A Guide to Employer of Record (EOR) Contracts

With the popularity of remote work, many companies are expanding their teams globally. 41% of companies (including Fortune 500 companies) are already utilizing EOR services to manage their distributed teams. For founders and HR leaders, this model is the ultimate express lane to international talent. In APAC alone, 77% of employers struggle to find specialized skills within their own borders.

But here’s the high-stakes truth: while the model is popular, your protection isn’t automatic. The success (and safety) of your expansion rests entirely on the fine print of your EOR service contract. 

In this article, we’re going beyond the basics to drill down into the crucial legal, financial, and operational clauses that protect your business in the long run. Let’s make sure your contract is truly rock-solid.

Essentials of an EOR Service Agreement

The EOR relationship is inherently triangular, involving the Client Company (you, who directs the work), the EOR Provider (the legal employer), and the Employee (the worker). The contract must explicitly define how this three-way relationship functions.

Jurisdiction & Governing Law

Here’s the golden rule: the contract’s governing law must be the labor law of the employee’s country of residence. Trying to enforce your headquarters’ laws on an international employee will almost always fail in local courts, leaving you exposed. Your EOR needs to nail this every time.

Suppose you’re a company from the U.S. who hires a developer in Bangkok. In the States, you might be used to “at-will” employment, where you can end a contract at any time. However, Thailand’s Labor Protection Act (LPA) is strictly enforced. Under the LPA, you must provide a written notice at least one full pay period in advance and pay mandatory severance (up to 400 days’ wages for long-term staff). 

Even if your contract says “California Law governs this agreement,” a Thai labor court will override it. Ignoring these local “mandatory rules” can lead to expensive lawsuits and even criminal penalties for the EOR. Although they are the legal employer, the cost associated with these penalties will trickle back to you.

Scope of Services & Responsibility Allocation

The contract has to clearly draw the line between the EOR’s administrative responsibilities and your ongoing management responsibilities:

Party	Responsibilities (EOR)	Responsibilities (Client Company)
Legal	Issuing compliant local contracts, payroll tax filing, statutory benefits administration.	Defining the job role, setting salary, managing performance, providing equipment.
Operational	Managing local registration, tracking statutory leave/hours, handling local HR inquiries.	Assigning daily tasks, project management, managing company culture.

The “Direct” vs. “Aggregator” Clause

There are two types of EOR models: direct and aggregator. Direct EOR models are when a provider owns and operates its own legal entities in the countries it serves. This means tighter control, faster issue resolution, and usually a single point of liability for you. 

On the other hand, an aggregator/partner EOR provider  uses a network of local third-party firms. While it offers broad coverage, this model can introduce inconsistent service quality, fragmented Intellectual Property (IP) ownership, and complex indemnity claims if something goes wrong.

Asking about their EOR structure is essential because the Aggregator Model often leads to “lost in translation” moments. If there’s a payroll error or a legal dispute, you have to wait for the EOR to talk to their partner, who then talks to the local authorities. In the Direct Model, the EOR is the local authority for your worker, leading to much faster resolution and clearer legal liability.

Financial Transparency & Total Cost of Employment (TCE)

Focusing only on the EOR’s monthly service fee is a common and costly mistake. The number you really need to calculate is the Total Cost of Employment (TCE). Make sure your agreement clearly itemizes every single component of the total invoice:

• Service Fee: The EOR’s profit (often a flat monthly fee or a percentage of the gross salary). 
• Worker Cost: This includes the employee’s gross salary, plus all employer taxes, social security contributions, and mandatory insurances.

Statutory vs. Supplemental Benefits

The EOR must administer statutory benefits (e.g., minimum paid leave, national healthcare). The contract needs to clearly define how your supplemental benefits (private health insurance, gym stipends, stock options) are handled, ensuring they are compliant and correctly taxed in the local market.

Protecting the “Crown Jewels”: IP & Data Privacy

Since the EOR is the legal employer, protecting your Intellectual Property (IP) requires a critical. This is especially true if you’re dealing with your client’s personal data or if you have trade secrets that need to be protected. 

Back-to-Back IP Assignment

We have to ensure the legal chain of ownership is fully compliant and leaves no room for ambiguity:

1. Employee to EOR: The local employment contract must mandate that all work product (including code, designs, trade secrets, and inventions) is assigned to the EOR immediately upon creation. This is vital because many countries default ownership to the legal employer of record.
2. EOR to Client: Critically, the master service agreement must contain a “back-to-back” clause where the EOR explicitly assigns all IP to you.
3. Moral Rights Waiver: In jurisdictions like France or Germany, creators have “moral rights” that cannot be transferred. Ensure your contract includes a clause where the employee agrees to waive or not assert these rights, preventing them from blocking your use of the work later.

Data Sovereignty and Compliance

You need ironclad assurances that your sensitive employee data is secure and compliant with global privacy laws such as GDPR, LGPD, or CCPA. Failure here can lead to fines reaching 4% of your global annual turnover.

• Role Definition & DPA: Clearly define the EOR’s role as the Data Processor and your role as the Data Controller. This should be formalized in a detailed Data Processing Addendum (DPA) that outlines security protocols and breach notification timelines (ideally within 48–72 hours).
• Data Residency & Transfers: Demand a clause that specifies where sensitive personal data is stored (e.g., “Data will only be stored on servers located within the EU/EEA”). If cross-border transfers are necessary, ensure the EOR uses approved legal mechanisms like Standard Contractual Clauses (SCCs).
• Audit Rights: The agreement should grant you the right to audit the EOR’s data security practices periodically to ensure they maintain the high standards required by your industry.

The Exit Strategy: Termination & Offboarding

Part of your service agreement with an EOR is termination and offboarding of your employees. Different countries have different rules for terminating an employee. Your EOR must be operationally ready and contractually obligated to enforce these rules with precision.

Termination and Severance Clauses

A vague termination clause is a litigation magnet. Your agreement needs to be granular about the financial and administrative burden of offboarding:

• Funding Responsibility: The contract must explicitly outline which party funds statutory severance payments, redundancy costs, and any administrative penalties resulting from non-compliant or “unfair” terminations. Typically, these costs are passed through to you, so you need a transparent estimation tool from the EOR before a termination is initiated.
• Statutory Notice Compliance: It must mandate that the EOR follows the local statutory notice period strictly. Failing to provide the correct notice can lead to “wrongful dismissal” claims where the EOR is the defendant, but you are the financier.
• Just Cause Documentation: In many jurisdictions (like Brazil or France), firing someone without “just cause” (e.g., gross misconduct) requires significant documentation and higher payouts. The contract should specify how the EOR will assist you in gathering performance data to mitigate these costs.

Employee Transition & Transfer

What if your international expansion is too successful and you decide to set up your own legal entity later? Your contract should not be a cage; it must define a smooth, predictable process for moving employees from the EOR to your new local entity.

• Transfer Mechanics: Ensure there are specific clauses that prohibit the EOR from charging exorbitant “buy-out” or “transfer fees” for an employee you sourced and managed yourself. A fair contract allows for a transition after a certain period (e.g., 12 months) with minimal administrative fees.
• Continuity of Service: The agreement should outline how “length of service” is handled during a transfer. In many countries, the new entity must recognize the employee’s original start date with the EOR for the purpose of calculating future benefits and severance, and the EOR must provide the necessary records to facilitate this.
• Non-Solicitation Protections: While the EOR shouldn’t block you from taking your team to your own entity, you should ensure they are contractually barred from “poaching” your talent for other clients during or after the transition period.

To ensure all your needs are met, RecruitGo provides personalized HR and EOR services so you can build remote teams quickly. During your onboarding and consultation process, we want to understand your business and how you operate as an organization. So instead of going through the complex process of building an entity, you can capture the market quickly with RecruitGo’s EOR. 

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