EOR Contracts: Definition, How does it work, Types, Benefits, and risks

An Employer of Record (EOR) contract is an agreement in which a third-party organization manages an employee’s legal and administrative tasks. At the same time, the client company oversees the employee’s daily work. This arrangement allows businesses to hire employees in different regions or countries without establishing a local office to make the hiring process simple and easy. 

Under an EOR contract, businesses outsource important HR functions such as payroll, tax compliance, benefits management, and worker protection. The EOR ensures all legal and regulatory requirements are met, which allows the client company to focus on managing employee performance and responsibilities.

The main types of EOR contracts are Professional Services Agreements (PSA), Master Services Agreements (MSA), and dedicated EOR contracts. The main benefits of using an EOR contract are reducing legal risks, accelerating international expansion, and gaining access to local compliance expertise. EORs also make it easier for businesses to hire employees globally while managing complex tax and labor laws, allowing companies to concentrate on their core operations.

There are also risks to consider, such as potential loss of control over employee relations, hidden costs, and challenges in ensuring the EOR is a good fit for the business’s culture and specific needs. It is important to weigh these factors carefully before entering into an EOR agreement.

What is an Employer of Record (EOR) contract?

An Employer of Record (EOR) contract is an agreement where a third-party organization assumes legal responsibility for employment tasks. These include managing payroll, taxes, benefits, labor law compliance, and administrative functions. The EOR becomes the official employer, while the client company manages the employee’s daily work and performance. 

An EOR is important because it facilitates international expansion and the management of remote teams. An EOR contract enables businesses to hire employees in different countries without the need to establish local legal offices. 

Businesses avoid risks of non-compliance with local labor laws and the complexities of managing employees in multiple locations by outsourcing HR functions. This reduces administrative work, ensures compliance with global labor laws, and supports managing remote or international employees. Businesses can lower legal risks, minimize burdens, and focus on growth and operations.

What does Tripartite mean?

Tripartite refers to involving 3 parties. Tripartite is used to describe systems, agreements, or structures that include three groups, each with distinct roles, responsibilities, and interests. This term is commonly found in legal, political, and business contexts to define the relationships among three entities.

An EOR contract has 3 main parts: the tripartite agreement, the employment contract, and the service agreement. 

The 3 contracts of an EOR are explained below.

• Tripartite agreement. A tripartite agreement is a legally binding document signed by the EOR, the client company, and the employee. It defines each party’s roles, responsibilities, and liabilities. The agreement covers hiring, employee evaluation, and compliance with local labor laws and tax regulations, as the EOR handles the legal and regulatory aspects. A tripartite agreement is essential for businesses looking to hire employees in foreign countries without opening a permanent office.
• Employment contract. The employment contract is between the EOR and the employee. It outlines the employee’s job title, duties, compensation, benefits, and working hours. The employment contract also covers paid time off, sick leave, health insurance, and retirement benefits. Additional clauses include intellectual property, confidentiality, and post-employment conditions. It specifies termination procedures, including notice periods and conditions for ending the employment relationship.
• Service agreement. A service agreement is signed between the EOR and the client company. It details the services provided by the EOR, such as employee management, payroll processing, benefits administration, and ensuring compliance with local laws. The agreement also includes pricing, payment terms, data protection, confidentiality, and the responsibilities of both parties. The service agreement also outlines conditions for contract termination, dispute resolution, and transition assistance. The service document provides a clear approach to managing a global workforce.

How does an EOR contract work?

An EOR contract acts as the legal employer, managing compliance with local labor laws, tax regulations, and other legal requirements. The client company benefits from the employee’s work but focuses on directing their tasks and performance. The employee is hired under the EOR’s umbrella and receives wages, benefits, and legal protection based on local labor laws. 

The EOR assumes several responsibilities, including handling legal employment matters such as payroll, tax withholding, benefits administration, and compliance with labor laws. The EOR manages employee compensation, benefits, and contributions to social security, pensions, and health insurance. 

The EOR also manages risks, including employee disputes and compliance, and simplifies market expansion by managing legal and regulatory complexities in foreign markets. Employees hired through an EOR receive the same benefits and legal protections as those working in the client company’s home country, ensuring their rights are upheld in line with local laws.

What are the types of EOR contracts?

The types of EOR contracts are standard EOR contracts, multi-country EOR contracts, professional employer organization (PEO) contracts, and co-employment agreements. 

The 4 types of EOR contracts are listed below.

• Standard EOR contracts. A standard EOR contract is a legal agreement between a company and an EOR provider that outlines the terms under which the EOR will act as the legal employer for the company’s workforce in a specific country or region. It takes full legal responsibility for employees, handling payroll, benefits, compliance with local laws, and other employment-related tasks. The client company oversees the employees’ daily work and manages their performance and responsibilities. This type of contract is perfect for businesses entering new markets or operating in countries without a legal entity.
• Multi-country EOR contracts. A multi-country EOR contract allows businesses to employ people in multiple countries without setting up separate legal offices in each one. The EOR handles all legal employer duties in each country, ensuring compliance with local laws, regulations, and taxes for all employees. It is ideal for multinational companies looking to manage a global workforce through a single contract and provider.
• Professional Employer Organization (PEO) contracts. A PEO contract is a co-employment arrangement where the PEO and the client company share responsibility for the employee’s legal employment. The PEO handles administrative tasks such as payroll, benefits, and compliance, while the client company maintains control over the employee’s daily work and job performance. This type of contract is great for companies that want to outsource administrative duties while retaining significant control over their employee’s work activities.
• Co-Employment agreements. A co-employment agreement is similar to a PEO contract but with a more balanced share of responsibilities. Both the client company and the EOR (or PEO) have legal obligations to the employee, such as managing payroll, ensuring compliance, and providing benefits. The client company controls the employee’s work, while the EOR ensures it meets legal and compliance requirements. This arrangement is common for businesses looking to reduce administrative work while still maintaining oversight of their workforce.

How to create an EOR contract?

The 8 steps to create an employer of record (EOR) contract are discussed below.

• Define the scope of services. The process of creating an EOR contract starts by defining the scope of services the EOR will provide. The services include handling recruitment, managing payroll, ensuring compliance with local labor laws, and administering employee benefits.
• Identify the parties involved. Identifying the parties involved helps clarify the roles and responsibilities of the three main parties in the contract which includes the client company, the EOR provider, and the employee. This avoids confusion and ensures all parties are on the same page.
• Address legal and compliance considerations. Addressing legal and compliance considerations ensures the contract complies with both local and international labor laws. The EOR handles legal matters such as tax withholding, employee rights, and benefits, making sure these obligations are fulfilled. 
• Establish payment terms. Establishing payment terms defines the payment structure for the EOR’s services and how the employee’s salary and benefits are managed. This includes payment frequency, service fees, and additional costs. 
• Draft the tripartite agreement. Drafting the tripartite agreement formalizes the roles and responsibilities of the three parties, which are the client company, the EOR, and the employee. The agreement ensures everything is in accordance with legal requirements. 
• Define employment terms. Defining employment terms introduces the employment conditions between the employee and the EOR. The employment terms include job duties, compensation, working hours, benefits, and leave policies.
• Review and finalize the contract. Review and finalizing the contract ensures the contract is clear, accurate and legally compliant. Once all aspects are reviewed and agreed upon, all parties sign the contract to make it official.
• Regularly review and update the contract. Regularly reviewing and updating the contract ensures the contract remains current by showing changes in laws, business needs, or employment terms. 

What are the essentials of an EOR contract?

The 6 essentials of an EOR contract are explained below.

• Clear identification of parties. Clear identification of parties means specifying the client company, the EOR, and the employee in the contract. This ensures clarity on each party’s role and responsibilities without misunderstandings. For example, a U.S.-based company hiring a worker in Spain shows that the U.S. company is the client, the EOR oversees legal employment, and the employee resides in Spain.  
• Scope of services provided. The scope of services provided defines the specific functions the EOR performs, including payroll processing, tax filing, benefits management, recruitment, and compliance with local labor laws. The EOR ensures remote workers abroad have access to local health benefits and tax compliance, allowing the client to avoid setting up a legal entity in that country.
• Legal and compliance obligations. Legal and compliance obligations ensure a business follows the laws and regulations controlling labor practices, taxes, and employee rights. The EOR manages payroll and taxes, while the client oversees employee performance. In jurisdictions such as France, where worker protections are extensive, the EOR complies with regulations such as local labor contracts and termination procedures.
• Compensation and benefits structure. The compensation and benefits structure specifies the employee’s salary, benefits, bonuses, and other incentives provided by the employer. The contract also includes deductions, such as taxes and pension contributions, as required by local laws. For example, a contract states an annual salary of €50,000 with health insurance benefits while noting deductions for income tax and pension contributions.
• Termination and notice periods. Termination and notice periods show the conditions under which employment ends, including required notice periods, grounds for termination, and severance pay, where applicable. For example, in the UK, the contract requires a one-month notice period from the employee, while the EOR ensures compliance with local termination procedures, including severance provisions.
• Dispute resolution process. The dispute resolution process details the procedure for handling disputes among the client company, EOR, and employees. This involves mediation to avoid costly legal conflicts. For example, in the case of a wage dispute, the contract mandates arbitration for an equitable resolution without court involvement.

What terms should be included in an EOR contract?

The 7 essential terms included in an EOR contract are listed below. 

• Employment terms and conditions. The employment terms and conditions section specifies the employee’s role, salary, job responsibilities, work hours, location, and other important aspects. For small businesses, the contract may be brief and straightforward, focusing on the basics. For medium and large companies, it includes more detailed clauses on performance expectations, job duties, and any specific responsibilities related to the role.
• Payroll and benefits administration. Payroll and benefits administration is managed by the EOR. It ensures the employees are properly compensated and that taxes and benefits are handled in accordance with local regulations. For smaller businesses, this process is simpler but still requires compliance, while larger companies have more complexity due to the number of employees and varying benefits offerings.
• Termination clauses. The termination clause mentions the conditions under which the employment is terminated, the notice periods required, and any severance pay that is owed. For smaller businesses, termination clauses are basic and less formal, but for larger businesses, they are structured with specific procedures for layoffs, misconduct, or restructuring.
• Intellectual Property (IP) and confidentiality. Intellectual property and confidentiality ensure that any intellectual property created during employment belongs to the company and outlines confidentiality expectations. Small businesses include basic non-disclosure terms, while larger companies have more extensive provisions, such as ownership of inventions or detailed exclusive clauses.
• Compliance with labor laws. Compliance with labor laws ensures that employment practices follow local labor laws, including tax obligations, health insurance, and other legal requirements. For small businesses, this means simpler legal consultation to achieve minimum compliance, while larger organizations require extensive oversight, particularly when managing employees across multiple regions or countries.
• Employee performance and management. The employee performance and management section defines how employee performance will be managed, including expectations, performance reviews, and any specific KPIs or goals. Small businesses have informal processes, with the client company directly overseeing the employee. Larger businesses have structured performance management systems.
• Dispute resolution. The dispute resolution clause specifies the process for resolving any disputes that arise between the parties. Small businesses prefer simpler, local solutions, while larger businesses include formal dispute resolution processes, such as arbitration or mediation, and specify the jurisdiction for resolving issues.

What are the benefits of an EOR contract?

The benefits of an Employer of Record (EOR) are simplified compliance with labor laws, reduced administrative burden, fostering expansion into new markets, risk mitigation, enhanced flexibility in hiring, and improved employee experience.

The 6 benefits of an EOR contract are mentioned below.

• Simplified compliance with labor laws. Simplified compliance with labor laws ensures businesses remain fully compliant with local, state, and international regulations. The EOR manages legal requirements, from taxation to employee benefits and termination processes. This is especially beneficial for global companies, as it removes the complexities of looking for different legal systems. Small businesses avoid costly mistakes while ensuring employees are treated according to the law.
• Reduced administrative burden. Reduced administrative burden frees up time and resources for businesses to focus on strategic initiatives, such as hiring and employee development. The EOR takes on the responsibility of payroll, benefits, and HR tasks. For small businesses without full-time HR teams, this is particularly valuable. Larger businesses simplify processes and maintain consistency across multiple locations.
• Faster expansion into new markets. Faster expansion into new markets opens up opportunities to access global talent and business prospects. The EOR handles all legal and regulatory aspects, eliminating the need to set up local entities. This helps in the hiring process, especially for medium and large companies looking to scale globally.
• Risk mitigation. Risk mitigation minimizes exposure to legal risks associated with employee management. Partnering with an EOR shifts responsibilities, such as employee rights, benefits, and protections, to the EOR. This reduces legal liabilities, particularly in regions with complex or constantly changing labor laws. Businesses of any size limit their legal risks by collaborating with an EOR.
• Enhanced flexibility in hiring. Enhanced flexibility in hiring allows businesses to adjust their workforce based on changing needs. The EOR offers a range of contract types, including full-time, part-time, temporary, or project-based positions. Small businesses tap into skilled talent without long-term commitments, while larger companies easily manage fluctuating labor demands. 
• Improved employee experience. Improved employee experience ensures better benefits and services for employees. The EOR provides access to superior healthcare, retirement plans, and other benefits that smaller businesses struggle to offer. This results in higher employee satisfaction and retention. Small businesses remain competitive with larger organizations by providing attractive benefits.

What are the risks of an EOR contract?

The risks of an Employer of Record (EOR) are loss of control over HR functions, hidden or unexpected costs, compliance risk, legal liability, misalignment with company culture, and limited flexibility in customization. 

The 5 risks of an EOR contract are mentioned below.

• Loss of control over HR functions. Loss of control over HR functions limits the ability to manage critical aspects of employee experience. Delegating tasks such as payroll, benefits management, and labor law compliance to the EOR reduces administrative burdens but makes it difficult to implement specific HR strategies or address employee needs promptly. Businesses that value hands-on HR management find it challenging to maintain their approach when the EOR handles tasks remotely. 
• Hidden or unexpected costs. Hidden or unexpected costs arise when businesses encounter extra fees for services not initially agreed upon. EOR contracts reduce HR administration costs and fees for setting up new employees, modifying payroll details, or offering additional services. High turnover further increases these costs. Carefully reviewing the EOR contract helps businesses understand all potential costs and avoid unexpected expenses.
• Compliance risk and legal liability. Compliance risk and legal liability increase, particularly in regions with complex or changing labor laws. The EOR handles compliance, yet the business still faces responsibility if the EOR fails to meet regulations. Companies with employees in multiple jurisdictions are at a higher risk of non-compliance due to varying legal systems. It is essential to work with an experienced, reputable EOR with a proven compliance record. 
• Misalignment with company culture. Misalignment with company culture occurs when outsourcing employment to an EOR causes a disconnect between the business and its employees. Since the EOR technically employs the workers, it becomes harder to establish a strong connection with employees, affecting morale and retention. This is especially problematic for businesses where company culture is the source of success. Without direct oversight, employees feel disconnected from the business’s core values.
• Limited flexibility in customization. Limited flexibility in customization affects businesses that require tailored HR solutions. EORs offer standardized services, making it difficult for companies to customize benefits, payroll structures, or other HR functions to meet specific needs. This is particularly challenging for larger businesses or those with specialized workforces that require customized solutions to support their operations.

What to know more about EOR contracts?

Employer of Record (EOR) contracts simplify employee management, especially when hiring across borders. With an EOR contract, the EOR takes on legal responsibility for employment, handling tasks such as payroll, taxes, benefits, and compliance. The client company manages the employee’s daily duties, projects, and performance. 

A major advantage of using an EOR is ensuring compliance with local labor laws. This is especially helpful for businesses operating internationally, as the EOR helps handle complex regulations and reduces the risk of costly legal issues. EOR contracts involve service fees based on the number of employees and services provided, such as payroll processing, tax filings, and managing benefits. Understanding the full breakdown of these fees is key to avoiding unexpected costs. While the EOR manages administrative tasks, employees still interact with the client company for job-related duties. 

Clear communication and alignment between the company and the EOR are essential for employee integration. A major benefit of an EOR contract is the flexibility it offers. Companies quickly expand their workforce across regions without setting up a local legal entity. This makes entering new markets faster and more efficient. Despite these benefits, businesses evaluate EOR providers carefully to ensure they meet their needs. Risks include hidden fees, loss of control over employee management, and misalignment between the company’s culture and the EOR’s approach.

What are the compliance responsibilities of an EOR?

The compliance responsibilities of an employer of record (EOR) are acting as the legal employer for a company’s workforce. It includes ensuring compliance with local employment legislation and managing payroll and tax responsibilities. The EOR prepares and provides proper employment contracts and necessary documentation for employees, ensuring all records align with legal requirements. 

The EOR advises organizations on accurate worker classification, preventing misclassification that can lead to fines or legal risks. The EOR also ensures employees receive accurate and timely payroll and detailed payslips that include salary, hours worked, and additional compensation. The EOR calculates and files employment tax contributions and submits payments to the correct local tax authorities. 

The EOR arranges these assessments, connecting employees with suitable health providers and ensuring compliance in countries requiring occupational medical checks. The EOR ensures employees receive mandated benefits, such as healthcare, pensions, and other social contributions, following local regulations.

Who manages the employee in an EOR agreement?

The client company manages the employees in an EOR agreement. The client oversees daily tasks, projects, performance, and job responsibilities. The EOR handles payroll, benefits, taxes, and compliance-related paperwork.

Is EOR the only way to establish a contract with an employee abroad?

No, an EOR is not the only way to establish a contract with an employee abroad. Companies can hire employees directly or set up a local branch or subsidiary. These alternatives require managing local compliance, taxes, and legal obligations independently. An EOR simplifies international hiring by managing these responsibilities, making it a practical choice for businesses expanding into new markets.

Who decides to retain an employee in an EOR agreement?

The client company decides whether to retain an employee in an EOR agreement. The EOR handles legal and administrative tasks like payroll, benefits, and taxes. The client company controls the employee’s performance, daily responsibilities, and employment status. When the company is satisfied with the employee’s work, it keeps them. If performance issues arise or the company no longer needs the employee, the client company decides to terminate or not retain the employee.

Is handling contracts part of the services provided by an EOR?

Yes, handling contracts is part of the services provided by an EOR. The EOR drafts and manages employment contracts between the client company and the employee, ensuring they comply with local labor laws. The contracts cover job duties, salary, benefits, working conditions, and termination clauses. The EOR services minimizes the risk of legal issues for the client company.

Is an EOR contract more expensive than hiring an employee directly?

Yes, an EOR contract is more expensive than hiring an employee directly. The EOR charges a service fee for handling payroll processing, tax compliance, benefits management, and local labor law compliance, which increases the overall cost. However, the value of using an EOR is in reducing legal risks, ensuring compliance, and simplifying employment issues, especially in international or complex labor law regions.

What are the prohibited job titles in an EOR contract?

The prohibited job titles in an EOR contract are government positions, executive-level roles, and jobs that require specific licenses or qualifications. These titles differ depending on local labor laws and regulatory restrictions in different regions. The EOR ensures that these titles are excluded from the contract to comply with local regulations and reduce legal risks for both the client company and the EOR.

How to request changes to an Employer of Record (EOR) contract?

To request changes to an Employer of Record (EOR) contract, the client company contacts the EOR provider. The client specifies the required changes, such as adjustments to the contract duration, compensation, job duties, or employee benefits. The client needs to submit a written request that details these changes. Both parties then discuss the proposed changes. Once everything is decided, the updated contract is sent for review and signatures.