How EORs work: A deep dive into the technicals

If you employ people in multiple countries or are just doing some initial research on making your first international hire, you’ve likely come across the concept of an “Employer of Record” (EOR). But what exactly is an EOR, and how do these staff leasing models work on a technical level?

In this blog post, we will provide a deep dive into the nitty-gritty details of how EORs operate behind the scenes. We will cover how EOR models differ between countries, why sometimes there are restrictions and limitations that need to be respected, and why EORs are even illegal in some countries!

Whether you’re an HR manager exploring options for expansion or a business owner hiring remotely for the first time, our goal is to give you a clear picture of the mechanisms powering this approach to global employment.

An Employer of Record (EOR) simplifies global hiring by acting as the legal employer for your team members in other countries. This eliminates the need for your company to establish its own legal entities in each location, saving you time, money, and complexity.

More specifically, an EOR takes care of critical employer responsibilities that allow you to be compliant when hiring globally. This includes tasks like:

• Handling local employment contracts
• Managing in-country payroll
• Paying local taxes and benefits
• Ensuring compliance with local laws
• Managing severance and termination processes

All this means you can hire talent across borders without having to build out your own legal and HR infrastructure internationally. This saves time, energy, and resources when entering new regions and dramatically accelerates your company’s ability to scale globally.

At the same time, the EOR ensures full compliance and takes on employer liabilities related to taxes, benefits, and payroll. Meanwhile, the employee gets the security of having a legal local employer and a legal local contract, even though day-to-day management comes from the foreign employer.

Now, all of that sounds great on paper, but you may be wondering how all of this actually works in practice. Who is contracted to whom? How do Employer of Record models change across countries and jurisdictions? Is it possible to employ people through EORs in any country?

These are all valid questions that get into the nuts and bolts of EOR arrangements. Let’s explore some key technical details.

The purest form of Employer of Record arrangements includes three parties: the client company, the employee leasing provider, and the worker. This three-way agreement is referred to as a tripartite relationship. It’s generally only viable when staff leasing is unregulated and there are no restrictions imposed on the employee’s location.

Here’s how it would work if you entered into a tripartite agreement with an EOR:

• You maintain a direct working relationship with the employee. You oversee their tasks, provide day-to-day instruction, and manage performance expectations as you normally would.
• The EOR handles payroll, taxes, benefits, compliance, and other HR functions as the legal employer. They ensure the entire employment lifecycle adheres to local labour regulations.
• The employee fulfils their role and responsibilities as outlined by you.

In countries where a pure EOR model is permitted, you should always be offered a tripartite agreement outlining the responsibilities of all parties. The key benefit is that the employing company is directly part of the contractual agreement with the employee. This keeps the foreign employer more connected to the employee and facilitates clear communication about expectations from both sides.

Though tripartite agreements are ideal, local employment laws sometimes necessitate a different structure. In many regions, this means the agreement needs to be split into two separate (two-way contracts) to meet compliance standards:

• A service agreement between the company and EOR. This defines the range of services the EOR will provide.
• An employment agreement between the EOR and the employee. This outlines job duties, compensation, benefits and termination terms according to local standards.

While the contracts appear more complex on paper, the outcome is the same. The foreign company still manages the employee’s day-to-day workload and performance. The Employer of Record handles behind-the-scenes HR duties related to payroll, taxes, and compliance. And the employee works on behalf of the company under the watch of the licensed EOR entity.

The contracts explain who is responsible for what. It is worth seeing how that works in practice once someone is actually being paid, because the money moves through several hands before it reaches the employee.

1. The client funds payroll: Before each payroll run, the client company pays the EOR an invoice covering:

• Gross salary
• Employer taxes and statutory contributions
• The EOR’s service fee

1. The EOR processes payroll: The EOR runs payroll through its local entity and pays the employee in the local currency and on the standard local pay cycle.
2. Taxes and employee contributions are deducted: The EOR withholds income tax and employee social security contributions, then remits them to the relevant local authorities.
3. Employer contributions are paid: The EOR pays all required employer-side costs, such as pension contributions, social insurance, and other payroll levies.
4. The employee receives pay and benefits: The employee receives a compliant local payslip, while the EOR:

• Maintains payroll and tax records
• Administers statutory leave and benefits
• Manages any additional benefits funded by the client

The result is a familiar local employment experience for the employee, while the client manages payroll through a single invoice instead of navigating a foreign tax system.

A quick way to see how much these rules vary is to line the countries up side by side.

Each country allows the arrangement, and ties it to a licence or model and caps how long the same worker can stay with the same client.

While EORs unlock global hiring potential, some countries outright prohibit legally employing talent through third-party staff leasing. Strict regulations block this model in places like Spain, for example.

Without localised entities already operating there, no compliant workaround exists for formal payroll and benefits management under another employer.

You may be wondering, then, why some Employer of Record providers list Spain as one of the countries where they state they can operate. The reality is that these providers are using workarounds that do not fully comply with Spanish regulations and could potentially expose customers to legal risks.

One common approach EOR providers use to sidestep the restrictions is to assign workers to client companies as consultants, rather than employees. However, this classification often does not accurately reflect the actual working relationship and activities performed.

In most cases, these arrangements are still employer-employee relationships in disguise rather than true autonomous consulting engagements. Local compliance obligations are not met when:

• Consultants work exclusively for one client full-time
• Clients directly manage and instruct the contractors
• Contractors perform duties typical of regular employees

Instead, the consultant should be providing expert advice and services with minimal supervision or control.

Using non-compliant workarounds rather than accurate employment classifications increases risks substantially when disputes arise regarding severance, termination, and other worker rights.

At Boundless, integrity and ethics are baked into everything we do. We believe compliance should be black and white when it comes to employment laws. If arrangements can’t be structured 100% above board, we simply will not pursue them. No exceptions.

As a result, we have made the decision not to offer our services in Spain.

Selecting an Employer of Record is no simple decision. With this critical partner handling employment on your behalf across borders, you need to ensure you get it right. But with so many options on the market, how do you choose? Here are five quick tips to keep in mind:

Before diving into your search, take a step back and identify your primary goals for using an EOR. Are you looking to relocate existing employees, hire new talent internationally, or convert contractors to full-time employees?

Each scenario demands a different set of capabilities from your EOR partner. A clear understanding of your needs will help you filter out providers who might not be the right fit and focus on those who can truly support your specific goals.

When choosing an Employer of Record service, it’s important to find one with on-the-ground expertise in the countries where you’ll hire. The best EOR providers have local entities, along with deep knowledge of local labour regulations, tax rules, and cultural norms.

This level of in-country experience ensures they can handle compliance and make the employment experience smooth for you and your overseas team members.

When choosing an Employer of Record, opt for one that has a local entity and infrastructure in the countries where you want to hire. Some EORs rely on third parties to make hiring possible instead of setting up established entities.

However, this “white label” EOR approach adds an extra party into the arrangement and can significantly reduce service quality and the employee experience.

By opting for an EOR with owned infrastructure in your target countries, you remove extra layers from the process. This ensures more direct control, faster response times if issues arise, and higher accountability.

At the same time, if an EORs has in-country entities, you can be confident they truly understand local laws and regulations where your employees reside.

It’s important to thoroughly vet potential Employers of Record. Don’t hesitate to ask them detailed questions to understand their capabilities and experience. For example, you’ll want to inquire about how much experience they have working with companies in your specific industry. Ask for examples.

If you can, get them to walk you through how they would handle more complex employment situations that could arise when hiring globally.

You also need to find out what the level of ongoing support and expertise is that you can expect if you have questions or need guidance down the road. Most importantly, grill them on the methods they have in place to ensure full legal and tax compliance across the different countries they serve.

A trustworthy Employer of Record should welcome such questions and provide transparent answers. High-quality providers want their customers to feel confident that they can handle any hiring complexity or support need. The more detailed their responses, the better sense you’ll have of their service levels.

Be cautious of EORs that make grandiose claims or promises without providing concrete evidence to back them up. If an EOR claims they offer employment in 185+ countries, there is a high likelihood that they are using third-party providers and don’t own infrastructure in many of those locations.

With this in mind, make sure to thoroughly examine any promises, request referrals you can contact, and search for online testimonials to gauge their standing and history.

Selecting the proper Employer of Record is an important choice when expanding internationally, one that could greatly sway the success or failure of the endeavour. Do your due diligence before making this impactful decision.