Employer of Record (EOR): Guide for Small Businesses

Hiring across state lines or international borders can get complicated fast, especially for businesses without a dedicated HR team. An employer of record (EOR) takes on the legal and administrative side of employment so you can focus on finding the right people and growing your business.

What to know about an employer of record

• An employer of record (EOR) is a third-party organization that becomes the legal employer for your workers and handles payroll, taxes, benefits, and compliance.
• EORs allow small businesses to hire across states or countries without setting up a local legal entity.
• Key EOR responsibilities include payroll processing, tax withholding, employment contracts, insurance, and regulatory compliance.
• An EOR handles the administrative side of employment, but you still manage your workers’ day-to-day tasks and assignments.
• For small businesses looking to hire across states or countries, an EOR can simplify the process and reduce risk.

A business that hires a new employee takes on full responsibility for payroll, taxes, contracts, insurance, and labor law compliance. These liabilities can add up quickly for a small business. 

An employer of record can help alleviate some of that burden by stepping in as the legal employer for new hires, giving you more freedom and flexibility to focus on running your business. Here’s what to know about working with an EOR.

What is an employer of record (EOR)?

An employer of record (EOR) is a separate organization that is designated as the legal employer for a new hire. The EOR appears on official tax and legal documents, and takes on responsibilities like payroll, tax withholding, and benefits administration. You still retain control over day-to-day management and workflow. 

Because an EOR’s responsibilities can extend across states and countries, your business can more easily expand and hire internationally without setting up a local entity in each location. The EOR takes on a variety of tasks associated with managing the human resources (HR) side of the business, which we’ll cover in more detail below.

What does an employer of record do?

An employer of record manages various tasks for the businesses that hire them. Some of their most significant responsibilities include:

• Financial. This includes managing payroll and employee compensation. They also manage taxes related to the employee and any stock options to distribute, even when crossing state or national borders.
• Legal. This includes responsibilities related to unemployment, managing employment contracts, and handling onboarding and termination processes.
• Insurance. The EOR also maintains the certificate of insurance for the employee and conducts any background checks or drug tests.
• Regulatory. Hiring an EOR means they’ll handle employee regulations, including tracking labor laws and regulations for the country and state where the employees live. They’ll make sure employment contracts, benefits, and compensation abide by these regulations.
• Form-related. The EOR manages important forms, such as I-9s and W-2s, so the business remains compliant.

If you engage an EOR, their management of these tasks gives you greater freedom and flexibility to focus on your business. You can put aside many of the concerns and considerations that would otherwise come with hiring a team member

How does an employer of record work?

Working with an EOR typically follows a straightforward process. You identify the talent you want to hire, and the EOR handles the legal and administrative aspects of bringing them on board.

Here's what the process typically looks like:

1. You select your candidate. You find and interview talent the same way you normally would. The EOR doesn't recruit for you — that's still your decision.
2. The EOR sets up the employment relationship. Once you've chosen a candidate, the EOR creates a compliant employment contract based on local labor laws in the worker's location. They also handle registration with local tax authorities and any required filings.
3. Payroll and benefits are managed by the EOR. The EOR processes payroll on your schedule, withholds the correct taxes, and administers benefits like health insurance or retirement contributions according to local requirements.
4. You manage the work. Even though the EOR is the legal employer, you direct your worker's day-to-day tasks, set goals, and manage performance, just as you would with a direct hire.

This setup lets you focus on the work itself while the EOR handles the compliance and administrative requirements behind it.

What is the difference between a PEO and an EOR?

You'll likely come across both PEOs (professional employer organizations) and EORs when researching options for outsourcing HR. PEO and EOR providers serve similar goals but work differently depending on where your business is and how you plan to grow.

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A professional employer organization (PEO) is another way to outsource human resources at your organization. It has some similarities with an EOR. For example, both can help you manage your payroll and HR responsibilities. However, they have some key differences.

With an EOR, your employees are legally the employees of the EOR. With a PEO on the other hand, you have a co-employment setup. You must own a legal entity in the foreign country or region where you want to hire employees.

You are also responsible for full compliance with employment laws specific to employees’ locations. The PEO arrangement often works best for those with a local entity needing HR services.

Learn more about these two types of organizational arrangements.

Benefits of an employer of record

An EOR can make it easier to grow and manage your business. In the following sections, we cover some of the most common benefits that companies experience.

1. Save time and money

One benefit that small businesses notice when transitioning to an EOR is the time and resources they save. Outsourcing payroll and related HR responsibilities gives owners more energy and money to direct toward building their businesses.

Businesses with an EOR don’t have to worry about building and funding an HR department large enough to manage all the responsibilities associated with managing employees.The time and energy needed to remain updated on the latest regulations, answer employee questions, and track the different components and liabilities associated with employees can be extensive.

An EOR eliminates this need, creating a cost-effective solution for hiring new employees and managing the HR side of a business.

2. Maintain labor law compliance for out-of-state or international workers

As your business grows, you can take advantage of opportunities that remote employees and new markets present. With remote workers, you can hire the best candidates from a global talent pool.

But while remote work can help you find the best candidates, it can make employee management a challenge. Staying updated on the regulations that can vary from state to state — or even between countries — can be time-consuming. Fortunately, an EOR can relieve this burden. The organization will remain updated on regulations, keeping everything straight regarding contracts and employee benefits.

Having an EOR helps prevent accidental noncompliance as you work to build your business. You don’t need a local business entity if your EOR operates legally in that area.

3. Provide competitive benefits packages

Offering a competitive compensation plan is important for retaining full-time employees. However, expected benefits — such as health insurance, workers’ compensation, retirement funds, and life insurance — can get expensive.

Some small businesses may need help to remain competitive in their benefits packages when competing with larger businesses. Since the EOR manages employee benefits, they may be able to help you offer plans and benefits packages that draw in top performers.

Risks and challenges of using an employer of record

An EOR offers several benefits to businesses, but you also need to note the potential risks and drawbacks. 

• Compliance gaps are still possible. When you hire an EOR, you’re counting on them to stay current with local labor laws and tax regulations. If they fall short in a specific jurisdiction, your business could face fines or penalties even though the EOR was responsible for compliance.

• Hiring quality takes clear communication. An EOR officially hires the talent that serves your company. For this to work successfully, make sure you clearly articulate your standards and expectations up front. Make sure the people hired through the EOR fill the need you have at your company.

• You’ll share some control over employment decisions. With an EOR managing things like employee pay and benefits, you won't have as much direct input on those decisions. This shift can sometimes lead to miscommunication between your team and the EOR, particularly during onboarding when that personal touch matters most. Also note that if some of your employees are hired directly and others through the EOR, differences in benefit packages could cause frustration.

How much does an employer of record cost?

The cost of an EOR varies depending on the provider, the number of employees, and the countries involved. Most service providers use one of two pricing models:

• Flat monthly fee. A fixed rate per employee per month, typically ranging from $300 to $700 for standard coverage. Some providers start lower for basic services or charge more for complex jurisdictions.
• Percentage of payroll. A percentage of each employee's gross salary, usually between 10% and 25%. This model scales with compensation, so costs increase as salaries go up.

Additional fees may apply for onboarding, visa sponsorship, benefits administration, or background checks. When comparing EOR providers, ask for a full breakdown of costs so you can evaluate the total expense — not just the headline rate.

For small businesses hiring a few international employees, the flat-fee model is often more predictable and easier to budget for.

How to choose an employer of record service provider

To find an employer of record service, carefully evaluate your options to identify the organization that fits best with your business needs. Here are a few areas to research before choosing an EOR.

1. Consider their compliance expertise

The EOR service provider should help you remain compliant with important labor laws and regulations. However, these regulations can differ from state to state, country to country, and across different industries.

A restaurant, for example, may have different wage and hour considerations than a retail store. Given those differences, you should verify that the EOR has compliance expertise in your sector and the jurisdictions where you plan to hire. Working with a provider who already understands your regulatory landscape means you can move forward confidently, trusting them to handle payroll taxes, insurance obligations, and processing responsibilities.

2. Research their pricing model

Examine how the employer of record manages their payments and pricing structure. This can help you find the payment model that best suits your business. For example, some EOR services set up payments based on a flat fee. On the other hand, some businesses base their fees on a percentage of the employee wages or the business profits.

3. Check out any additional services they offer

Different service providers may offer additional services, such as help with employment visas and work permits, benefits management services, or solutions to help you work in new countries by either moving your business or opening a new branch.

Consider the services the EOR offers and which ones will benefit your business. For example, suppose your long-term plan includes global expansion and hiring international employees. In that case, you may prefer a global employer of record provider that offers services to help guide you through the transition.

4. Look at reviews online

Finally, look at the EOR’s success with businesses like yours. This type of feedback from real-world experiences will help you make a better informed decision.

Reading online reviews and relevant articles can show you what other businesses have experienced. You can look for common complaints, what other businesses appreciate or dislike about their EOR service provider, and how one benefited their company. 

Hire and manage global talent with Upwork

Expanding your team globally doesn’t have to mean navigating compliance on your own. Through Upwork Payroll, you can compliantly hire talent in over 180 countries with EOR services for payroll, taxes, and local compliance. Any Hire also includes worker classification support and up to $50,000 in misclassification protection per client, so you can move forward with confidence.

Whether you're bringing on your first international hire or building a distributed team, Upwork can help you get there. 

This article is intended for educational purposes and should not be viewed as legal or tax advice. Please consult a professional to find the solution that best fits your situation.