Employer of Record (EOR) Explained: Pros, Cons, and the Best Alternatives for Global Employers

According to Atlas, 61% of US and 71% of UK companies see international hiring as a key driver of growth — yet only 40% are confident they can comply with the legal requirements. Mistakes when hiring foreign employees can be costly, from tax penalties to a complete ban on operations in a particular country.

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One solution for businesses is to use an employer of record (EOR). In this guide, we’ll describe how an EOR works, its advantages and disadvantages, and alternatives like CORs, PEOs, and AORs. Ready to dive into the alphabet soup.

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What is an employer of record

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An EOR is an intermediary that officially hires employees on behalf of a client company. It performs legal and administrative tasks such as:

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1. Drawing up contracts in line with the laws of the employee’s country. These legal requirements ensure comprehensive protection for both employers and employees throughout the entire employment lifecycle.
2. Calculation of salaries and taxes. The EOR is responsible for withholding and paying taxes to local authorities on time.
3. Compliance with labor laws. This includes working hours, safe conditions, and compliance with local discrimination, data protection, and employee privacy regulations.
4. Social security. The EOR handles issues related to mandatory health insurance, retirement savings, paid vacation, and fringe benefits like corporate trainings and meals.

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The EOR market is projected to grow from $5.8 billion in 2024 to $12 billion by 2030. Companies often obtain services through EOR software (specialized platforms or services) — a segment worth $5.23 billion in 2024 and projected to reach $9.17 billion by 2033.

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Case studies

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GitLab has over 2,300 employees in more than 60 countries. In many of them, it uses EORs to avoid the hassle of registering legal entities around the world.

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If a business fails to consider local laws and market specifics, it can lead to significant losses. This happened to Uber Eats, Glovo, Just Eat, and Deliveroo. In Italy, they were fined €733 million (£628 million) for misclassifying 60,000 couriers.

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Types of EOR

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Companies can choose between three basic EOR models: direct, indirect, and hybrid.

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Direct model

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How it works

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The EOR establishes a local legal entity in each country of operation and employs employees through it directly.

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Pros

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• No intermediaries. The EOR has full control over the process: it keeps personnel records, signs contracts, and ensures compliance with local laws.
• The client can contact the EOR directly and solve problems quickly. Also, the fewer intermediaries there are, the lower the risk.

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Cons

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• This is more expensive than other models, as setting up and maintaining legal entities can involve a lot of costs.
• The EOR’s services are limited to countries where it has established a legal entity. It can’t operate elsewhere.

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Who can benefit from this model

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Large companies that plan to hire many employees in a new country and want full control over work processes.

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Indirect EOR model

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How it works

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In this model, rather than being registered in the country of operation, the EOR works through local partners. Those become the official employers, drawing up contracts, paying taxes and salaries, and providing services on behalf of the EOR. The EOR just coordinates the process and passes information to the client.

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Pros:

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• Costs less than the direct EOR model. 
• Efficient, since companies can enter multiple new markets quickly.

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Cons:

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• Less transparency, control over workflows, and flexibility. Even if you urgently need to fire an employee or change the terms of a contract, the EOR first has to coordinate with the local partner.
• Risk of delays and errors. For example, if the local partner has its own internal rules, this can lengthen payment timelines and increase paperwork.

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Who can benefit from this model

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Companies for which speed is of the essence, especially if budgets are limited and operations need to be launched in multiple countries.

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Hybrid EOR model

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How it works 

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This model uses the direct model in key countries and the affiliate model in others.

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Pros:

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• Gives a customized balance of control and flexibility.

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Cons:

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• Risk of inconsistent service. This model can get complex, and it can be difficult for the EOR to coordinate with multiple third-party partners.

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Who can benefit from this model

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Companies with varying needs in different markets and the administrative capacity to handle complexity.

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Three types of EOR contract

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There are three main types of contract involved in working with an EOR. Each governs a different aspect of the relationship linking the employee, the EOR, and the client company.

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1. Employment contract

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This is between the EOR and the employee and is governed by local labor laws. It defines the key terms of employment:

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• Position, duties, start date.
• Salary and frequency of payment.
• Taxes and contributions, including for social security and health insurance.
• Terms of termination (dismissal, probationary period, severance pay).

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The client company is not a party to this agreement, but it defines the employee’s tasks and requirements.

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2. Service agreement

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This regulates the relationship between the EOR and the client company. It specifies:

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• The parties’ responsibilities (which services the EOR provides and which remain with the client).
• Service costs (fixed fees, commissions, additional charges).
• The EOR's responsibility to comply with local labor laws.
• Dispute resolution procedures and terms of termination.

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3. Side agreements

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Sometimes additional agreements are concluded to protect the client company's interests. 

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• Non-Disclosure Agreements (NDA) prevent the leakage of confidential information.
• Intellectual Property (IP) Agreements secure the rights to solutions and techniques created by employees.
• Non-compete Agreements restrict employees from moving to a competitor.

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Alternatives to EORs

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While using an employer of record has many advantages, it’s not always the best choice. Let's take a look at some alternatives.

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Contractor of record (COR)

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A contractor of record helps companies with the legal aspects of working with freelancers and independent contractors. It doesn’t employ anyone on behalf of the client but protects the latter from the risks involved in hiring abroad, such as misclassifying workers. CORs cost less than EORs and provide more flexibility.

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Employer of Record vs. Contractor of Record

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• An EOR hires workers and fulfills all the obligations of an employer.
• A COR works only with freelancers and contractors and doesn’t register them as full-time employees.
• A COR handles the legal registration of contractors in each country and protects against the risks of incorrect classification and tax penalties.

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Who can benefit from a COR

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• Companies that work with independent professionals rather than salaried employees.
• Businesses that want to hire contractors in foreign jurisdictions without setting up branch offices.
• Companies without the budget to work with EORs.

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Example

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A US company wants to hire developers from Germany on a contract basis. Germany has strict employee classification rules, and if contractors work for only one client, they can be reclassified as full-time employees. A contractor of record helps the company register workers as independent professionals and reduces legal risks.

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Professional employer organization (PEO)

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A professional employer organization provides HR and administrative support to companies within the same country.

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PEO vs. EOR

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• An EOR helps with recruitment when the client doesn’t have a legal entity in the country; a PEO helps with HR in a country where the company already has an office.
• An EOR has full legal responsibility for the employee, while a PEO works on a co-employment model, sharing responsibilities (and compliance risk) with the client company.
• PEOs often have minimum employee counts (typically 5–10), but EORs do not.

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Who can benefit from a PEO

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• Companies that are already operating in a given country and want to outsource HR to simplify administration.
• Organizations that need help with payroll, taxes, and benefits, but not hiring.

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Example

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A French retail company has opened a branch in Brazil but doesn't want to deal with local taxes and labor laws on its own. It hires a PEO to take care of payroll and paperwork.

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Agent of record (AOR)

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An agent of record (AOR) helps companies manage contract compliance. It isn’t the official employer and doesn’t administer employees.

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AOR vs. EOR

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• EORs handle employee onboarding and manage the employment relationship; AORs only ensure that contracts and worker classifications comply with legal requirements.
• The AOR doesn’t pay wages, file taxes, or provide benefits.

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Who can benefit from an AOR

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• Businesses that want to protect themselves when drawing up international contracts but that need only basic legal support.

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Example

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A US marketing startup hires contractors in Spain, South Korea, and Canada for temporary projects. It uses an AORs to make sure contracts are handled correctly.

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Model comparison

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Conclusion

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A company’s choice of EOR, PEO, COR, or AOR depends on its business objectives, hiring structure, and budget. An EOR is the best option if you need to hire a foreign full-time employee quickly, a PEO is appropriate for companies with existing branches, and a COR gives you the flexibility to work with freelancers, while an AOR provides minimal legal support for contracts.

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If your company works with freelancers and independent contractors, explore the COR and contractor management platform Mellow.

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Request a free demo →

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