When to use an Employer of Record

An Employer of Record is often used by organizations that are expanding internationally. With an EOR, businesses can hire and onboard foreign employees in a fast and compliant way, without having to go through the trouble of creating a local legal entity.

When is the use of an EOR service the best option? What are the most common use cases for Employer of Record?

There are several cases where hiring employees with an Employer of Record is the best option for expanding businesses. This notably includes cases where the business is not familiar with the employment laws in the country where the new hire resides.

On a more general level, hiring via an Employer of Record is a great option for businesses that have never hired someone outside the borders of their home country. But even multinationals with an extensive track record in international hiring and global employment can benefit from an EOR arrangement.

An Employer of Record is an employment outsourcing solution that allows businesses to compliantly hire talent abroad without creating a local legal entity. Within this general framework, there are different use cases for EOR services. Here is an overview of different scenarios when hiring through an EOR is a good option.

Testing a new market

Not every foreign market turns out to be suitable to a business’s product offering. Hiring local employees through an Employer of Record gives expanding businesses time to get to know the local customer base and validate their market expectations before fully committing to it. Should the local conditions fall short of the business’s expectations, withdrawing from the market is a lot easier when there is no legal entity involved.

Hiring specific remote talent

Skill shortages often push organizations to look for talented candidates abroad. Since hiring one or two employees in a country doesn’t warrant the expenses and effort of setting up a local legal entity, an Employer of Record is often the only viable option in these cases. This is probably the most common use case of EOR services.

Converting freelancers to full-time employees

Very often businesses decide to convert their freelancers to full-time employees after having worked with them for long periods of time. While this is an easy move if both the business and the freelancer are based in the same jurisdictions, making the transition with an international freelancer usually requires the help of an Employer of Record. The freelancer is hired through the EOR and doesn’t need to relocate to the country where the former client business is registered.

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Providing employees with greater flexibility

Remote work has opened up vast opportunities for employees to work from anywhere they want. Working with an Employer of Record enables team members to relocate to different countries, which can be a game changer for retaining talented workers. EOR solutions can therefore be seen as an attractive addition to an organization’s global mobility strategy.

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Transitioning to a local legal entity

An Employer of Record is the perfect intermediate solution when establishing a local presence in a new market. With an EOR, businesses can hire employees and build a working local team while the incorporation process is still under way. Once the legal entity is created, all that is needed is to move the EOR hires to the newly created legal entity.

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There are many cases where hiring through an Employer of Record is a good option. However, there are also some scenarios where businesses should be careful before contracting an EOR service. These scenarios include:

• High number of employees in a certain country: An Employer of Record is a solution that is typically used for hiring an individual employee or a small group of employees in a foreign market. When employee numbers exceed certain limits, using an EOR is not an option anymore.

• Revenue-generating business activities: Another limitation to the EOR model is the type of business activities the EOR hires engage in. Hiring for roles that are directly involved in revenue generation for the foreign entity might lead to permanent establishment (PE) and tax liabilities.

• Possible Foreign Employer option: In some cases, it might be possible to hire an employee in a new market directly under the foreign entity. This model is called Foreign Employer (FE). Hiring the employee directly under the foreign entity is more cost-effective than using an Employer of Record. However, businesses should keep in mind that there are fewer risks when hiring through an EOR.