sometimes minimum capital requirements
The point of hiring an external EOR is that they already have the entity in place, saving you the time setting one up and maintaining it.
So what does an EOR actually do?
An EOR takes care of the legal and administrative side of employment, including:
Running payroll and handling local taxes
Providing and administering benefits (health insurance, retirement, etc.)
Ensuring compliance with local labor laws
Managing HR paperwork, onboarding, and offboarding
Signing the actual employment contract with the worker
As you can see, an EOR does a lot more than simply acting as a legal entity. When hiring an international employee, using an EOR saves you lots of time doing tedious, complex legal work.
Cons of EORs
While there are many benefits of using an EOR for an international employee, there are a few things you should consider:
Loss of direct employment control: EORs typically use pre-set employment contracts, you’ll have limited flexibility for things like salary structure, benefits, and terminations.
Cost: EOR fees typically run $300–$700 per employee per month.
Scaling Issue: Due to the high cost of EOR’s, it only really makes sense to use them if you only have a few employees in a single country. At some point (often around ~10 employees in a single country), setting up your own local entity becomes cheaper over a multi-year period.
The Bottom Line
In the small scale, using an EOR for international hires will save you time and money. Taking on the task of setting up a legal entity in another country is not a simple task, so if possible, save yourself the stress by using an EOR.
