The Employer of Record Agreement: What Is (and Should Be) in the Contract

An Employer of Record (EOR) agreement sets the rules for an employment arrangement involving three parties: your company, the EOR provider, and the employee. It divides the legal responsibilities of employment from day-to-day operational control, making it materially different from traditional employment contracts.

The EOR is the employee’s legal employer in the relevant jurisdiction, while your company directs the employee’s work and remains responsible for the commercial relationship. The agreement should reflect that split clearly, particularly where responsibilities overlap, or decisions carry lawful consequences.

This guide highlights the core provisions of the working arrangement. We’ll cover service scopes, legal clauses, and exit and contingency terms that should be in your EOR agreement. 

The Core Operational Terms

Every EOR arrangement relies on a clear operational division between administrative employment responsibilities and daily team management. 

The Tripartite Relationship

An EOR framework creates a three-way relationship between your company (the Client), the EOR provider, and the worker (the Supported Employee). However, the legal structure of this relationship usually takes one of two contractual forms:

Scope of Services and SLAs

A well-structured EOR contract establishes strict boundaries between what the EOR handles as the legal employer and what your team manages as the operational employer.

Pricing Models, Deposits, and Financial Terms

Clear financial terms make it easier to forecast the real cost of each international hire and avoid disputes over what the EOR can charge. When you lock in clear pricing rules upfront, you also prevent vendor overhead from silently inflating every time an international employee receives a merit raise, bonus, or statutory salary adjustment. 

Fixed vs Percentage Pricing Models

EOR pricing typically falls into two main categories:

• Flat Monthly Fee: The EOR charges a fixed fee per worker per month (typically ranging from $300 to $700 USD). This is the industry standard for full-time workers because it aligns incentives and keeps costs predictable.
• Percentage of Payroll Model: The EOR charges a percentage of the worker's total gross compensation (typically 8% to 15%). This pricing model can be costly for mid- to senior hires since EOR cost scales according to their salary. For example, if you hire a senior engineer making $150,000 per year, a 10% fee means paying $15,000 annually in administrative fees for a single employee.

In our article about the cost of hiring an employee through an EOR, we talked about RecruitGo’s flat monthly fees in our breakdown. 

Security Deposit Requirements

Most EORs require a deposit before an employee starts. It acts as a reserve if payroll funding is delayed or if the arrangement ends with costs still due, such as notice pay, severance, or employer contributions. 

A deposit equal to one or two months of total employment cost is common. Still,  you should ensure that the arrangement explicitly states that it remains your property, is held in a segregated account, and fully refunded within 30-60 days following contract termination. This ensures your vendor cannot hold excessive amounts of working capital or delay returning your funds once the agreement ends. 

Foreign Exchange (FX) Markup Clauses

If your corporate entity pays in USD or EUR while the employee receives salary in local currency (e.g. Malaysian Ringgit, Brazilian Real, or Polish Zloty), FX conversion fees are a major cost driver. EORs often add a hidden 2% to 5% markup on foreign exchange rates above the mid-market rate. 

To mitigate these costs, you can negotiate an FX clause that caps rate markups at transparent thresholds. You can also negotiate to fund local payroll in the target local currency directly. Make sure this is explicitly covered in the EOR agreement. 

Legal, IP, and Data Protection Terms

This section breaks down the core legal mechanics protecting your company balance sheet, proprietary assets, and cross-border operations. International labor laws heavily favor local workers, which makes standard B2B contract terms insufficient for managing global talent. 

Setting clear protective terms upfront helps you secure foreign intellectual property, negotiate sensible liability caps, prevent unexpected corporate tax bills, and stay compliant with global data privacy rules.

IP and Work Product Assignment

Intellectual property (IP) clauses are one of your highest risk areas in an EOR contract, especially when managing trade secrets or proprietary code. In many countries (like the Philippines) local labor codes automatically assign employee-created work products to the direct legal employer by default (Section 178.3 of the Intellectual Property Code of the Philippines (Republic Act No. 8293). Because your EOR holds that legal status on paper, they automatically acquire those rights first.

To keep your proprietary assets fully under your ownership, insist on a clear three-part assignment mechanism in your contract:

• Worker-to-EOR Assignment: The local employment contract must state that the worker assigns all future work products directly to the EOR as it gets created.
• EOR-to-Client Assignment: The Master Services Agreement (MSA) must automatically transfer all received IP rights from the EOR directly to your company without extra fees or delays.
• Moral Rights & Power of Attorney: Civil law jurisdictions (like France, Germany, or Brazil) treat moral rights as non-transferable. Your agreement needs explicit moral rights waivers to the legal limit, supported by a power-of-attorney provision so you can enforce your rights locally.

Watch out for clauses that hold back IP transfers until you pay every pending invoice. IP assignment should happen automatically upon creation so a vendor cannot leverage your source code during a billing dispute.

Indemnification and Limitation of Liability

When an international worker files a claim over wrongful termination, discrimination, or back pay, the EOR stands in court as the named defendant. However, most MSAs use indemnification clauses to pass those financial losses back to you if the dispute grew out of your operational management.

EOR providers routinely try to cap their liability at a small multiple of their administrative fees (often 12 months of service charges). That ceiling leaves you exposed, because statutory penalties for illegal dismissals or payroll tax miscalculations can easily dwarf a year of basic vendor fees. Push for separate, higher liability limits (or complete exclusions) across these high-risk areas:

• Gross negligence, fraud, or intentional misconduct by the vendor.
• Failure to deposit collected payroll taxes or mandatory statutory benefits with local tax offices.
• Data security breaches caused by the vendor's internal platforms.
• Breaches of intellectual property assignment terms.

Permanent Establishment and Tax Nexus Risk

Hiring through an EOR lowers your chances of triggering a foreign corporate tax presence, but it does not grant complete immunity. Foreign tax authorities evaluate your day-to-day operations over your contractual labels, and they can classify your business as a Permanent Establishment (PE) even without a registered office in the country.

Global tax treaties often refer to the OECD Model Tax Convention, but economic hubs across Southeast Asia (such as Malaysia, Indonesia, Thailand, and the Philippines) frequently incorporate terms from the UN Model Double Taxation Convention. The UN model enforces strict "Service PE" rules, where foreign tax officers can declare a taxable presence simply based on how long your team performs services in-country.

Your agreement should establish clear operational rules. It must state that the EOR operates strictly as an independent contractor without authority to sign contracts on your behalf. It should also require the EOR to flag job titles or duties that could create foreign tax exposure.

Data Privacy and Cross-Border Data Transfer

When you hire internationally, both you and the EOR will handle sensitive employee data, including identification details, bank information, and health records.  Your MSA should include a dedicated Data Protection Addendum (DPA) tailored to international frameworks like the EU General Data Protection Regulation (GDPR).

Your contract must clearly spell out how data moves between your firm, the EOR provider, and any local payroll subcontractors:

• Data Controller vs. Data Processor Roles: Under GDPR framework, the EOR acts as a Data Controller for payroll processing, tax filings, and local regulatory reporting. Your company acts as a Data Controller for internal performance metrics and operational work output. Formalize these boundaries in your DPA, and require the EOR to notify your security team within 48 to 72 hours of any suspected breach.
• Transfer Mechanisms: Moving employee records to jurisdictions without equivalent privacy protections requires standard contractual clauses (SCCs). The EOR must also commit to end-to-end data encryption across all transfers.
• Audit Rights: Maintain explicit rights in the MSA to inspect the vendor's data security protocols on a periodic basis.

Exit and Contingency Terms

Ending an international employment arrangement carries legal and financial risks that go way beyond stopping a standard software subscription or vendor contract. Outside the US, "at-will" employment is virtually non-existent, and foreign labor codes heavily protect workers. Writing explicit separation rules into your Master Services Agreement (MSA) keeps offboarding smooth, prevents sudden payroll disruptions, and stops unexpected severance bills from landing on your desk.

Navigating Local Termination Laws

Most countries require documented statutory cause, mandatory notice periods, or guaranteed severance payouts to let an employee go. For instance, dismissing a team member in Malaysia requires demonstrating "just cause or excuse" under the Industrial Relations Act 1967.

Your MSA must clearly state who pays when an engagement ends:

• Client-Initiated Exits: If you decide to end a worker's role for operational reasons, your company covers the statutory severance and required notice pay.
• Vendor Error Exits: If a termination dispute stems from an EOR compliance mistake, payroll error, or failure to follow local labor laws, the vendor must absorb the legal costs and liabilities.

Offboarding, Entity Transitions, and Service Exit

As you expand your workforce, you might decide to open your own local entity or switch providers. Your contract needs a clear blueprint for how team members transition off the platform without breaking local labor laws:

• Entity Transfer (Novation): Secure explicit terms that let you transfer local employment contracts directly to your new entity without triggering fake redundancy claims or early exit penalties.
• Offboarding Support: Require the vendor to assist with final tax filings, benefits transfers, and employee record handovers when your service contract ends.
• Non-Solicitation Protections: Include strict non-solicitation rules so the EOR provider (or their local sub-contractors) cannot recruit your departing team members after offboarding.

We explained the process on how to transition from a third-party provider to your own legal entity in our guide on how to switch EOR providers.

Build a Reliable EOR Arrangement with RecruitGo

RecruitGo’s global Employer of Record service supports business hiring across 40-plus markets. From local contracts and payroll to statutory compliance and liability clauses covered above, we’ll help you work through all the terms that shape an employment arrangement before your employee starts.

You will have a clearer view of total employment costs, deposits, and the responsibilities attached to the arrangement in each market. Talk to our team to discuss your international hiring plans.