The Employer of Record (EOR) model has become popular for international hiring and remote-first expansion. An EOR legally employs workers on behalf of the client company, handling payroll, local law compliance, and tax withholding. But EOR is not a compliance silver bullet — it introduces its own risks and obligations that companies must understand.
What an EOR Does and Does Not Do
An EOR handles: payroll processing, local tax withholding, statutory benefits, employment-related filings, and local labor law compliance. An EOR does NOT: manage the work itself, ensure IP assignments are properly structured, eliminate permanent establishment (PE) risk in foreign jurisdictions, or guarantee correct worker classification under local law.
Permanent Establishment Risk
Using an EOR significantly reduces but does not eliminate PE risk. PE risk arises when a company has sufficient economic presence in a foreign country to be subject to corporate income tax there. EOR workers generally do not create PE if they cannot bind the client to contracts — but workers with negotiating authority create PE risk regardless of EOR arrangement. Countries with aggressive PE rules (India, France, Germany) require careful structuring.
IP and Confidentiality Gaps
When using an EOR, the EOR is the legal employer — standard employment agreement IP assignment provisions must be carefully structured with direct contractual relationships between the client company and the EOR workers. Companies should always have separate IP assignment and confidentiality agreements directly with EOR workers, regardless of what the EOR's employment contract says.
When Each Model Makes Sense
EOR works well when: testing a new market before entity formation, hiring 1–5 workers where entity formation costs exceed 2–3 years of EOR fees, moving quickly, or in jurisdictions with genuinely complex labor law.
Direct employment (own entity) works better when: hiring 10+ workers in a jurisdiction — EOR markup (15–25% of payroll) becomes very expensive at scale — or building a long-term presence requiring client-facing relationships.
U.S. State EOR Considerations
EOR is also used domestically for new states where the client hasn't registered as an employer. EOR workers still count for the client's headcount thresholds under federal laws (ACA, FMLA, WARN Act). The arrangement may be scrutinized by state regulators if the client is effectively doing business in the state without being registered there.
How Compliance Singularity Handles EOR Arrangements
Compliance Singularity tracks EOR arrangements in your company profile and includes EOR workers in all headcount-based compliance threshold calculations. The system flags PE risk for international EOR arrangements based on country and worker role, and identifies jurisdictions where direct entity formation may be more cost-effective based on headcount growth.