A company hiring its first employee in Germany faces a problem. Germany requires a registered legal entity to employ someone. Setting one up takes months, costs thousands in legal fees, and creates ongoing accounting and compliance obligations. But the candidate won't wait three months for the paperwork.
An employer of record solves that problem. A payroll provider does not. The two services are often mentioned together and sometimes confused, but they handle fundamentally different parts of the employment relationship.
What an employer of record does
An employer of record (EOR) is a company that becomes the legal employer of your workers in a given country. It already has the registered entity, the local bank accounts, the statutory benefit registrations, and the compliance infrastructure in place. When you hire through an EOR, the worker signs a contract with the EOR, and you sign a separate services agreement with the EOR covering the commercial terms.
The EOR handles everything that legal employment in that country requires. It withholds income tax according to local rules, pays employer social contributions, registers the worker for mandatory benefits, ensures the employment contract meets local labor law minimums, and manages termination procedures when employment ends. If a worker in France files a claim with the labor tribunal, the EOR is the respondent, not your company.
For the worker, the employment experience is largely the same as working for any local employer. They receive a local contract, a local payslip, local benefits, and local statutory protections. The fact that the commercial client is your company rather than the EOR is visible in the services agreement but not in their employment documents.
What a payroll provider does
A payroll provider calculates gross pay, applies the correct deductions, and distributes net pay to employees. It handles the math and the mechanics of payment. It does not hold any legal employment relationship.
To use a payroll provider in a foreign country, your company must already be the registered employer in that country. That means you have a local legal entity, a local bank account, and local employer registrations with the tax authority and social security system. The payroll provider then operates within that structure, ensuring calculations are correct and filings are submitted on time.
The distinction matters because the legal liability stays with you. If the payroll provider miscalculates a tax withholding, your company faces the fine, not the provider. If local labor law changes and the provider doesn't update their system in time, your company is non-compliant.
When to use each
The decision follows the structure of your international presence.
Use an EOR when: You have no registered entity in the country. You're hiring a small number of people (typically fewer than 10) and the cost of setting up a local subsidiary doesn't justify itself. You're entering a market to test it and want to be able to exit cleanly without dismantling a corporate structure. You need to hire quickly, within weeks rather than months.
Use a payroll provider when: You already have a registered entity and employed staff in the country. Your headcount in the country is large enough that the per-employee EOR fee becomes more expensive than maintaining your own entity. You need local control over employment contracts, benefit structures, and HR policy that an EOR arrangement doesn't provide.
EOR fees typically run $199 to $599 per employee per month, varying by country and provider. At that cost, an operation with 20 employees in a single country pays $4,000 to $12,000 per month in EOR fees. A local subsidiary with a local payroll provider might cost $1,500 to $3,000 per month at similar headcount once the setup costs are amortized. The crossover point varies but is commonly cited at 8 to 15 employees per country.
The contractor misclassification problem
Some companies try to avoid both options by classifying international workers as independent contractors. For genuinely independent work, this is legitimate. For workers who function as full-time employees, it creates significant legal exposure.
Labor authorities in France, Germany, Spain, Brazil, and most of the EU apply economic reality tests to classify workers. They look at whether the worker works exclusively or primarily for one company, whether the company controls how and when the work is done, and whether the worker bears real financial risk. If a worker passes those tests, they are an employee under local law regardless of what the contract says.
Penalties for misclassification include back payment of employer social contributions for the entire employment period, interest, and fines. In Brazil, the misclassification risk is particularly acute because employees are entitled to FGTS contributions (8 percent of salary into a severance fund) and a 40 percent penalty on the FGTS balance at termination. A company that misclassified a Brazilian worker earning $60,000 per year for three years faces a retroactive bill that can exceed $80,000 before penalties.
Setting up a local subsidiary versus using an EOR long-term
Setting up a local subsidiary makes sense when the headcount justifies it, when you need IP ownership in that jurisdiction, when you're bidding for government contracts that require local entity status, or when local investors or partners require it.
The setup process typically takes 2 to 6 months depending on the country. Germany and the Netherlands run faster than Brazil and Argentina. Costs include legal fees ($3,000 to $15,000), registered office expenses, director appointment requirements, and ongoing accounting and audit obligations.
Once a subsidiary exists, transitioning workers from an EOR to the subsidiary is administratively straightforward but requires new employment contracts and formal notice. Workers in countries with strong termination protections have the right to object to transfers in some jurisdictions, so the transition should be managed with local legal advice.
Frequently Asked Questions
What is the difference between an employer of record and a payroll provider?
An employer of record (EOR) becomes the legal employer of your workers in a given country. It signs employment contracts, handles statutory benefits, withholds taxes, and bears legal liability under local labor law on your behalf. A payroll provider assumes none of that legal responsibility. It calculates gross pay, deductions, and net pay, then sends the money. To use a payroll provider internationally, you must already have a registered legal entity in that country. An EOR lets you hire without one.
When should a company use an employer of record?
An EOR makes sense when a company wants to hire in a country where it has no registered legal entity, when the headcount is too small to justify setting up a local subsidiary (typically fewer than 10 employees), or when the company is testing a new market and wants to hire quickly without committing to a permanent structure. EOR fees typically run $199 to $599 per employee per month depending on the country and provider.
What are the risks of misclassifying an international employee as a contractor?
Classifying a worker as an independent contractor when local law treats them as an employee exposes the company to back taxes, unpaid statutory benefits, and penalties. Countries like France, Germany, Spain, and Brazil have strict tests for employment status that look at exclusivity, control, and economic dependence, not the label on the contract. Penalties can include multiple years of back social contributions plus interest and fines.
How long does it take to hire through an employer of record?
Most EOR providers can onboard a new employee in 1 to 2 weeks in straightforward markets like the UK, Canada, and Australia. More complex jurisdictions with mandatory registration steps or union notification requirements, such as France, Germany, and Brazil, can take 3 to 4 weeks. This is significantly faster than setting up a local subsidiary, which typically takes 2 to 6 months depending on the country.