Recruit
Key Takeaways
- A contract is essential when forming a working relationship with an EOR service.
- Key clauses should cover the scope of services, define roles, and outline legal responsibilities.
- Drafting an effective contract can be challenging, but the benefits of having one far outweigh the costs.
- Consult a legal expert to ensure any EOR contract is effective and enforceable.
An Employer of Record (EOR) contract outlines the legal terms, responsibilities, and service scope between your business and the EOR provider. It defines how employment will be managed, from payroll and taxes to compliance and employee benefits.
In this guide, we break down what a strong EOR contract should include, whether it needs to be tripartite, and key considerations for structuring it to protect your business and your team.
What Is an Employer of Record (EOR) Contract?
An Employer of Record (EOR) contract is a legally binding agreement between a company and an EOR provider that clearly defines each party’s roles and responsibilities. It outlines how employment will be handled – covering essentials like payroll, taxes, statutory benefits, and compliance with local labor laws.
Under this arrangement, the EOR acts as the legal employer in the target country, ensuring all employment processes align with local regulations. Meanwhile, your company retains full control over day-to-day operations, such as assigning tasks, managing performance, and setting goals.
Choosing to work with an EOR instead of establishing your own legal entity allows you to hire internationally with fewer administrative burdens and significantly lower legal risk. It’s a flexible, efficient way to expand into new markets without getting tangled in red tape.
EOR contracts can take different forms depending on the legal framework, the hiring country, and the level of involvement between the parties. Below are the three most common structures used in Employer of Record agreements and what they mean for your business, the EOR provider, and your employees.
Common EOR Contract Structures
EOR contracts can take different forms depending on the legal framework, the hiring country, and the level of involvement between the parties. Below are the three most common structures used in Employer of Record agreements and what they mean for your business, the EOR provider, and your employees.
Tripartite Agreements
Sometimes it is possible for an EOR contract to be structured as a tripartite agreement. This means that there is one contract, signed by the Employer of Record, the client company, and the EOR employee.
However, EOR contracts are not usually tripartite agreements. Most EOR contracts are bipartite, involving just the company and the EOR provider signing a service agreement. The employee then signs a separate employment contract with the EOR company. In that case, we would say that there are two legal contracts, but one tripartite relationship.
EOR Employee Contracts
The EOR employee contract is a locally compliant employment contract containing all the standard provisions of an employee agreement in that country. This includes responsibilities, working hours, pay, leave, and how disputes will be resolved.
An Employer of Record (EOR) employee contract differs from a regular employee contract in terms of which party holds specific legal and administrative responsibilities. In a regular employee contract, the hiring company directly manages all aspects of the employment relationship, including payroll, taxes, and benefits.
In an EOR employee contract, the EOR provider takes over legal responsibility for compliance and administrative functions while the employee still works operationally for the client company. As a result, some clauses, especially those related to legal obligations and compliance, will differ significantly.
Differences between EOR Employee Contract and EOR Contract
| Clause | Regular Employee Contract | EOR Contract |
|---|---|---|
| Employer Responsibility Clause | The hiring company is responsible for all legal aspects of employment, such as withholding taxes and social security contributions and ensuring compliance with local labor laws. | This responsibility shifts to the EOR provider, who manages payroll, pays taxes, provides benefits, and ensures compliance with employment regulations in the employee’s country of residence. This clause also clarifies that while the EOR is the legal employer, the client company retains control over day-to-day work tasks, performance management, and decisions on promotions or terminations. |
| Dispute Resolution or Governing Law Clauses | Dispute resolution typically follows the legal framework of the company’s home country, with employment disputes settled under that jurisdiction’s laws. | Employment-related disputes are governed by the laws of the employee’s country, as the EOR is legally responsible for compliance there. For instance, if an employee in Brazil has a dispute, the contract refers to Brazilian labor laws and dispute resolution processes, even if the client company is headquartered elsewhere. |
This distinction ensures the employee’s rights are protected under local laws, a crucial aspect of the EOR arrangement.
Employer of Record (EOR) Service Agreement
An Employer of Record (EOR) service agreement (also called a ‘service-level agreement’) is a contract between a company and an EOR provider, outlining the terms and conditions under which the EOR will handle employment responsibilities on behalf of the company. The service agreement typically includes clauses detailing the scope of services provided by the EOR, the division of responsibilities between the company and the EOR, compliance obligations, and the fees associated with the EOR services.
When the agreement is with a local co-employer, rather than an EOR, it is known as a Professional Employer Organization contract.
Below, we break down the key terms you’ll typically find in an EOR service agreement.
What Terms Should Be Included in Employer of Record (EOR) Contracts?
As with any business agreement between two parties, the purpose of an EOR contract is to clarify the relationship between the EOR and its client company. This includes defining the scope of services to be carried out and the role and responsibilities of each party.
It should also feature the key clauses regarding confidentiality, data protection, and dispute resolution. By agreeing and documenting these elements in a legally binding framework, both the EOR and its client can go forward in their relationship with confidence.
1
Scope of services
One of the most important elements of any EOR contract is the section that defines the scope of services. Typically, this covers:
- Handling any or all parts of the employment cycle from hiring workers, issuing contracts, and managing payroll.
- Administering benefits
- Dispute settlements
- Terminations
- Ensuring compliance with local labor laws in every action it takes.
Among the most complex services offered by an EOR are payroll management, compliance with local labor laws, and HR management. For a successful relationship, it is vital the parameters and responsibilities of these elements are clearly outlined in a written contract.
For example, in payroll management, this might include what method will be used for salary calculations, what the frequency of payments will be, and what benefits or deductions should be administered.
Ambiguous liability and future disputes regarding labor laws can be avoided by stating exactly what areas the EOR will take responsibility for, such as employment contracts, termination processes, employee rights, and statutory benefits. Expressly stating where liability lies prevents confusion arising at a later stage.
In addition to this, due to the usual arrangement which sees an EOR taking the role of the legal employer, but the worker actually performing their day-to-day duties with the client company, it is important to define which HR management functions will be the responsibility or the EOR and which, if any, will be handled by the client company. This is an important respect in which Global EOR companies differ from payroll outsourcing providers (the latter take care of payroll, but don’t become the legal employer). Read more in our EOR vs Global Payroll Guide.
As an example of assigning HR responisbilities, it may be convenient for the client company to control rotas and schedules, while performance management or grievances might better fall within the scope of the EOR. Establishing exactly where this line exists will help ensure an efficient and uncomplicated relationship for all parties involved.
2
Roles and responsibilities
While the scope of services an EOR will be expected to carry out might be the primary concern of any contract with its client companies, this legal document is also an opportunity to clearly define all aspects of the roles and responsibilities of both parties. In doing so, misunderstandings and disputes can be minimized and, if they do arise, more easily resolved.
On the side of the EOR, these responsibilities may stretch beyond day-to-day HR management and legal compliance to maintaining complete records or representing the client in interactions with local authorities. For the client company, responsibilities that might typically be formalized in a contract include providing accurate information, making decisions in a timely manner, and ensuring all resources and funding needed for the EOR to fulfill its duties are supplied without restrictions or delays.
3
Key clauses
In addition to defining the relationship, any contract between an EOR and its client company should also include key clauses covering aspects such as pricing, confidentiality, data protection, and dispute resolution.
Pricing is perhaps the most important aspect to be clear on in the EOR contract including:
- Whether the price is per employee or percentage of payroll-based
- Whether the provider offers bulk discounts
- Whether there are currency exchange fees
- Whether there is an onboarding fee
- Whether there is a cancellation fee
- Whether an EOR security deposit is required.
Confidentiality and data protection responsibilities are important to define as the EOR is likely to have access to significant amounts of information about both the workers it hires and the client company. How these are stored, processed, and shared will be dictated by the needs of the business, the consent of the employees, and the regulatory framework both in the country of operations and, potentially, the home territory of the business.
It is vital that all parties understand their responsibilities in regard to data security and proper processing or sharing. This includes any legal responsibilities plus those agreed between the parties themselves. It should also cover both day-to-day operations and the one-off actions that must be taken in the event of a data breach, dispute, or the discovery of non-compliance.
Speaking of disputes, any worthwhile contract between an EOR and its client company should include a clear and agreed framework for dispute resolution in all areas of the relationship. This should cover the processes that will be employed in each circumstance, from negotiation and mediation to arbitration or, in the most extreme cases, litigation. In the interest of speedy resolution or in situations where the answer might be ambiguous, dispute clauses should also make it clear which jurisdiction and laws will be applied should legal proceedings be initiated.
Table: Essential Clauses for EOR Service Agreements
| Key EOR Contract Terms | Description |
|---|---|
| Price | Employer of Record contract should set out all prices, including onboarding fee, per-month fee, transaction fees, security deposits and cost of additional services. |
| Responsibilities of each party | Employer of Record contract should set out what the EOR is responsible for (like payroll and income tax withholding), and what the client company is responsible for (like corporate income tax, if any is owed). |
| Dispute Resolution | EOR contract must set out how disputes will be resolved and which country’s laws apply. |
| Contract Termination | Contract should set out how and when contract can be terminated, repudiated or cancelled. |
| Confidentiality and Data Protection | The Employer of Record agreement must set out responsibility for protecting employee information. |
| Liability and Warranties | The EOR contract must specify who is liable for what and whether there is any exclusion or limitation on liability. |
What Are the Benefits of EOR Contracts?
Contracts are an important tool for establishing a clear relationship, defining the nature of services, and outlining responsibilities. In an agreement between an EOR and a client, some of the specific benefits include:
Clearly defining legal obligations
When it comes to legal liability in a business relationship, there is no room for assumptions and implications.
A contract is an opportunity to create complete clarity when it comes to the legal obligations of each party. For the EOR, this can mean ensuring compliance with local labor laws. For the client company, this might mean providing accurate information and resources.
A contract should outline all legal requirements from all sides in as much detail as is necessary to remove all ambiguity and confusion throughout the working relationship.
Ensuring legal compliance
One of the key services of an EOR is ensuring compliance with local labor laws in all operations. This means being aware of the most up-to-date regulations and applying them rigorously. Failure to do so can result in heavy fines, reputational damage, and potential legal action from affected parties.
If it is not clearly stated in the contract that the liability for compliance falls on the shoulders of the EOR, the client company also remains at risk of being exposed to these negative consequences. If the client company is to be properly protected and free to focus on its core business, particularly in those territories with the most stringent laws and severe fines, any contract of service must be unequivocal in stating it is the EOR who will be liable for all aspects of labor law compliance.
Dispute minimization
Finally, a key purpose of an EOR contract is to ensure every part of the relationship with its clients is agreed upon and properly understood and that all expectations are set.
This is essential for reducing the potential for misunderstandings and disagreements. By creating a legally binding document that clearly outlines the roles and responsibilities of all parties, the potential for conflict can be minimized. Similarly, if and when issues do occur, a well-drafted contract will provide both a reference point for and a pathway to a speedy and amicable resolution.
Challenges in Drafting EOR Contracts/Agreements
When employing the services of an EOR, having a contract in place is essential. While a finalized contract comes with benefits, there are many challenges that must be negotiated to reach the stage where an agreement that satisfies all parties can be drafted.
Aligning Expectations
The first of these challenges, aligning expectations and responsibilities, involves bringing the preconceived ideas of each party together to reach an agreement everyone is happy to go forward with.
Each party may have different ideas on the best way to divide the scope of services or the level of involvement each should have with various aspects of an employee’s day-to-day work.
For instance, a client company may prefer to take control of performance management for the most efficient working practices while the EOR may see the need to look after this to maintain compliance with local labor laws. Transparent, open, and honest discussions are required at the time of contracting to find the most beneficial arrangement for all parties and to define it clearly within the contract.
Managing Costs
Another sticking point of EOR contract drafting can arise around the costs and fees for the service.
In a complex arrangement, the financial compensation for the services of an EOR is rarely a simple upfront cost. Fees may be issued for each part of the service, alongside requests for funding to complete payroll and fulfill other expenses.
Many past EOR arrangements have seen disputes arise when clients encounter what they believe are “hidden” fees. For this reason, it is important for an EOR contract to include a detailed breakdown of all potential costs and fees, when they will become due, and how they should be paid. That way, all parties can understand where they stand from the start and are accurately able to assess the value and affordability of the arrangement.
Ensuring Flexibility
Finding the right balance between establishing a clear framework for a working relationship and maintaining the flexibility a business needs to succeed can also be a challenge when drafting an EOR contract.
Business needs can change rapidly and may require altering the scope of services or division of responsibilities between an EOR and its client, even in the middle of a contract term.
Ensuring flexibility is built into any contract by allowing the potential for amendments while also providing enough certainty and stability for everyone to carry out their responsibilities efficiently and without restriction is a key challenge of EOR contracts.
Steps to Effectively Draft and Manage EOR Contracts
While drafting an effective EOR contract can be challenging, it is a vital part of entering such a relationship. Thankfully, there are several steps any business can take to help create and manage the best possible legal agreement with an EOR.
The first step any client company contracting an EOR should consider is employing the services of legal experts who specialize in contracting. This is an excellent way of ensuring that not only does the contract contain all the correct clauses and information, but that the wording is also clear, legally sound, and enforceable.
Once a contract has been created, agreed upon, and signed, it should not simply be filed and forgotten unless it is required for reference or dispute settlement. Effective contract management means regularly reviewing its contents to ensure it is still relevant for both the relationship and the legal framework that regulates it. Where necessary, it should be renegotiated and amended to reflect the evolving situation.
For the most successful relationship, clear communication channels should be established between the EOR and the client company, and should remain open throughout the course of working together. Provisions for regular meetings and reports should be made in the contract, and these should be adhered to. This allows performance to be monitored, concerns to be addressed, and plans for the future to be made well in advance. It also creates opportunities to clear misunderstandings and solve issues before they fully develop.
Alternatives to Employer of Record (EOR) Contracts: Freelancer Contracts, Legal Entities, and Local Employer Registration
EOR contracts have their pros & cons and are not the best hiring solution for every business. In light of this, it is worth considering some alternatives to EOR contracts.
One alternative to signing an Employer of Record (EOR) contract is hiring overseas workers as freelancers or independent contractors. This approach allows companies to avoid the formalities of employment contracts and related administrative duties like payroll, taxes, and benefits, which are all handled by the contractor. In this arrangement, the client company will sign contracts directly with the freelancer, without an intermediary like an EOR. However, this option carries risks, such as potential misclassification of workers as contractors when they should be treated as employees under local laws, which could lead to fines or legal liabilities. Read more about this option in our EOR freelancers guide.
Another alternative to an EOR contract is setting up a local entity, such as a subsidiary in the country where you plan to hire employees. In this situation, the client company would enter directly into an employment contract with the employee, as their local employer. While this option gives full control over the employment process, it requires a significant financial and administrative commitment, such as registering the entity, maintaining it, and ensuring ongoing compliance with corporate and labor laws, which an EOR contract would otherwise simplify.
A third alternative to an EOR contract is local employer registration, which allows a company to hire employees directly under local labor laws without establishing a full legal entity. This is an EOR alternative in Germany, for example. This option offers more control over employment decisions compared to an EOR arrangement but still requires navigating local regulations regarding payroll, tax filing, and labor compliance. As with setting up a subsidiary, the client company would enter into a contract directly with the employee.
Local employer registration can be a practical solution for companies needing to hire a few employees without setting up a permanent presence, though it still involves more administrative effort than simply outsourcing the employment management to an EOR provider. Note, there are a few Employer of Record companies, such as Workmotion, that provide this as a specially priced service.
Ensure Robust EOR Contracts Are In Place
Contracts are a vital part of any business relationship and legal agreements between EORs and the clients are no exception. Settling on terms for such a complex arrangement can be challenging, but the benefits of clarity, legal certainty, and creating the best environment for a productive collaboration far outweigh the costs and difficulties of establishing and defining such terms in a legally binding document.
To ensure you have the right Employer of Record contract in place, get in touch with Remote People to discuss your EOR requirements and ensure your employment setup is compliant from the start.
Frequently Asked Questions (FAQs)
An EOR contract is a legal agreement between a business and an Employer of Record provider. It outlines how the EOR will handle employment responsibilities, like payroll, benefits, compliance, and taxes, on behalf of the business. The contract defines each party’s obligations to ensure clarity, compliance, and a smooth working relationship.
Not exactly. An EOR contract is a service agreement between the client company and the EOR provider. The actual employment contract is signed separately between the EOR and the employee. So while both contracts relate to the employment arrangement, they serve different legal purposes.
Not always. Tripartite agreements, where the company, EOR, and employee all sign one contract, can be useful in certain jurisdictions, but most EOR arrangements use two separate agreements: one between the company and the EOR, and another between the EOR and the employee. This setup still forms a tripartite relationship, but with two distinct contracts.
A strong EOR service agreement should clearly outline the scope of services (like payroll, onboarding, compliance), division of responsibilities, confidentiality and data protection clauses, termination terms, and pricing structure. These details help avoid misunderstandings and ensure everyone’s on the same page from the start.
