Why Use a Employer of Record? A Guide for US Businesses

Hiring international employees can be a smart way for growing U.S. firms to tap into diverse talent pools, but can introduce complex responsibilities to business operations. An employer of record can streamline the hiring process and reduce overhead costs, but this approach may not work for everyone.

In this guide, we’ll look at what an employer of record is, how it works, and the most important factors to consider before choosing to work with one. We'll also talk about how BatchTransfer can help your team do international payroll.

What is an employer of record?

An employer of record (EOR) is an external group that becomes the full legal employer of global talent. These providers step in to handle legal and administrative tasks with region-specific requirements, such as payroll, taxes and compliance.¹

Think of the EOR as the external HR department with global expertise. Some of the tasks they’re likely to take over include:

• Processing payroll and making sure employees are paid on time
• Filing employment-related taxes with the relevant authorities
• Administering employees benefits like health insurance and retirement contributions
• Overseeing workers compensation and unemployment
• Maintaining compliance with international, federal and local employment law
• Managing employee contracts, onboarding and offboarding
• Facilitating work permits, visas and other immigration documents
• Conducting background checks and other pre-employment screenings
• Tracking time off, PTO and maintaining compliance with local labour laws
• Maintaining employee records for legal audits
• Managing ongoing updates to laws and other regulations

Essentially, these firms cover the legal requirements associated with hiring employees around the globe so companies can focus on their core business operations.

When to use an employer of record

So you’re thinking about hiring an employee based in another country. Seems simple, right?

Think again. Employers around the world have to follow specific tax and payroll rules and meet local legal requirements around employment. These rules can vary from country to country. Failure to comply can lead to serious consequences, including fines, legal penalties, audits, reputational damage and, in some cases, restrictions on doing business in that country.²

Needless to say, no company wants to take on those challenges. But for smaller, growing businesses, the impact can be even more severe, draining resources and slowing momentum at a time when every opportunity matters.

Essentially, for growing companies looking to hire abroad, there are two main choices available: form a new legal entity in the country and build the expertise in-house to handle compliance, or partner with an employer of record who can take care of those processes for you.

For smaller businesses expanding overseas, working with an employer of record can make a big difference. These services make growth possible without adding a heavy administrative load, so you can stay focused on running the business as you enter new markets.

But EORs can be more costly and restrictive than other hiring options, especially as the size of the local workforce grows. At some point, usually when a company has around 10 to 15 employees in the same country, it may become more economical to establish its own legal entity instead of continuing with an EOR.³

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Employer of record benefits: 4 reasons international businesses work with an EOR

Access to global talent

An EOR lets businesses hire skilled professionals anywhere in the world without geographical restrictions. Once you hire one international employee, you can keep going without having to form another legal entity in each country you’re hiring in. This access to a wider talent pool helps companies build diverse, high-performing teams, with the added bonus of extra assistance in recruitment, background checks and onboarding.⁴

Cost and time savings

From locating office space to hiring legal teams and managing compliance, setting up a legal entity in a foreign country tends to be a slow and expensive endeavor. An EOR helps businesses avoid these administrative headaches by acting as the registered employer, allowing companies to hire and operate quickly.⁵

Not every pricing plan for EORs is the same. There’s a percentage-based model, where they may charge 8% to 20% of each employee’s monthly salary, as well as a flat-fee model regardless of the employee’s salary.⁶

There would be a one-time setup fee for an EOR, which can range from $500 to $2,000 depending on the local complexities, and then a monthly fee of $200 to $2,000 per employee going forward.¹¹ That is much cheaper than the costs to set up a local entity, which could go as high as $50,000, and the subsequent monthly costs to handle things like payroll, legal fees, employee benefits, office space and more.¹¹

Reduced risk of non-compliance

Local employment law and tax regulations vary widely across countries and change frequently. EOR providers have deep knowledge of what’s required to ensure adherence with employment standards. As a result, companies stay protected against legal risks, penalties and reputational damage.

Simplified global expansion

It’s hard enough to grow your business into new markets. Add in the complexities associated with local labour laws, payroll taxes and employment standards, and you’re in over your head. An EOR manages all legal and HR functions so your company can focus on business growth and seize more opportunities.

Employer of record drawbacks: 4 reasons to take on the workload in-house

Cost

While businesses save on the initial setup costs when choosing an EOR, the monthly fees associated with EORs can add up over time if your workforce grows exponentially. For companies planning a long-term presence with a sizable workforce, forming a local entity may be more economical than ongoing EOR fees.⁶

Loss of control

Since the EOR is the official employer, the client company tends to have limited influence over employment contracts, salary structures and disciplinary policies. In many cases, EORs use pre-set employment contracts to comply with local laws, which can limit customization of benefits, salary structures, bonuses, equity compensation and more.

Impact on employee experience

Employees hired through an EOR may feel a degree of separation from the client company, especially when it comes to onboarding and HR communications. These tend to be standardized across client companies, rather than tailored to the unique needs of each business. The responsiveness of the EOR makes a huge difference: poor communication can further alienate top talent.⁷

Potential data security and privacy concerns

Since EORs manage sensitive employee data across borders, there can be risks associated with data privacy and security. Companies must evaluate an EOR’s compliance with data protection regulations and ensure strong cybersecurity measures are in place to avoid legal liabilities.⁸

Is an EOR the right fit for my business?

Now that we’ve explored the pros and cons, it’s time to decide whether an EOR makes sense for your international hiring plans.

Ultimately, when you employ people abroad, you have to work within the restrictions of the country where they reside. In most cases, you won’t need to set up a legal entity there, but you will need to cooperate with local regulations through alternative channels such as nonresident employer registration or partnering with an EOR.

The first step is always to confirm the legal requirements of your target country. Labor, tax and immigration laws vary widely, and compliance starts with understanding those differences.

From there, you can weigh your options. An EOR is usually best-suited for companies entering a market without plans for a large, long-term presence. It enables quick, compliant hiring while avoiding the cost and complexity of entity formation. Over time, as your headcount grows or your strategic goals shift, you may decide to transition to a different employment structure.

The key is to match your hiring approach to your growth stage, and to stay flexible as your business evolves.

Frequently Asked Questions

Why Employer of Record for my company?

A company should consider an Employer of Record when it’s expanding internationally but isn’t ready or doesn’t want to form a legal entity in the foreign country. EORs are particularly useful for businesses seeking quick market entry or hiring employees abroad for the short or medium-term. They’re also ideal for companies that want to avoid the administrative burden of managing payroll, benefits, taxes and contracts across multiple jurisdictions.

What are the main employer of record benefits?

The key benefits include:

• Access to global talent without geographical restrictions
• Significant time and cost savings by avoiding entity setup
• Reduced risk of violating local labour laws or tax regulations
• Simplified global expansion so client companies can focus on growing the business rather than compliance tasks.

How does an EOR help with local employment law and compliance?

EOR providers have local legal entities in the countries where they operate, staffed with experts familiar with local labour laws, tax codes and immigration rules. They handle all employment-related administrative tasks to ensure compliance, including payroll tax filings, employee contracts, work permits and termination processes. This mitigates the risk of penalties and legal issues for the client company.

Do I still need to form a legal entity in a country if I use an EOR?

Generally, no. One of the main advantages of using an Employer of Record is the ability to hire employees legally without establishing a local legal entity. EORs serve as the registered employer, allowing companies to bypass the often lengthy and costly process of entity formation. However, this depends on local laws, so companies must verify regulations in each specific country.⁴

How does an EOR differ from a staffing agency?

While both can assist with hiring, a staffing agency primarily recruits and places workers, often on a temporary basis, and the client company remains the legal employer. An EOR, however, becomes the legal employer on record, handling payroll, tax compliance and HR duties.⁹

What are some drawbacks of using an EOR?

Notable drawbacks include:

• Higher ongoing costs compared to managing employment in-house, especially with larger local workforces
• Limited control over employment contracts, benefits customization, and disciplinary actions
• Potential impact on employee experience due to less personalized onboarding and communication
• Possible data security and privacy concerns, as the EOR handles sensitive employee information.

How responsive and communicative are EORs generally?

Responsiveness varies by provider. Effective communication is critical for a positive employee experience and smooth compliance. Businesses should assess an EOR’s customer service, support availability, and communication channels before partnering to avoid feelings of disconnect or delays.

Can employees hired through an EOR be transitioned to direct employment?

Yes. If your company eventually forms a local entity or changes its hiring structure, employees can be transitioned from the EOR employment to a direct employment agreement with your company. Usually, this involves ending the EOR contract and issuing new employer documents.¹⁰

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Sources:

1. What is an Employer of Record (EOR)? A Full Guide | Oyster
2. Global Employer of Record (EOR): A Comprehensive Guide | Omni HR
3. Employer of Record Pros and Cons | Third Sail
4. What is an Employer of Record? A Complete Guide for Global Employers | Velocity Global
5. 10 Benefits of Using an Employer of Record Service | People Managing People
6. How Much Does an Employer of Record Cost? | Hire Borderless
7. Employer of Record Explained: A Practical Guide for Global Teams | Bamboo HR
8. Evaluating Employer of Record service providers: 10 Factors to Consider | Mauve Group
9. What is an Employer of Record? | Rippling
10. What is an Employer of Record? Full Guide for First Time Global Employers | Hire Borderless
11. How Much Does An Employer of Record Cost? | People Managing People