What exactly an EOR does
The EOR acts as the formal employer in the destination country. It hires the worker under a local contract, registers them with Social Security, calculates and pays the salary, applies tax withholdings and manages terminations, holidays and severance payments. Your company does not sign anything with the employee: the employment relationship is between the worker and the EOR.
In return, you keep control of the work: you decide what each person does, where and with what tools. That separation between formal employer and actual management is the essence of the model, and also its most delicate point from a legal standpoint.
When it makes sense to use an EOR
An EOR shines when you need to hire now in a country where you have nothing. Setting up a company takes weeks or months and requires an initial investment; with an EOR the first person can be on the payroll within days.
It also fits when testing a market without committing yourself: if the country does not work out, you end the agreement with the provider and that is that. With one or two employees, the cost of the EOR (typically a 10-15% margin on the gross monthly salary) pays off compared with building the entire local structure.
When it is better to open a subsidiary or branch instead
Your own subsidiary is an asset: you pay for it once, it stays on your balance sheet and it gives you direct control over contracts, brand and operations. An EOR is a recurring cost that builds nothing for you except the payroll of the person you hire.
The practical rule: if the country is strategically important in the medium term, it pays to incorporate from the start; if it is a test, an EOR avoids burning capital. From a stable team of three to five people upwards, a subsidiary usually works out cheaper than paying the EOR margin every month.
There is an accounting nuance: with a subsidiary, personnel costs form part of your company and of the country; with an EOR, you pay for a payroll service and the worker does not even appear in your company for local Social Security purposes.
The legal framework: staff leasing is not unrestricted
In Spain, staff leasing is regulated: only an authorised ETT can legally supply staff, and illegal leasing (article 43 of the Workers' Statute) can turn the client into the actual employer, with all employment liabilities on its shoulders. The Court of Justice of the EU set a key criterion in 2025: what matters is who actually exercises control and direction over the worker, not the name of the contract.
That is why the quality of the provider matters more than its brand. A serious EOR operates with its own local entity, contracts that comply with the collective agreement and Social Security paid up to date. A paper agreement, with no real substance in the country, is an employment and tax risk for everyone.
In France, Germany and Italy, inspectors ask the same question: whether the entity listed as the employer has real activity or is a shell. CJEU case law on staff leasing applies equally across the EU.
What to check before signing with an EOR
First, which entity issues the contract: it must be a company established in the employee's country, with its own tax number and payroll issued from there. Then, who is liable if there is a dismissal, an inspection or long-term sick leave, and whether the contract complies with the sector's collective agreement (in Italy, for example, the CCNL prevails).
Also ask about the real price: monthly margin, onboarding costs, what exactly is covered (payroll, contributions, insurance, taxes) and what happens if the worker leaves in the first month. And check the exit clause: some providers require long notice periods or charge for migrating payroll to your future subsidiary.
