Employer of Record vs Common Law Employer: What's the Difference?

When you're growing your team, especially across borders, understanding who's legally responsible for your employees becomes crucial. Let's break down the key differences between an Employer of Record (EOR) and a Common Law Employer to help you decide which approach makes sense for your business.

What is an Employer of Record (EOR)?

An Employer of Record is a third-party organization that takes on the legal responsibility of employing workers on behalf of another company. Think of an EOR as the official employer on paper, handling all the administrative and legal aspects of employment while you maintain day-to-day management of your team members.

An EOR handles:

• Payroll processing and tax withholding
• Benefits administration
• Employment contracts and compliance
• Worker's compensation and unemployment claims
• Visa and work permit applications (for international hires)

Companies typically use EORs when they want to hire talent in countries where they don't have a legal entity, need to onboard employees quickly without setting up local infrastructure, or want to reduce their administrative burden.

What is a Common Law Employer?

A Common Law Employer is the traditional employment model where your company directly employs workers and takes on all associated legal responsibilities. This is what most people think of when they imagine a typical employer-employee relationship.

As a Common Law Employer, your company:

• Directly hires employees under your company name
• Manages all payroll, benefits, and tax obligations
• Bears full legal responsibility for compliance with employment laws
• Controls all aspects of the employment relationship
• Maintains all employment records and documentation

This is the standard model for companies hiring employees in jurisdictions where they already have established legal entities.

Key Differences Between an EOR and a Common Law Employer

Legal Responsibility

With an EOR, the legal burden of employment shifts significantly. The EOR becomes the employer of record in official documents and takes responsibility for compliance with local employment laws, tax regulations, and mandatory benefits requirements.

As a Common Law Employer, your company shoulders all these legal responsibilities directly. This means you need in-house expertise or consultants who understand the employment laws in every location where you have employees.

Control Over Employees

When using an EOR:

• You maintain control over day-to-day work assignments
• You direct professional development and performance reviews
• You determine working hours and project deadlines
• The EOR handles administrative aspects only

As a Common Law Employer:

• You have complete control over all aspects of employment
• You determine all company policies and procedures
• You directly manage the entire employee experience
• You have no third party involved in the relationship

Payroll and Taxes

An EOR manages the entire payroll process, including:

• Calculating correct tax withholdings based on local laws
• Making timely tax payments to appropriate authorities
• Providing pay stubs and tax documentation to employees
• Managing year-end tax reporting requirements

Common Law Employers must establish these systems themselves in each jurisdiction, requiring significant knowledge of local tax codes and reporting requirements.

Hiring Speed

An EOR can facilitate hiring in a matter of days, allowing you to quickly onboard employees in new markets without the lengthy process of establishing a legal entity. This is particularly beneficial for companies looking to test new markets or fill urgent roles.

In contrast, a Common Law Employer must navigate the legal entity setup process, which can take weeks or even months, delaying the hiring process.

Employee Experience

With an EOR, employees may feel a disconnect since they are technically employed by the EOR, even though they work for your company. However, you still manage their day-to-day activities and performance.

As a Common Law Employer, employees have a direct relationship with your company, fostering a stronger connection to your brand and culture.

Cost Structure

EORs typically charge a monthly fee per employee, which can add up, especially for larger teams. However, this fee often includes comprehensive services that reduce your administrative burden.

Common Law Employers incur direct costs associated with salaries, benefits, and internal HR administration. While this can be more cost-effective at scale, it requires a significant investment in HR infrastructure.

Termination Process

When terminating an employee, an EOR handles the process in compliance with local laws, ensuring that all legal requirements are met. This can reduce the risk of potential legal issues.

As a Common Law Employer, your company is responsible for managing terminations directly, which requires a thorough understanding of local labor laws to avoid legal pitfalls.

Benefits of Using an Employer of Record

Partnering with an Employer of Record provider offers a lot of strategic advantages for businesses looking to streamline their employment operations. Here are the key advantages an EOR can bring to your organization:

Quick Market Entry

An EOR allows you to hire talent in new countries within days instead of months. There's no need to establish a legal entity, open local bank accounts, or navigate unfamiliar incorporation processes.

Compliance Assurance

EORs specialize in staying current with employment laws across multiple jurisdictions. This expertise minimizes your risk of non-compliance with constantly changing regulations around minimum wage, overtime, paid leave, and termination requirements.

Focus on Core Business

By outsourcing employment administration, your team can focus on business growth rather than HR paperwork. This is particularly valuable for smaller companies without dedicated HR departments.

Flexibility for Testing Markets

EORs provide a low-commitment way to establish presence in new markets. You can hire local talent without long-term infrastructure investments, making it easier to pivot if needed.

Simplified Multi-Country Operations

Managing employees across multiple countries means dealing with different languages, time zones, currencies, and legal systems. An EOR consolidates this complexity into a single relationship.

Benefits of Being a Common Law Employer

While Employers of Record offer significant advantages for global expansion, operating as a common law employer provides unique benefits that many organizations find invaluable as they grow:

Complete Control

As a direct employer, you maintain full control over all aspects of the employment relationship without any third-party involvement.

Brand Consistency

Employees have a direct connection to your company without the potential confusion of being legally employed by another entity.

Cost Efficiency at Scale

While EORs charge ongoing fees per employee, establishing your own entity can be more cost-effective once you reach a certain headcount in a specific location.

Customized Employment Policies

You can create employment policies that perfectly align with your company culture rather than working within an EOR's standardized framework.

Direct Access to Local Incentives

Some countries offer tax incentives or grants to companies that establish local entities and create jobs, which you might miss when using an EOR.

When to Choose an Employer of Record vs. Common Law Employer

Deciding between an Employer of Record or a Common Law Employer structure is a strategic decision that depends on your business goals, timeline, and resources. We've created this guide to help you navigate this important choice based on common business scenarios:

For Rapid International Expansion

If speed is your priority, an EOR offers the fastest path to hiring internationally. With an established EOR, you can onboard employees in new countries within days rather than the months it typically takes to set up a legal entity. This makes EORs ideal for companies that need to:

• Quickly secure top talent before they accept other offers
• Respond to time-sensitive market opportunities
• Launch projects with tight deadlines in new territories

For Flexibility and Lower Initial Commitment

EORs provide valuable flexibility for businesses testing new markets or dealing with uncertain conditions. Consider an EOR when:

• You're unsure about long-term prospects in a specific country
• You want to validate market fit before significant investment
• Your business needs may change rapidly due to economic conditions
• You need the ability to scale up or down quickly without legal complications

For Small Teams in Multiple Countries

The economics of international employment favor EORs when you have small teams spread across multiple countries. The cost of establishing and maintaining legal entities typically exceeds EOR fees until you reach a certain headcount threshold (usually around 10-15 employees per country). An EOR makes financial sense when:

• You have just a few employees in each country
• Your international workforce is distributed across many jurisdictions
• You want to avoid maintaining multiple small legal entities

For Long-Term, Established Operations

As your presence in a specific country grows, transitioning to a Common Law Employer structure often becomes advantageous. Consider establishing your own legal entity when:

• You have a substantial and growing team in a specific country
• Your long-term strategy includes deep market penetration
• The cumulative cost of EOR fees exceeds entity setup and maintenance
• You want to build a stronger local brand presence and corporate identity

For Complete Control and Customization

While EORs offer convenience, they do introduce a third party into your employment relationships. Becoming a Common Law Employer gives you maximum control when:

• You need highly customized employment policies beyond standard templates
• Your industry has unique regulatory requirements or compliance concerns
• You want to directly shape every aspect of the employee experience
• Your company culture requires specific approaches to employment

For Accessing Local Business Incentives

Many countries offer significant benefits to companies that establish local entities and create jobs directly. Consider the Common Law Employer approach when:

• Tax incentives or grants are available for foreign direct investment
• Government contracts require local business registration
• Building relationships with local officials and agencies is strategically important
• You want to participate in local business development programs

Bottom Line

The choice between using an Employer of Record or becoming a Common Law Employer depends on your specific business needs, growth stage, and international strategy.

An EOR makes the most sense when you're expanding internationally, need to move quickly, or want to minimize administrative complexity. It's a flexible solution that reduces risk while allowing you to access global talent.

Being a Common Law Employer works best when you have an established presence in a location, need complete control over the employment relationship, or have reached a scale where direct employment is more cost-effective.

Many companies actually use both models simultaneously - operating as Common Law Employers in their primary markets while using EORs to expand into new territories or hire remote workers in countries where they don't have entities.

The right approach is the one that balances your need for control, compliance, speed, and cost-effectiveness based on your unique business circumstances.

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