If you've ever tried to hire someone in another country, you've probably hit the same wall: "Great, we found the perfect candidate in Portugal. Now what?"
Setting up a legal entity abroad isn't like opening a Stripe account. We're talking months of paperwork, local legal counsel, ongoing compliance headaches, and costs that can easily run into six figures before you've even made your first hire. For a single employee. In one country.
This is where Employer of Record services come in, and why the EOR market has exploded from a niche HR solution into a $6.8 billion industry that's projected to more than double by 2030.
But here's the thing: not every company needs an EOR. And choosing the wrong one can cost you more than just money.
Let's break it down.
What Exactly Is an Employer of Record?
An Employer of Record (EOR) is a third-party organization that becomes the legal employer of your international workers. They handle the parts of employment that require a local presence: payroll, taxes, benefits, compliance with local labor laws, and employment contracts.
You still manage the day-to-day work. You decide who to hire, what they work on, and how they're evaluated. The EOR handles everything that requires boots on the ground (or, more accurately, legal entities on the ground).
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EOR vs. Contractors vs. Setting Up Your Own Entity
This is where things get interesting (and where a lot of companies make expensive mistakes).
Independent contractors are the cheapest and fastest option, until they're not. Many countries have strict rules about what constitutes an employee versus a contractor. Get this wrong, and you're looking at back taxes, penalties, and potential lawsuits. The Netherlands, Germany, and California are particularly aggressive about contractor misclassification. This is why understanding the difference between flexible talent arrangements and traditional employment matters so much.
Your own legal entity gives you the most control, but it's the slowest and most expensive option. You're looking at $20,000 to $100,000+ in setup costs, 2 to 6 months to get operational, and ongoing compliance obligations whether you have one employee or one hundred.
EOR services sit in the middle. You get compliant employment without the overhead of your own entity. The trade-off? You're paying a premium (typically $400 to $900 per employee per month) and you're somewhat dependent on your EOR's infrastructure and processes.
Here's a rough decision framework:
- 1 to 2 contractors, low risk of misclassification? Probably fine to stay with contractors.
- Testing a new market with 1 to 5 employees? EOR is usually the smart play.
- Committed to a market with 10+ employees long-term? Start thinking about your own entity.
The break-even point varies by country, but most companies find that setting up their own entity starts making financial sense somewhere around 10 to 15 employees in a single market.
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How EOR Pricing Actually Works
EOR pricing looks straightforward until you read the fine print.
The advertised monthly fee ($399! $499! $599!) is rarely the full picture. Here's what else can show up on your invoice:
Setup fees: Some providers charge $500 to $3,000 per employee to get started. Others waive this entirely.
Deposit requirements: Most EORs require 1 to 3 months of total employment cost as a security deposit. This can tie up significant capital, especially at higher salary levels.
Currency conversion markups: If you're invoiced in USD but paying an employee in EUR, someone's making money on the exchange. FX spreads of 2 to 5 percent are common and can add hundreds of dollars per month to your actual cost. This is one area where understanding cross-border payment costs becomes critical for budget planning.
Benefits administration fees: Health insurance, pension contributions, and other benefits often come with additional administrative charges.
Off-cycle payroll fees: Need to pay a bonus mid-month? That might cost you $250 per occurrence.
Termination fees: Offboarding an employee can incur charges, especially if severance calculations are complex.
The lesson? Always ask for a complete cost breakdown including deposits, FX rates, and all potential add-on fees. The $200/month difference between Provider A and Provider B can evaporate quickly when you account for everything.
If you're looking for an EOR, we suggest looking at the best employer of record services comparison from Employsome, where they've done the work of breaking down pricing transparency across 100+ providers.
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What Makes a Good EOR?
After talking to dozens of companies who've used EOR services (and plenty who've switched providers), a few factors consistently separate the good from the mediocre:
1. Owned Entities vs. Partner Networks
Some EORs operate through their own legal entities in each country. Others work through a network of local partners.
Neither is inherently better, but the implications are different:
- Owned entities typically mean more control over the employee experience and faster response times.
- Partner networks allow broader geographic coverage but can introduce delays and communication layers.
The question to ask: "Do you have your own legal entity in [country], or do you work with a local partner?"
2. Actual Compliance Expertise
"We operate in 180 countries" sounds impressive until you realize that listing a country on a website and actually understanding its labor laws are very different things.
Countries like Germany (AÜG licensing requirements), France (complex termination rules), and Brazil (extensive mandatory benefits) require genuine local expertise. Ask specifically about the countries you're hiring in, not just the total count.
3. Employee Experience
Your EOR employee might never meet anyone from the EOR. But they will interact with their systems for onboarding, payslips, time off requests, expense reimbursements, and benefits enrollment.
A clunky platform or unresponsive support doesn't just frustrate your employee; it reflects on you as their actual employer (even if not their legal one). The importance of smooth payment and administrative experiences can't be overstated when you're building trust with distributed team members.
4. Flexibility on Contracts and Terms
Some EORs require 12-month minimum commitments with 60-day notice periods. Others are month-to-month. Some allow custom employment contract clauses; others are take-it-or-leave-it.
If you're uncertain about a market or a hire, look for flexibility. If you're committed long-term, you might trade flexibility for lower pricing.
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The Hidden Risks Nobody Talks About
EOR services are generally safe and well-established at this point. But a few risks deserve mention:
Permanent Establishment (PE) Risk: An EOR doesn't eliminate the risk that your company could be deemed to have a taxable presence in another country. This is especially relevant if your EOR employee is senior, customer-facing, or has authority to sign contracts on your behalf. Get tax advice specific to your situation.
Dependency Risk: If your EOR has operational issues or goes out of business, your employees are in a weird limbo. This is rare but not impossible, so due diligence on your provider's financial stability matters.
Communication Layers: When your employee has a payroll question, it goes to the EOR, not to you. If the EOR is slow or unhelpful, you look bad even though you can't directly fix it.
Contract Lock-In: Some EORs make it complicated to transfer employees to your own entity or to a different EOR. Ask about offboarding and transition processes before you sign.
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When an EOR Makes Sense (And When It Doesn't)
EOR is probably right for you if:
You're hiring in a country where you don't have (and don't plan to have) a legal entity
- You need to onboard quickly, as most EORs can have someone employed within 1 to 2 weeks
- You're testing a new market before committing to full infrastructure
- Compliance complexity in the target country is high
- You value flexibility over absolute cost optimization
EOR is probably not right for you if:
- You're only hiring contractors who genuinely operate as independent businesses
- You're planning to hire 15+ people in one country, where your own entity likely makes more sense
- The role involves activities that could create PE risk and you haven't gotten tax advice
- You need highly customized employment terms that EORs won't accommodate
For companies that fall into that second category, especially those working with genuinely independent contractors and freelancers, there's a growing ecosystem of alternatives. Many teams are successfully building with fractional talent strategies that don't require traditional employment structures at all.
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The Rise of Flexible Alternatives
It's worth noting that the binary choice between "full-time employee via EOR" and "contractor" is increasingly outdated. The future of global agencies and distributed teams is moving toward more fluid arrangements.
Micro-agencies, fractional specialists, and project-based teams are becoming the norm for many growth-stage companies. These arrangements often don't need an EOR at all. Instead, they need robust systems for collaboration, invoicing, and cross-border payments that can handle the complexity of working with multiple independent contributors.
The freelance economy has matured to the point where senior specialists with deep expertise are available on flexible terms. For many companies, especially in tech and creative industries, this represents a fundamentally different (and often better) way to build global capabilities than hiring full-time employees through an EOR.
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The Bottom Line
Employer of Record services have genuinely changed what's possible for companies hiring globally. What used to require months of legal work and significant capital can now happen in days.
But EOR is a tool, not a magic solution. It works brilliantly in certain contexts and poorly in others. The companies that get the most value are the ones who understand what they're buying, choose providers carefully, and have a realistic view of both the benefits and limitations.
For most growing companies expanding internationally, an EOR is the right first step. Just make sure you understand what you're signing up for before you sign.
