What is an employer of record (EOR) and how does it actually work?

An employer of record is a company that takes on the legal employer role for a worker in a specific country so another company can employ that person without registering an entity of its own there [1][3]. The worker signs an employment contract with the EOR rather than with the business they work for every day [1]. The EOR's entity is the name on the payslip, the local tax filings, and the social security registration, while the client decides what the person works on, what they are paid, and whether they stay [1].

The split that defines the model

The arrangement separates the legal employment relationship from the working relationship. An EOR assumes the role of legal employer for anyone you hire, and your organization keeps control over setting salaries, managing day to day operations, and assessing job performance [1][3].

That separation is what makes the model fast. Registering a company abroad usually means a local address, sometimes a resident director, a corporate bank account, registrations with the tax and social insurance authorities, and local bookkeeping. Vendors put entity setup at roughly three to twelve months and EOR onboarding at days [2][3].

How does this relate to the US PEO rules?

The neighboring US arrangement is the professional employer organization, which the IRS certifies through a voluntary program required by the Tax Increase Prevention Act of 2014 [4]. That statute makes a certified organization responsible for reporting, withholding, and paying employment taxes on a worksite employee's wages without regard to the receipt or adequacy of payment from the customer [5]. No equivalent certification exists elsewhere, and EOR work runs under each country's own rules for employment agencies and labor leasing [11].

The sequence runs from a country feasibility check through a local contract, onboarding, payroll, and eventually an exit, with the provider standing in the employer position at every stage. It opens with the provider confirming it can lawfully employ in that country, at that salary, for that role, since some jurisdictions license the activity and cap how long a worker can stay on the arrangement [11].

The employment contract

The worker signs with the provider's local entity, in the local language where the law requires it, on terms that country recognizes [1]. Probation length, notice period, working hours, minimum leave, and any mandatory additional month of salary come from local statute rather than your home-country template. Your commercial terms live in a separate agreement the worker is not a party to, which is why the intellectual property chain needs attention [13].

Onboarding and right to work checks

Before the start date the provider runs whatever verification the jurisdiction requires, and that obligation sits with the provider as the employer. A UK employer must check that a job applicant is allowed to work in the UK before employing them and repeat the check when a time-limited permission expires, with a civil penalty for employing an illegal worker after an incorrect check [10].

Payroll, benefits, and contributions

Payroll runs on the country's normal cycle rather than yours. The provider calculates gross to net under local rules, withholds income tax and the employee share of social contributions, adds the employer share, and remits both under its own registration [1][2]. Statutory benefits follow the same route, covering pension or social insurance, state healthcare contributions, and minimum paid leave, with supplementary benefits priced separately [1].

Ending the employment

Termination goes through the provider and follows the local rulebook. You decide to end the relationship and you fund the cost, and the provider executes it in a form the local law will accept [2]. UK statutory minimum notice alone is one week for service between one month and two years, then one week per year up to twelve weeks [9].

You pay the provider and the provider pays everyone else. A monthly EOR invoice carries the worker's gross salary, the employer-side statutory contributions that country levies on that salary, and the provider's service fee. You supply the funds, and the provider sends payment in the employee's local currency and distributes the payslips [2].

Timing runs backwards from payday

Funds have to clear before the local payroll date, so providers set a funding cutoff several days ahead and invoice in advance rather than in arrears. Currency conversion happens on the provider's side, so the rate and any spread applied to it belong in the contract rather than in an assumption. Many providers also hold a deposit or accrue against future severance, because they are the party legally obliged to pay a terminated worker whether or not you have wired the money, the same principle US law applies to certified professional employer organizations [5].

The employer-side load is the part that surprises people

Employer contributions vary widely between jurisdictions, which is why a matching salary in two countries can produce very different invoices [2]. Comparing providers on the service fee alone misses most of the number, so ask for a per-country breakdown with contributions itemized separately.

Four exposures stay with the client company even under a well-run EOR arrangement, and a standard service agreement does not cover them without specific drafting. This is general information rather than legal advice.

Intellectual property

Because the provider is the legal employer and the party to the employment contract, work produced by the employee can vest first in the provider rather than in you. Unless the arrangement includes clear assignment provisions linking all three parties, the EOR may be the first owner of any intellectual property developed by the worker and not the client [13]. The worker generally cannot assign directly to you either, since you are not a party to the engagement between the provider and the worker [13]. The workable structure is a chain: the employee assigns to the provider in the employment contract, and the provider assigns to you in the service agreement, with warranties covering whatever the first link misses [13]. Acquirers examine that chain in diligence, and a break in it can delay a deal [13].

Permanent establishment

An EOR reduces the chance of creating a taxable presence abroad without settling the question. Whether a foreign company has an office or other fixed place of business is decided on the facts of each case, and an agent's office counts as the principal's own where the agent has authority to negotiate and conclude contracts in the principal's name and regularly exercises it [7]. An engineer working through a provider is unlikely to create that exposure, while a country manager who signs customer contracts for you is a different fact pattern regardless of whose payroll they sit on. Providers position the model as protection against permanent establishment [2], which holds for the ordinary case rather than for every role.

Misclassification

Moving a worker onto an EOR is usually the cure for a misclassification problem rather than the cause of one. The exposure that remains is anyone you keep engaging as a contractor who is functioning as an employee. US common law rules examine behavioral control, financial control, and the nature of the relationship, and an employer that classifies an employee as a contractor without a reasonable basis may be held liable for employment taxes for that worker [6].

Who actually controls the work

Some jurisdictions look past the paperwork to who behaves as the employer, which is what labor leasing statutes exist to police [11][12]. Guard that line in daily practice as well as in the contract, particularly on disciplinary process, which the provider is supposed to own.

Some providers employ your worker through an entity they own in that country, and others sign with you and then subcontract the actual employment to a local partner. Deel describes itself as operating with owned entities in over 110 countries and calls the alternative an aggregator model that uses local third-party partners [2]. G-P describes over 100 wholly owned entities and contrasts that with providers routing employment through local third-party providers or subcontractors [3].

The distinction changes things buyers rarely ask about. Liability runs through a longer chain, since your remedy is against the platform and the platform's remedy is against a partner you did not select and cannot audit. The intellectual property assignment chain gains a fourth link, and it only works if every link holds [13].

Providers answer this readily when asked directly. Request the list of countries where the provider owns the employing entity, and ask which legal entity name will appear on the employment contract in each country you plan to hire in. Almost no provider owns entities everywhere it sells.

Country rules, termination law, and the exit path are where EOR arrangements go sideways.

Some countries restrict or time-limit the model

Germany treats much of what an EOR does as temporary agency work. Under the Act on Temporary Agency Work, an employer assigning employees to a user undertaking within the scope of its business activity requires a permit, and the same worker may not be assigned to the same user undertaking for more than eighteen consecutive months [11]. Operating without that license carries fines, and the client can be required to employ the worker directly [12]. Comparable rules exist elsewhere, so a provider's license position country by country matters more than its headline country count.

Notice and severance look nothing like at-will employment

In forty-nine US states the default is at-will employment, where an employer may end the relationship at any point provided the reason is not unlawful, with Montana requiring good cause once an employee passes probation [8]. Very little of the rest of the world works that way. UK statutory minimum notice alone reaches twelve weeks for long service [9], and many civil law countries add mandatory severance and a documented cause requirement before a dismissal is valid.

Leaving the provider is a project, not a cancellation

Moving workers to your own entity or to a different provider means new employment contracts, and continuity does not happen on its own. Accrued paid time off does not carry across from a previous EOR contract, benefit plans change and employees notice, and the transfer window can disrupt payroll and compliance if it is not scheduled around existing notice periods [14]. Whether local transfer-of-undertaking protections apply is a question for local counsel rather than the provider's project manager.

Four adjacent arrangements get confused with an EOR, and the differences are structural.

It is not a professional employer organization

A PEO shares employment responsibilities at a company that already holds its own legal entity and employer registrations in that country, and in the United States it can be certified by the IRS under a defined statutory framework [4][5]. An EOR serves the opposite situation, where you have no entity at all [1].

It is not a staffing agency

A staffing agency sources candidates and supplies them for a period of work. An EOR engagement usually begins after you have chosen the person and assumes an ongoing employment relationship rather than a placement [1].

It is not a contractor platform

Contractor platforms handle agreements and payments for self-employed people, and the worker stays a contractor without the statutory protections an employee has. Choosing between the two is a classification question governed by local law rather than a pricing decision [6].

It is not a substitute for your own entity

An EOR gives you an employed worker in a country, not a registered presence in it [1]. Anything requiring a local legal presence still requires the entity. Most companies use the model as a bridge, hiring through a provider while volume is low and opening an entity once headcount justifies the fixed cost [2].