How does an Employer of Record work? A guide for people leaders

If you’ve been looking into hiring international talent, you’ll know that it’s a complex process. One that’s made even harder with different laws and regulations for each country. Fortunately, an Employer of Record (EOR) offers a simple solution for global employment.

But how does an EOR actually work? How can it help your business hire talent worldwide? And what’s the legal impact of working with one?

In this guide, we take you through the EOR model, how it works, and what it means for your company legally. Let’s get started.

What is an EOR?

An Employer of Record (EOR) is a company that employs international talent on your behalf. For example, let’s say your business is based in the UK, but you want to hire a candidate in South Africa. An Employer of Record can help you do that compliantly by adhering to local laws.

On paper, the candidate will be legally employed by the EOR. But you're in control of the day-to-day relationship with the employee and their tasks.

It’s important to know how an EOR differs from a Professional Employer Organization (PEO). The terms are often confused as both have similar functions. They both provide HR services like payroll. But EORs become the legal employer of the employee, whereas the PEOs do not.

So now you know what an EOR is, how does this employment model actually work?

How does an EOR work?

An EOR works by legally employing your international talent through its own local entities.

Many countries require employers to have a local entity—such as a foreign subsidiary—to employ talent. However, setting up local entities abroad can be complex and expensive. So instead, you may choose to work with an EOR that already has a local entity in your chosen hiring countries.

EORs have expert knowledge and familiarity with local employment laws. They can ensure compliance regarding:

• Onboarding
• Payroll
• Compensation
• Benefits
• Severance and termination
• And more

The EOR co-signs the employment contract with the employee. They then assign the employee to your company through a service agreement.

This places your company responsible for the daily management of the employee. So, you’d be in charge of their roles, projects, meetings, and general integration into the team.

Outside of the EOR relationship, the employee should seem like a regular member of your team.

Three types of EOR contracts you should know about

There are three types of contracts you should be aware of when working with an EOR.

1. The employment contract

The EOR draws up a compliant employment contract and signs it alongside the employee

This is a standard employer-employee relationship. The EOR takes on the legal responsibility for the employee in compliance with local laws. They also manage employee onboarding, payroll, benefits, and offboarding.

In these employment contracts, there may be some room for flexibility. Your company might be able to change the number of paid days off or the types of benefits available, for example. But any changes must still meet minimum local requirements.

2. The service agreement

The service agreement is a contract signed by the EOR and your business. It outlines the relationship your business has with the employee and the EOR. The agreement states that your company is responsible for the day-to-day management of the employee and their tasks.

The service agreement also demonstrates the limitations of liability that the EOR has. Each EOR provider has different terms. However, a common limitation of liability is client error. For example, you must consult the EOR before terminating an employee. Otherwise, your business may be liable for legal action if the employee files a claim.

Permanent Establishment (PE) is another liability to consider. In some cases, hiring talent abroad can trigger Permanent Establishment. This means local tax authorities might consider your business liable for paying corporate taxes or VAT.

This is why it’s important to read and understand your service agreement in detail before signing it. If you’re unsure about any terms, your EOR provider can clarify them with you before proceeding.

3. Side agreements

Side agreements are additional contractual agreements between your business and the employee. These usually cover terms that protect your company and business interests. It may include intellectual property, confidentiality, restricted covenants, and non-compete clauses.