The Smart Guide to Employers of Record (EOR): Benefits, Risks & What to Watch For

This article was written in partnership with Fragomen, the world’s leading provider of visa and immigration services.

From Work From Anywhere to Hire From Anywhere

As employees ask how to work from anywhere, employers are asking how they can hire from anywhere. Perhaps a prospective employee is only willing to work in a specific country. Perhaps the business wants to lower salary overheads. Perhaps the company simply cannot find the talent they need in their home jurisdiction. One option – an expensive one – might be to establish a satellite office in each target jurisdiction. This carries significant administrative and monetary costs. 

An alternative solution is the idea of ‘leasing’ an employee via an ‘Employer of Record’ (EOR). The arrangement has three parts: 

1. A prospective employee who is located in country A, and who will work there. 
2. A business in country B – often called the ‘end-user’ – who wants to engage the services of the employee, but has no interest in setting up a presence in country A. 
3. An EOR based in country A who is willing to hire and then ‘lease’ the prospective employee to the end-user business. 

The EOR formally hires the employee in Country A and discharges all human resources-related administrative and regulatory obligations: income tax (though not corporate tax), payroll, social security, workers compensation, employee benefits, and insurance issues, among others. The EOR then ‘leases’ the employee to the end-user business so that the employee in turn provides their substantive work output and services to the end-user. 

Briefly, it is worth distinguishing EORs from Professional Employer Organizations (PEO). The two concepts are often referred to interchangeably. In reality, there are distinctions:

• A PEO effectively serves as an out-sourced human resources department, assisting businesses by handling talent management challenges. Formally, however, they are not the sole employer; rather, at most, they are a ‘co-employer’ alongside the end-user employer. Critically, this means that end-user employers must still have a presence in the target jurisdiction.
• An EOR, meanwhile, formally takes on the entirety of the employer relationship, including all liability and obligations related to local employment law. This means end-user employers do not need to establish a presence in the target jurisdiction.

Benefits of EOR arrangements

EOR arrangements offer certain unique benefits for businesses. 

A light-touch foreign engagement. EOR arrangements allow end-user employers to quickly access talent in jurisdictions where they neither currently have a presence, nor perhaps ever want a presence. Businesses thus avoid a considerable outlay on overheads while still being able to access foreign talent: No need to allocate resources on payroll or income tax, or turn attention to the myriad human resources, compliance or administrative features of daily business existence in the foreign worker’s home jurisdiction. Additionally, EOR arrangements may allow end-user businesses to conduct an initial, testing foray into the new jurisdiction – after which they can decide whether to scale-up and establish a long-term presence.  

Levelling the playing field. For smaller employers – for whom the time and cost of establishing a multi-jurisdictional presence is often prohibitive – EORs may offer the only viable pathway for accessing talent overseas. To that end, some proponents of EOR refer to the arrangements as ‘levelling the playing field’. 

Avoids risks associated with the contractual alternative. Businesses looking to avoid establishing a foreign presence may also consider opting for a ‘contractor’ relationship with their foreign talent – as opposed to an ‘employee’ relationship. Certainly, this may suffice for certain business challenges, especially as a contractor relationship is often going to be cheaper than an EOR equivalent given the considerable additional back-end administrative work of an EOR. 

However, true contractor relationships generally require businesses to have less managerial control, and offer fewer, if any, benefits for the contractor (for instance, no holidays, sick leave, or health insurance). For the employer, this ‘hands off’ relationship may not always be suitable; and for prospective talent, the lack of benefits may simply be a non-starter. Additionally, there is always the risk that a ‘contractual’ relationship will be viewed by authorities as, in truth, an ‘employer-employee relationship’ – resulting in a raft of sudden and significant regulatory risks and challenges.

Broader and more diverse workforce. By opening up new potential labor markets and cutting across national barriers, EOR arrangements allow employers to access a broader and more diverse workforce. Such increased diversity can bring new perspectives and solutions, and improved outcomes – with data highlighting that diverse workforces often significantly outperform less-diverse equivalents. 

Risks and Limits of EORs

Despite their benefits, EOR arrangements come with legal, regulatory and reputational risks. 

Jurisdiction-by-jurisdiction variation. Each jurisdiction has different rules regarding employee leasing: EOR arrangements do not offer a ‘one size fits all’ foreign-hiring solution. Instead, employers must conduct a case-by-case assessment. In some countries, employee leasing (or at least some types) may be illegal; in others it is possible, but only with a lot of strings attached or limitations imposed. Elsewhere, there is more flexibility or even a complete lack of regulation. However, even if the laws in a jurisdiction do not expressly address EOR relationships (whether immigration law, employment law, or other laws), this alone does not necessarily mean EOR arrangements will be possible. 

A 2022 Fragomen global survey of more than 90 countries noted that: 

• 48 countries expressly permit EORs;
• 26 expressly do not permit EORs;
• 14 countries were listed under a “Caution” category given either high-risk legal ambiguity regarding whether EOR arrangements were allowed; or, alternatively, significant limitations on the scope of allowed EOR arrangements. 

Adding further complexity, businesses must keep in mind that there are two regulatory zones to consider: the EOR rules in their own country of operation, and the equivalent rules in the target employee’s jurisdiction. A green light in one location will be of limited assistance, if the other location is showing red.

Key Regulatory Variables of Employers of Record

Fragomen internal data highlights certain common regulatory variables across Organisation for Economic Co-operation and Development (OECD) jurisdictions:

• • Immigration: 
    • Sponsorship. Immigration issues may arise where the target employee is a foreign national in their host country – especially with respect to employer sponsoring of a work permit or visa. In many jurisdictions, the sponsoring employer must be the entity with whom the employee will actually be working or the entity with actual day-to-day management of the employee. This is a common requirement in many OECD countries. By definition, an EOR is unlikely to satisfy this requirement. Rather, authorities are likely to look past the formal ‘EOR veil’ and into the employment relationship as it actually exists. In such circumstances, any work permit or visa application that relies on the EOR as the sponsor may be rejected. 
    • Conversely, in jurisdictions where EORs are allowed to sponsor visas or permits (and may even enjoy status as a ‘recognized sponsor’ resulting in streamlined processing), then the EOR option may provide a quick, simple and cheap alternative. Relatedly, the EOR option may serve as a temporary stopgap measure while the end-user business goes through the process of not only establishing a presence but also receiving recognized sponsor status. 
    • Business travel. EOR-hired employees may face limits on their ability to conduct business travel – from increased administrative requirements, to outright bans. This may be due to the rules in their host country, or in the country to which they seek to travel, or both. Regardless, this can produce counter-productive outcomes where an employee under an EOR arrangement is unable to travel for business purposes to the country of their actual employer (the end-user business).
  • Limited time frames. Some governments require that an ‘employee-leasing’ arrangements can only be temporary (perhaps six months, or one year). This can limit the applicability of any EOR arrangement to short-term hires.
  • Registration and licensing. A large number of OECD countries require EORs to register with authorities. This presents a due diligence challenge for end-user businesses, who should satisfy themselves that their target EOR is adhering to local registration requirements. 
  • Restrictions. Some OECD countries ban certain forms of employee leasing, for instance barring foreign EOR businesses from leasing employees to domestic employers while allowing domestic EOR equivalents to engage in the practice. In Europe, these limitations are sometimes relaxed where the foreign EOR business is located in certain other European countries. Elsewhere, the scope of restrictions may be broader. 

• Regulatory silence. The regulatory landscapes of some countries are silent on EORs. Businesses should nonetheless treat such absence of rules with caution and conduct their due diligence. Even if there are no direct regulations on the subject, a country’s laws may effectively preclude EOR-like arrangements or present other unexpected hurdles. The sponsorship requirements noted above offer a prime example of such ‘indirect’ restricting of employee leasing. 

Is it a reputable, and financially stable EOR? A legal and reputational question. Employers must be careful to ensure they work with high-quality, reputable and financially sure-footed EORs. This is due to various legal, reputational, and talent management considerations: 

• As a matter of course, EORs will discharge domestic compliance requirements: payroll, income tax (though not corporate tax), employment, social security, and the equivalent. Additionally, they may also need to satisfy EOR-specific regulatory requirements (for instance, registering with authorities). Even if end-user businesses may in some circumstances be shielded from any legal blowback if their EOR breaches such regulations (though this should not be assumed), the end-user business may still suffer reputational damage. 
• Separately, end-user businesses will want to be confident that the EOR has strong financial standing – lest it face a sudden talent management short-circuit in the event that the EOR goes insolvent, and the link with the target employees is cut.  
• The EOR arrangement also raises data security concerns. As part of the leasing arrangement, the EOR will ultimately handle or control sensitive information about the employee, and may also become privy to a certain portion of the end-user’s confidential or market-sensitive data. Accordingly, the EOR should be employing industry-standard data security systems and protocols.

Relatedly, in some situations, an EOR may not actually have set up a legal entity in the target jurisdiction, rather they rely themselves on other EORs (effectively engaging in a chain of third-party relationships). Such complex legal relationships may cause significant headaches for an end-user employer, including inconsistent service delivery and unforeseen legal risk.  

Accidentally setting up a ‘permanent establishment’

Tax and regulatory authorities are more than happy to peer beyond a formal legal relationship, and inquire into the details of the actual business situation. To that end, an EOR arrangement (depending its nature and scale) may result in local authorities determining that an end-user employer has actually set up a ‘permanent establishment’ – an outcome that comes with a full raft of regulatory and compliance requirements. 

This ‘permanent establishment’ risk turns both on the number of employees engaged and their specific roles. A small number of entry-level or administrative staff has a lower risk; while employing even a handful of senior, managerial or sales-generating employees poses a high risk. Separately, any sizeable operation – regardless the nature of the roles – is likely to create a prohibitive risk. 

No wonder employers often cite the risk of inadvertently setting up a permanent establishment as a top concern around remote work. With this in mind, if employers intend to involve themselves heavily in another jurisdiction, then the EOR framework may not be appropriate. 

Commercially sensible? Quite apart from the risk of accidentally setting up a permanent establishment, the EOR pathway may also not make financial sense when looking to hire a large number of employees. The proportionate administrative costs of each employee will generally decrease as a business hires more workers. Accordingly, if a business is seeking to engage a large number of employees (especially for long period of time), then EOR fees (plus risks) may quickly start to outweigh the administrative costs of establishing a legal entity. In short, the more employees a business wants to hire the less attractive an EOR pathway. Coupled with permanent establishment concerns, this factor limits the scope of viable EOR arrangements to the smaller scale variety. 

Other risks and challenges. Quite apart from regulatory or reputational risks, businesses must also remain mindful of unique commercial risks and challenges that arise in the EOR framework. These include: 

• Intellectual property. Generally, employment contracts ensure that an employer is assigned ownership over an employee’s work-related intellectual property. EOR arrangements, however, are not standard employment relationships. Unless the end-user business is careful, it may be the EOR who ends up with the intellectual property rights. Certainly, careful contractual drafting and structuring can resolve any risk in this space. Nonetheless, this is an issue that must be proactively addressed; it cannot simply be assumed away.  

• Post-employment restrictions. Employers often impose certain post-termination restrictions on employees. This might include non-compete and non-poaching clauses which temporarily prevent former employees from establishing a competing business, or soliciting or dealing with their former employer’s client base. This might also include confidentiality clauses, which prevent former employers from disclosing sensitive business information. Again, however, the EOR relationship is different. Technically, the now former employee’s post-termination contractual obligations exist between themself and the EOR, not the end-user business (which has no direct contractual relationship with the employee). End-user businesses may be able to contractually oblige EORs to act against the former employee. However, even in this instance there may be challenges as the EOR itself is unlikely to have suffered much (or at least commensurate) damage by reason of the former employee’s conduct. 

• Mergers and acquisitions. EOR arrangements may also present a challenge during any corporate merger or split of the end-user business – especially with respect to the transfer of the end-user business’s employers. Again, this is because there is no formal employment relationship with the end-user business. Accordingly, EOR schemes may require increased legal and administrative input during the merger or split process to ensure that ‘leased’ employees are not only accurately accounted for, but also de facto transferred to, the new end-user entity. 

• Simple benefit packages. It will rarely be possible to provide unique and sophisticated benefits packages for EOR-engaged employees. This extends to limitations on the ability to establish viable (let alone attractive) equity arrangements. However, as EOR options are generally less viable for the hiring of senior staff (given ‘permanent establishment’ risks), such limitations may not always present an issue in the hiring process – especially given the employee’s counter-benefit of being able to reside in the country of choosing.

• Business culture. Employers often pride themselves on possessing a unique internal business culture and identity. It helps employees feel part of a team. For some companies, this is a critical part of the talent attraction and retention strategy. EOR-employment arrangements, however, may not be able to replicate such company-specific cultural environments. After all, EORs seek to provide an employment landscape for employees of a wide range of end-user employers. This requires leaning into a generic, as opposed to bespoke, business identity. EOR-based employees may therefore feel a jarring disconnect, which weakens long-term retention as well as general team coherence. 

EORs: An important talent management innovation

Employee leasing is an important innovation for foreign talent management. It opens up new flexibility for businesses that are seeking to engage foreign talent quickly and easily while avoiding the costs of establishing a multi-jurisdictional presence. Certainly, given regulatory, commercial and reputational risks, businesses should ensure that they conduct their due diligence before embarking on any EOR arrangement. 

Employee leasing will be particularly relevant in the following circumstances:

• When speed matters. If an end-user needs to hire a target employee quickly (especially one who poses little to no ‘permanent establishment’ risk), EORs allow end-user businesses to move with haste. 

• As a stop-gap measure. EOR arrangements can serve as an important stop-gap measure while a business goes through the motions of establishing a local presence. This helps to ensure that an end-user employer can hire and retain locally-based staff during this period. Not only would this be relevant to businesses looking to expand into new jurisdictions, but is also relevant during merger or acquisition procedures where the new employer has not yet set up a local presence. 

• For roles that have a low ‘permanent establishment’ risk. Where an end-user business is looking to engage staff that pose a low risk of establishing a ‘permanent establishment’ (namely administrative or entry level roles at a limited scale), then EOR arrangements are likely to offer an attractive solution. Conversely, businesses will not want to pursue deep, significant and wide-ranging business activities via employee leasing, lest they accidentally establish a formal presence in the foreign jurisdiction. 

• Scaling down. Where a business has various legal entities with a small number of employees (especially workers that represent a low ‘permanent establishment’ risk), then it may make sense to unwind certain local operations and shift such staff to an EOR relationship.  

Ultimately, much turns on the facts on the ground. In some jurisdictions, the cost and administrative barriers of setting up a legal entity may be sufficiently low that EORs are simply not attractive enough (especially given associated risks). Of course, the reverse may also be the case, and EORs may provide a perfect solution. Ultimately, employer leasing is an important addition to the talent management armoury – one that should not be forgotten, especially with the rise of remote working. 

Need to know more?

For questions or support regarding remote work (including employer of record arrangements), please contact Partner Charlotte Wills at cwills@fragomen.com, or Lead Analyst Dominic Dietrich at ddietrich@fragomen.com. 

To keep up to date with all the latest updates on global immigration, please subscribe to Fragomen’s alerts and follow the firm on LinkedIn, X, Facebook and Instagram. 

In case you found this article helpful, feel free to check out this WFA article we wrote about the pros and cons of Employers of Record.

Co-Authored by Charlotte Wills and Dominic Dietrich of Fragomen along with John Lee of Work From Anywhere

Charlotte is a Partner and solicitor based in Fragomen’s London office. As a lead solicitor to clients, she provides strategic immigration advice and support across a range of industries. Her portfolio of accounts includes large financial institutions, companies from the IT and media industries, as well as clients from the oil and gas sector.

Dominic is a lead analyst based in Fragomen’s Brussels office. He tracks immigration policy trends across the Europe and MENA regions as part of providing actionable, forward-looking insights for Fragomen and its clients.

John Lee

John is Co-founder of Work From Anywhere, a platform to help companies execute a work from anywhere strategy.  John is a Chartered Accountant who speaks 6 languages and was previously the senior finance leader of a €4 billion division of FTSE-listed CRH Plc.  John and his family are passionate about travelling and his eldest daughter, Rosa, while only 5 years old has already travelled to 25 different countries.