Employer of record explained

An employer of record (EOR) is a company that becomes the legal employer of your worker in a country where you do not have your own entity. It holds the employment contract, runs local payroll, withholds and remits taxes and social contributions, and carries the local employment compliance, while you direct the person’s actual work. In exchange, you pay the EOR the employment costs plus a fee. It is one of the two main ways to employ someone abroad, the other being to set up your own entity, and knowing when each fits saves a lot of money and risk.

This guide explains what an EOR does, how it differs from an entity and from a contractor, what it does not solve, and how it sits alongside your own HR record. The specifics of employment law, tax and what a given EOR includes vary by country and by provider and change over time, so confirm the details with the provider and with local counsel before you rely on them.

What an EOR actually does

When you engage an EOR for a hire, the EOR’s local entity signs the employment contract with the person. From the worker’s point of view, the EOR is their employer: it pays their salary, operates local payroll, withholds income tax and social contributions, provides statutory benefits and leave, and handles the local filings and paperwork. From your point of view, you have someone working for you in a country where you never had to incorporate.

You still do the things that make them part of your team: you decide what they work on, manage them day to day, set their objectives, and (within local limits) their pay. What you hand over is the legal employer role and the local compliance burden that comes with it. The EOR invoices you for the salary, the employer contributions, and its margin.

EOR versus your own entity

Setting up your own entity means incorporating in the country, registering as an employer, and running payroll and compliance yourself or through local providers. It is a standing commitment with real overhead: filings, an accountant, a registered presence, and a wind-down cost if you later leave.

An EOR removes that commitment for a per-employee fee. The trade is straightforward: an EOR is faster to start, avoids incorporation, and is well suited to a first hire or two in a market you are testing. Your own entity gives you full control, avoids the per-head margin, and becomes cheaper once you have enough people in the country that the EOR fees outweigh the cost of running the entity. There is no universal crossover point; it depends on the country and the provider. A common and sensible pattern is to use an EOR to get started, then set up an entity once the headcount justifies it. The sequencing post walks through the order that tends to work: contractor first where genuine, EOR next, your own entity last.

EOR versus a contractor

An EOR and a contractor are not two versions of the same thing. With an EOR, the person is a real employee, with local employment rights, statutory benefits and protections, employed by the EOR. A contractor is self-employed, runs their own business, invoices you, and carries their own tax and benefits.

The distinction matters because using a contractor to sidestep the cost of employment, when the relationship is in substance employment, is misclassification, and regulators across countries look at the real substance rather than the label. Misclassification can bring back taxes, contributions and penalties, and expose you to employment entitlements you thought you had avoided. An EOR is a lawful way to employ someone without your own entity; a contractor arrangement is lawful only when the person genuinely is an independent contractor. If you are weighing the two, read contractor versus employee for the tests that actually get applied, and hiring global contractors for the engagement side.

What an EOR does not solve

An EOR is not a magic wand, and a few honest caveats are worth stating. It costs more per head than employing directly, because you are paying for the entity and service. You have less control over the employment terms, since the EOR must keep the contract compliant with local law and its own policies. Intellectual property assignment needs care, because the person’s employer is the EOR, not you, so the chain by which their work belongs to you must be set up correctly. Some providers are stronger in some countries than others, and the definition of what is included varies, so read the scope. And an EOR employs one person at a time for you; it is not the same as having a local presence for other purposes such as contracting, invoicing or a registered office.

An EOR also does not, by itself, give you a single clear picture of your whole team. Each EOR is its own system, and if you use different providers in different countries, plus your own entity somewhere, plus contractors, you can easily end up with several partial views of who works for you and no complete one. That is a records problem, not an employment one, and it is where a system of record earns its place.

How an EOR sits alongside your HR record

However someone is employed, through an EOR, through your own entity, or engaged as a contractor, they are part of your team and belong in one directory. The mistake is to let the EOR’s portal be the record for the people it employs, the entity’s payroll be the record for the people it employs, and a spreadsheet be the record for contractors. Then no single place answers who works here.

Capstan is not an employer of record. It does not employ anyone on your behalf, run statutory payroll, or file with any authority. What it is is the system of record that holds everyone in one workspace regardless of how they are engaged: employees under your entity, employees placed through an EOR, and contractors, each with the right structure underneath so a contractor cannot pick up employee access or count toward employee headcount. Where you do run payroll yourself in a country, the payroll module compiles clean inputs for your local provider and files their computed results back onto the record. When your people are employed across more than one arrangement, you are effectively running HR across multiple entities, and holding it in one place is what stops month end becoming a reconciliation exercise.

Where to go next

For the bigger picture of hiring across borders and how the entity, EOR and contractor routes fit together, start with the overview of hiring employees internationally. The country notes under it, such as Germany, the UK and Canada, each say where the EOR route tends to make sense for that market. And confirm what a specific EOR includes, and what local employment law requires, with the provider and with local counsel before you commit.