Expanding into new markets and hiring internationally comes with legal, tax, and administrative challenges. An Employer of Record (EOR) helps businesses navigate these complexities by handling employment responsibilities on their behalf.
This guide covers the basics of EOR, how it works, and its key benefits.
What is an Employer of Record (EOR)?
An Employer of Record (EOR) is a third-party organization that legally employs workers on behalf of a company. While the company manages day-to-day tasks and work responsibilities, the EOR takes care of administrative and legal employment duties, such as:
Payroll processing
Tax compliance
Employee benefits administration
Employment contracts
Ensuring adherence to local labor laws
Working with an EOR partner allows companies to hire employees in different regions without needing to establish a legal entity in each location.
An EOR will keep you fully compliant because it acts as the legal employer on your behalf and are responsible for all the back office, from HR and employment contracts to payroll and tax management.
How Does an EOR Work?
When a company partners with an EOR, the process typically follows these steps:
Hiring Employees – The company selects the employees they want to hire.
Employment Agreement & Onboarding – The EOR officially hires the employee, ensures employment contracts comply with local labor laws, and manages onboarding by providing necessary documents for a smooth start.
Payroll & Benefits Management – The EOR handles salary payments, tax deductions, and benefits such as healthcare and pensions.
Compliance Assurance – The EOR ensures its local employer company meets all legal obligations in the employee’s country.
Ongoing HR Support – The EOR provides continuous HR support, including contract renewals, terminations, and updates on local requirements.
What are the Benefits of Using an EOR?
An EOR offers businesses a faster, more efficient way to expand globally while ensuring compliance and reducing operational burdens. Establishing a legal entity in a foreign country can take anywhere from four to twelve weeks, whereas an EOR already owns a network of entities across the world, which significantly accelerates global hiring and market entry.
Beyond speed, partnering with an EOR provides several key advantages:
Reduces Legal and Compliance Burdens – Setting up an entity comes with legal complexities, tax filings, and compliance challenges. An EOR mitigates these burdens by acting as the legal employer, ensuring adherence to local labor laws while allowing businesses to focus on growth.
Lowers Financial Investment – Establishing an entity requires a substantial financial investment, legal fees, and accounting costs. A direct EOR, like Atlas, already has these structures in place, enabling companies to scale efficiently with reduced overhead.
Enhances Scalability and Benefits – EORs like Atlas also provide scalability by offering clients and their teams access to Fortune 500-level benefits, such as competitive medical, dental, vision, and pension programs. This makes it easier to attract and retain top talent across multiple markets.
Simplifies Payroll and Tax Management – An EOR handles local payroll regulations and tax requirements, ensuring smooth operations. By taking care of compliance and administrative complexities, businesses can focus on their core strategy and long-term growth.
What are the tax implications of using an EOR?
There are often concerns about permanent establishment (PE) exposure when using an EOR. A PE refers to a taxable presence in a foreign country, even without a formal subsidiary or legal entity. This occurs when a foreign tax authority determines that a company is conducting business activities that create a taxable presence in their jurisdiction.
If a company has a PE, it could be subject to local taxation on profits directly attributable to activities carried out in that jurisdiction, potentially resulting in taxation in both the company's home country and the foreign country. Atlas strongly recommends consulting with your tax accountants and legal advisors in the jurisdictions where you operate to manage such risks.
Using an EOR can mitigate PE risk by ensuring that the EOR partner acts as the legal employer in the country, which means your company does not establish nexus, the necessary connection or presence that could trigger tax obligations in that jurisdiction.
What Are the Different Types of EOR: Direct vs. Indirect?
Direct EOR
A direct EOR service provider, such as Atlas, owns and operates its own business entities in the countries where its employees are hired, eliminating the need to outsource the legal employer status to third-party EOR providers. With a direct EOR, your employees are directly supported by the provider’s in-house team, allowing you to address issues quickly through local, dedicated support.
Indirect EOR
An indirect EOR service provider, on the other hand, does not always have its own entities in every country where it operates. This model can present challenges regarding responsibility and accountability, especially when a client or international employee faces an issue requiring urgent assistance.
What is the difference between a global EOR and a PEO?
An EOR is empowered to employ staff in countries where your company lacks a legal entity. This means that your EOR partner is the sole legal employer liable before third parties for local employer tax and labor law compliance — including all induction and general administrative aspects of employment. This allows you to focus on your employees’ day-to-day work and making your business grow, while your EOR partner manages all HR compliance matters.
In contrast, a PEO undertakes certain HR tasks, such as the enrolment of benefits and the payroll. A PEO supports your company through a co-employment agreement, which means that both the PEO and the company are employers. This may expose your company to additional compliance risks.
What industries use Employer of Record services?
EOR services are applicable across all industries, depending on how companies plan to hire and retain global talent. Atlas has clients from sectors like technology, biotechnology, and industries that hire for sales or account management roles, especially when expanding into new countries with their first employee.
Companies like Swaps Monitor, Mamoon, Moniepoint, and Mama Cash have successfully leveraged Atlas’ services to expand globally and retain key talent without the need for establishing local entities. In addition, larger organizations are increasingly using EOR services as part of their talent retention strategies. With the ongoing "war for talent," many companies are finding it challenging to attract and keep top talent.
Employees are seeking more flexibility, with many preferring remote work rather than being tied to office spaces. We’ve had companies come to Atlas asking, “How can I retain this key employee without establishing an entity in this country?” Partnering with an EOR provides a solution, enabling businesses of all sizes from small start-ups to large enterprises to retain valuable talent while enjoying the flexibility and benefits that EOR services offer.
How EOR Services Help Established Companies Reduce Costs
EOR services offer established companies a powerful way to reduce operational costs and improve efficiency. By outsourcing employment functions to an EOR, businesses can avoid the significant expenses associated with managing payroll, taxes, benefits, and compliance in multiple countries. This allows companies to focus their resources on core business operations rather than dealing with the complexities of international HR.
One key way EOR services help companies save money is through entity consolidation. Traditionally, expanding into new countries required establishing separate legal entities, which involved high setup costs, ongoing administrative expenses, and compliance challenges. With an EOR, businesses can hire employees globally without the need for local subsidiaries, reducing both the initial investment and the long-term operational costs.
In addition to entity consolidation, EOR services can help companies reduce costs in areas such as legal compliance, risk management, and employee benefits administration. By streamlining these processes and ensuring compliance with local laws, businesses can avoid costly penalties and administrative burdens. Overall, EOR services enable companies to scale internationally with greater flexibility and at a fraction of the cost of traditional expansion methods.