An employer of record (EOR) is a third-party organization that legally employs workers on behalf of a client company and takes full responsibility for HR tasks, including payroll, taxes, benefits, and compliance with local labor laws. Businesses use EORs to expand internationally without setting up local entities in their target country.
Pricing matters because the cost of the EOR directly affects a company’s budget and can impact its expansion decisions. Costs for EOR services often change because of local regulations, benefit levels, and the number of people you plan to hire. Some providers give a single monthly price that simplifies budgeting, while others charge a fee linked to each employee’s wages.
The different employer of record pricing models are the fixed-fee model, percentage-based model, and custom pricing model.
The different types of EOR fees are the EOR contract setup fee, EOR security deposit, EOR monthly fee, and FX fee.
The hidden costs of an employer of record are onboarding fees, currency exchange fees, compliance and legal fees, termination fees, local taxes and government fees, additional service charges, and annual renewal fees.
What is an employer of record (EOR)?
An Employer of Record (EOR) is a third-party service that legally employs workers on behalf of the company. The EOR takes responsibility for administrative and HR tasks like payroll, tax compliance, employee benefits, and following local labor laws.
EORs are able to run a business even in another country at a fraction of the cost while providing speed, ease, and efficiency. Businesses can efficiently run hiring processes and focus on their core operations while EOR handles all the administrative and legal complications.
Why do businesses use an EOR instead of their own entity?
Businesses choose an EOR instead of their own entity because it offers cost-efficiency, reduced risks, and faster market entry. Establishing your own local entity is always more expensive as you would have to send resources on legal registration, tax compliance, payroll setup, and ongoing administrative costs. An EOR can handle all these responsibilities at a fee that costs less than setting up your own local entity.
An EOR also reduces risks by ensuring compliance with local labor laws and tax requirements, saving the business from facing any fines, penalties, or other legal issues. All these benefits, like handling administrative tasks and ensuring compliance, allow businesses to enter new markets quickly without any hurdles.
What are the different employer of record pricing models?
The different employer of record pricing models are the fixed-fee model, percentage-based model, and custom pricing model.
These pricing models are described below.
Fixed-fee model
The fixed-fee model offers a flat monthly fee per model, which can range from $200 to $2,000 per employee or more depending on the country and the complexity of the employment laws. The costs are predictable and already set, so it makes budgeting easier, but it may not scale well for larger businesses. This pricing model is best for startups and small businesses that want to expand on a small scale.
Percentage-based model
The percentage-based model charges a percentage of the employee’s gross salary, which means that the EOR takes a cut of total payroll expenses, typically ranging from 10-20%. This model scales with salary changes, so it is easier for businesses to align their budget with payroll, but the costs can be surprising for companies with high-salary employees. It is best for large enterprises and businesses that offer varying salary structures.
Custom pricing model
The custom pricing model offers highly customized plans for clients based on their specific needs and circumstances. This allows businesses to pay for only the services they require without the need to budget for additional services. However, this model offers less cost transparency, and the EOR service provider may present some unexpected hidden costs. This model is best for businesses that only want a few specific EOR services.
What are the different types of EOR fees?
An Employer of Record (EOR) charges different types of fees to cover payroll, compliance, and administrative services. These fees depend on the provider, location, and pricing model. Below is a list of the main EOR fees, along with their explanations.
The different types of EOR fees are the EOR contract setup fee, EOR security deposit, EOR monthly fee, and FX fee.
EOR contract setup fee
The EOR contract setup fee is a one-time initial fee that covers the costs of initial onboarding, employment contract setup, and legal compliance checksinitial onboarding, employment contract setup, and legal compliance checks. All of these costs are required to start the process of hiring employees through an EOR. The contract setup fees can range from $500 to $2,000 or more, depending on the complexity of the process.
EOR security deposit
The EOR security deposit is an initial deposit charged by the EOR for assurance of compliance with local labor laws. It also acts as financial protection for the EOR to ensure commitment and cover the costs of avoiding any potential early termination risks. The security deposit fee can be refundable or non-refundable, depending on the EOR service provider you choose. The amount charged is typically equivalent to your business’s average employee’s notice period pay.
EOR monthly fee
The EOR monthly fee is an amount charged by the EOR that covers all services and aspects like payroll processing, HR management, tax compliance, and other administrative tasks for every month. The monthly fee can be fixed by the EOR or be percentage-based and typically ranges from $299 to $1,500 per employee, depending on the complexity of the services provided.
FX fee
The FX fee is a cost charged by the EOR for currency conversion in the international payroll. This fee applies when salaries are paid to the employees in a different currency, which often includes a slight markup on exchange rates. The FX fee is percentage-based, and most EORs charge at a rate of 2-10%, depending on the currency or the current exchange rate.
What factors influence the cost of an EOR?
The factors that influence the cost of an EOR are EOR setup, refundable security deposit, supplementary employee benefits, number of employees, and custom requirements.
These factors are described below.
EOR setup
EOR setup refers to the initial setup process that involves legal documentation, compliance registration, and onboarding of employees under the EOR’s management. The EOR may charge a one-time setup fee to cover all the expenses of the initial setup, which adds to the overall cost of implementing an EOR model.
All initial tasks like administrative work, creating contracts, finding new employees with the right skill sets, and ensuring compliance with local labor laws are expenses that are covered by the EOR setup cost. The complexity of these tasks depends on the target country as some markets require extra legal formalities, which come at a higher cost.
Refundable security deposit
A refundable security deposit refers to the additional charge that EOR service providers require before the onboarding process, which covers the expenses of financial protection against early termination, non-payment, or unexpected liabilities.
The amount charged as a refundable security deposit can vary based on the number of employees or the level of risk the business is willing to take while setting up in a new market. Some providers will fully refund the security deposit at the end of the contract, while others may deduct some of the value from the initial cost.
Supplementary employee benefits
Supplementary employee benefits are the additional benefits companies provide, like health insurance, pension contributions, paid leave, and bonuses. EORs are also responsible for handling and providing these benefits to the new employees, so they charge extra administrative fees for them.
Higher quality of benefits can increase the cost of EOR services due to higher administrative and financial outlays, especially in higher regulated markets where the normal benefit packages can significantly increase the cost of EOR administrative charges.
Number of employees
The Number of employees a business has or is willing to hire can also impact the overall cost of an EOR. Some EOR service providers offer volume-based discounts, which reduce the per-employee fee if a business has large teams.
However, managing these large teams also increases the complexity of administrative tasks like compliance work and payroll processing. These complexities can lead to higher administrative costs charged by the EOR, which may defeat the purpose of any value provided by the volume-based discounts.
Custom requirements
Custom requirements refer to the unique needs of a business, like specialized employment contracts, non-standard work arrangements, unique payroll cycles, or industry-specific compliance requirements. These additional services can increase the overall cost of implementing an EOR, especially if they offer a service-based custom pricing model.
All customizations lead to legal consultations and extra administrative work, which are all extra tasks that the EOR needs to handle. The EOR will evaluate all the custom services a business requires and break down all the administrative costs affecting the overall fee.
What are the hidden costs of an employer of record?
The hidden costs of an employer of record are onboarding fees, currency exchange fees, compliance and legal fees, termination fees, local taxes and government fees, additional service charges, and annual renewal fees.
These hidden costs are described below.
- Onboarding fees: Onboarding fees are the initial charges for onboarding your company and hiring global talent. The fee covers expenses of administrative tasks like contract creating, employee registration, and compliance verification. Some EOR providers include this cost in their standard pricing, but many tend to bill it separately in the end.
- Currency exchange fees: Currency exchange fees are another hidden fee charged by EORs for international payrolls. This fee covers the conversion of salaries into foreign currencies and exchange rates. Many EORs apply a slight markup to these exchange rates, which can come as a shock to some businesses.
- Compliance and legal fees: Compliance and legal fees are costs charged for the legal expertise offered by the EOR to ensure compliance with local labor laws, tax regulations, and employment standards. Some EORs charge additional hidden fees for contract modifications, regulatory updates, or legal consultations.
- Termination fees: Termination fees are charged when a business ends a contract with the EOR service provider. Some of these costs include severance payments, early termination penalties, or notice period obligations. Some businesses don’t go through exit terms in advance, so these costs can be surprising.
- Local taxes and government fees: Local taxes and government fees involve costs of employer tax contributions and social security payments. Most EORs typically don’t handle these payments themselves and pass them directly to the client company or business.
- Additional service charges: Additional service charges are the costs of choosing services not included in the base package, like legal assistance or custom HR support. Most EORs don’t include these costs in the original quote. They instead present them to the client company later, after the services are performed.
- Annual renewal fees: Annual renewal fees are fees charged every year by the EOR for renewing the contract and continuing the access to compliance support, payroll services, and administrative management. These costs are typically not mentioned at the start of the contract, so they may come out very unexpectedly to some clients.
How to choose the right EOR for your business?
Choosing the right EOR is crucial for every business that wishes to expand globally while ensuring that they are compliant with local labor laws and that they hire the most efficient workforce for their tasks. If you choose the right EOR, all these tasks will be carried out seamlessly. Choosing the right EOR involves considering key factors like compliance and legal expertise, transparent pricing, geographic coverage, flexibility, and client reviews.
These factors are described below.
- Compliance and legal expertise: Compliance and legal expertise means that the EOR should have a strong understanding of local labor laws, tax regulations, and employment policies to prevent any legal issues.
- Transparent pricing: Transparent pricing means the EOR should have clear cost structures and minimal hidden fees. You can request a detailed breakdown of expenses, including setup fees, monthly charges, and additional service costs.
- Geographic coverage: Geographic coverage means the EOR should have strong experience in your target countries. A provider with a well-established presence ensures compliance with local employment laws.
- Flexibility: Flexibility means the EOR should support business growth by offering scalable solutions for workforce expansion and contract modifications.
- Client reviews: Client reviews mean the EOR should have a strong reputation and positive reviews from previous clients. You should check the provider’s track record by reading customer reviews, testimonials, and case studies to ensure reliability.
What’s the difference between an EOR and a PEO?
An employer of record (EOR) is a third-party employment outsourcing solution that takes full legal responsibility for employing workers on behalf of a business. A professional employer organization (PEO) is an external company that provides efficient HR solutions to businesses by forming a co-employment relationship.
The main thing to keep in mind when it comes to EOR vs PEO is that EOR takes full responsibility for the employment and the client company has no control over it, while a PEO offers a co-employment model where both the PEO and client company have equal control over employment.
How does an EOR handle payroll?
An EOR manages payroll by processing employee salaries, deducting taxes, handling benefits, and ensuring compliance with local labor laws. The EOR calculates wages, manages currency conversions if needed, and distributes payments on time.
How does an EOR ensure legal compliance?
An EOR ensures legal compliance by managing employment contracts, following local labor laws, handling tax filings, and ensuring proper employee classification. The EOR stays updated on regulatory changes, manages social security contributions, and ensures compliance with termination laws and benefits requirements.
What are the benefits of using an EOR?
There are many benefits of using an EOR, including access to global talent, reduced administrative burden, mitigation of legal risks, simplified HR management, cost-efficiency, and company flexibility. Using an EOR simplifies the process of global expansion and offers seamless onboarding of employees in new markets.
How does an EOR compare to a staffing agency?
An EOR legally employs workers on behalf of a company and manages all HR tasks like payroll, taxes, benefits, and compliance, making it ideal for long-term employment and global expansion. A staffing agency recruits and places temporary or contract workers but does not act as the legal employer.
