Employer of Record vs. Contractor: Differences, Risks, and More

Hiring talent across borders has never been easier, but figuring out the best way to do so — and do so compliantly — can be confusing.

Suppose you want to expand your company globally without establishing legal entities in other countries. In that case, two popular options are working with an Employer of Record (EOR) or hiring independent contractors with a Contractor of Record.

These options initially seem similar since they both let you hire international talent without establishing a local entity. However, there are some important differences in how they work.

In this post, we'll break down what sets an EOR apart from a Contractor of Record, highlight the pros and cons of each, and help you figure out which makes the most sense for your business.

Key takeaways:

• A Contractor of Record helps businesses engage international independent contractors by managing contracts, payments, and compliance with local labor laws.
• EORs are ideal for long-term hiring, while Contractors of Record are better for short-term or project-based work.
• A hybrid approach — working with an EOR and a Contractor of Record — allows you to build a global workforce that includes full-time employees and contractors.

What is an Employer of Record?

An EOR is an organization that enables businesses to expand internationally by legally employing workers on a company's behalf. This arrangement allows businesses to hire employees in different countries without establishing a local legal entity.

The EOR manages all employment-related responsibilities, including global payroll, tax compliance, benefits administration, and adherence to local labor laws. At the same time, the client company oversees the employees' day-to-day activities.

Partnering with an EOR lets companies mitigate the risks associated with international employment, such as misclassification of workers and noncompliance with local regulations. Plus, it makes it easy for businesses to hire internationally, especially when 40% of employers plan to increase global hiring in the near future.

Learn more about Employers of Record and how they work.

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When Should Businesses Choose an EOR?

There are numerous benefits to working with an EOR. Here are a few situations when you should consider partnering with one.

• You want to hire workers in a country where you don't have a legal entity. Establishing a legal presence can be complicated, time-consuming, and expensive.

• A new opportunity requires you to hire international talent quickly. An EOR enables you to hire and onboard employees in a fraction of the time while ensuring compliance.

• You need to hire international workers for a limited-term project. Instead of setting up a legal entity for a brief period to hire abroad, you can use an EOR to manage personnel for the length of the project.

• You want to minimize legal risks. Labor laws vary from country to country, and the penalties for not adhering to each nation's unique laws can be severe. An EOR takes on the legal responsibility for compliance, including everything from worker classification to tax reporting.

What is a Contractor?

A contractor is someone brought on to complete specific tasks under a set agreement, but unlike employees, they operate independently under a contractual agreement.

They handle their own taxes, benefits, and business expenses and typically aren't entitled to company perks like health insurance, paid time off, or equity.

Because of this, hiring contractors can be a more cost-effective option for companies, which is why about one-third of employers say they plan to expand their contractor workforce.

Read more: 7 Benefits of Hiring Contractors vs. Employees

Pros and Cons of an EOR vs. a Contractor

Let's look at the advantages and disadvantages of working with an EOR vs. hiring contractors.

EOR Pros:

• Allows companies to hire in different countries without setting up a local entity
• Ensures legal compliance with all local labor laws
• Manages contracts, onboarding, benefits administration, tax compliance, and payroll, as well as assumes risk on behalf of your business
• Your business maintains ownership of all intellectual property

EOR Cons:

• You may have less control over local HR practices
• Due to the scope of its support, they may be costly for small businesses

Contractor Pros:

• Can be more affordable for short-term projects
• Offers more flexibility in hiring
• Companies have fewer tax obligations and legal responsibilities

Contractor Cons:

• There's a greater risk of legal issues due to potential employee misclassification
• Companies have less control over workers' processes and may not retain intellectual property rights

Options for Global Employment

Companies looking to hire employees globally can do so in several ways, including:

• An EOR platform that allows businesses to outsource the complexities of employment, payroll, and compliance responsibilities
• Opening their own legal entity in every country where they employ workers

Options to Hire Global Contractors

Businesses that want to employ contractors have a few methods to choose from, including:

• Online freelancer marketplaces like Fiverr, Upwork, or Toptal
• Communities, networking, LinkedIn
• Contractor of Record, which is a service offered by most EORs

What is a Contractor of Record?

A Contractor of Record is a service that makes it easier for companies to hire and work with independent contractors and freelancers worldwide.

Contractors of Record handle details such as contract management, invoicing, tax documentation, and payroll for contractors and freelancers, and they ensure compliance with local labor laws.

When Should Businesses Use a Contractor of Record?

Here are a few situations when you should consider partnering with a Contractor of Record.

• You want to hire freelancers or contractors, especially in multiple countries. Each country has its own labor laws, so partnering with a Contractor of Record ensures that your hires are properly onboarded, classified, and paid, according to local regulations.

• You need to hire talent for a limited time in a country where you don't have a legal presence. While EORs focus on full-time employees, Contractors of Record specialize in managing international workers hired for short-term or project-based assignments.

• You need to hire international talent quickly without committing to full-time employment. Certain businesses, such as startups and agencies, rely on global contractors to help them build flexible, cost-efficient teams.

Which Do You Choose?

How do you determine whether an Employer of Record or a Contractor of Record is best for your business? 

Choose an Employer of Record if:

• You want to hire full-time employees in a country where you don't already have a legal entity established.
• You plan to expand into a new market and want to test it without setting up a local entity.
• You want to ensure compliance with local labor laws, tax regulations, and employment standards in other countries.
• You want to offer international employees benefits like healthcare, pensions, or paid time off.
• You're concerned about the risks of employee misclassification.
• You need full HR support, including contracts, payroll, and termination assistance.
• You're hiring for long-term roles requiring company culture and processes integration.

Choose a Contractor of Record if:

• You need to hire freelancers or independent contractors for short-term or project-based work.
• You want to maintain flexibility and scalability without committing to full-time employment contracts.
• You need to engage contractors in multiple countries, but don't have legal entities.
• You want help with compliance, contracts, invoicing, and tax documentation for contractors.
• You need to scale your contractor workforce quickly without increasing the workload for your internal HR team.
• You're hiring specialized talent for temporary or freelance roles that don't require benefits or long-term commitments.

You can also choose a hybrid approach if you need both full-time international employees and independent contractors for shorter-term projects.

What to Look for in an EOR or Contractor of Record

Choosing the right EOR or Contractor of Record significantly affects how smoothly your international hiring and compliance efforts go, so here's what to look for.

Compliance Expertise

Employment laws vary widely across countries and can change anytime, so a good EOR or contractor service provider should have in-depth knowledge of local labor laws, tax regulations, and worker classification rules.

Infrastructure and Support

Does the provider have an established presence in the countries where you want to hire? Does it offer localized HR support, payroll, and benefits administration? 

A quality EOR will have systems and legal and HR experts to handle everything from employment contracts to employee terminations. At the same time, Contractor of Record services should offer efficient onboarding and flexible invoicing.

Transparent Pricing

Look for providers that offer upfront pricing without hidden fees, and ensure that all potential costs are disclosed and that the pricing aligns with your budget.

Data Security

Verify that the organizations comply with international data protection regulations, such as the General Data Protection Regulation (GDPR). Inquire about their data security protocols, including encryption, access controls, and data breach response plans.

Ease of Use & Integration Capabilities

Assess whether the provider offers user-friendly platforms for onboarding, payroll management, contractor invoicing, and more. Additionally, consider the EOR's ability to integrate with your existing HR systems.

Experience With Similar Companies

It's beneficial to partner with an EOR with experience working with companies in your industry or of similar size so that they can provide you with the best possible support.

Excellent Reputation and References

Research the providers' ratings and reviews, check in with industry peers, and seek client references and testimonials before hiring an EOR or Contractor of Record.

Partner With RemoFirst for Your International Hiring Needs

Choosing between an Employer of Record and an independent contractor model comes down to your company's goals, risk tolerance, and long-term hiring strategy.

At RemoFirst, we make it easy to hire employees in 185+ countries as well as manage and pay contractors in 150+ countries.

‍Book a demo to learn how we can make international hiring a breeze.