Comparing Employer of Record Against Common Law Employer (Updated in 2026)

What is an Employer of Record?

An Employer of Record (EOR) is a third-party entity that takes on the legal responsibility for hiring, managing, and paying employees on a company’s behalf. Instead of building an in-house HR and payroll function in every location or setting up a local entity, businesses can outsource key administrative and compliance tasks to an EOR.

This arrangement is especially useful when a company needs extra support but lacks the capacity or local expertise to manage employment administration on its own. By handing off responsibilities like payroll, HR paperwork, and compliance, employers can focus on core business priorities without getting bogged down by employee management concerns.

At a basic level, an Employer of Record acts as a middleman between the company and its employees. The Employer of Record typically handles employment contracts and related documentation, payroll processing and tax withholding, benefits administration, onboarding and offboarding, and compliance support across the employee lifecycle. It commonly supports onboarding and terminations when needed, while helping ensure the correct processes are followed at each stage.

One important note is worth keeping in mind. While an Employer of Record can reduce operational burden and help with compliance processes, your organization still remains accountable for its decisions and actions. That is why it is essential to choose an arrangement and provider that align with your standards and responsibilities.

What is a Common Law Employer?

A Common Law Employer is an employer relationship established through common law principles. In simple terms, an individual or organization may be considered a Common Law Employer when they pay wages and provide benefits, control the work environment and day-to-day activities, and take responsibility for employment-related taxes.

Unlike an Employer of Record (EOR), a Common Law Employer does not outsource the employment relationship to a third-party provider. Instead, it relies on traditional methods such as direct employer-employee agreements to define the relationship.

A key difference is how employee obligations and rights are handled under labor laws. With a Common Law Employer structure, responsibilities like compliance, benefits, and insurance typically fall directly on the business rather than being administered through a service provider. For example, workers’ compensation coverage may need to be arranged separately under the company’s own policies.

Tax handling can also differ. In many jurisdictions, organizations using Employer of Record solutions may have taxes deducted at the source, while common arrangements may involve additional tax considerations depending on local rules and timing.

Ultimately, both structures can work. What matters is selecting the approach that best fits your compliance needs, budget, and operational capacity.

Advantages of Employer of Record

Using an Employer of Record can help businesses save time and reduce administrative complexity, especially when hiring across multiple locations. Because the Employer of Record takes on key employment responsibilities, companies can move faster while staying organized.

One major advantage is improved compliance support. By outsourcing employment administration to a provider experienced in local regulations, employers can reduce the risk of costly compliance mistakes. The Employer of Record also typically manages paperwork tied to onboarding, such as background checks and required documentation, based on local requirements.

Another advantage is a reduced administrative burden. Managing payroll, taxes, and HR processes across multiple countries can become complex quickly. An Employer of Record centralizes much of that work so companies can expand internationally without dedicating large internal resources upfront.

Cost savings may also be possible. An Employer of Record can reduce both direct and indirect costs, particularly those linked to research, setup, and compliance processes in unfamiliar jurisdictions. Working with a provider that already understands the requirements can reduce time spent troubleshooting and help avoid preventable errors.

Finally, an Employer of Record can help expand access to talent. Because the model supports hiring across locations, companies may reach candidates they would not typically access through local-only recruiting. This can make it easier to build diverse, distributed teams.

Disadvantages of Employer of Record

While Employer of Record services offer meaningful benefits, they are not the perfect fit for every company or situation. Before choosing this model, it is worth considering a few common drawbacks.

One disadvantage is cost over time. Although Employer of Record setup costs can look attractive compared to becoming a traditional employer in new locations, ongoing fees can add up. Costs may include services like payroll processing and employee benefits administration. In addition, many providers charge based on an hourly or project model rather than a flat rate, which can create cost uncertainty if your needs change.

Another drawback is reduced day-to-day control. Because the employment relationship is managed through a third party, some employers feel they have less influence over how certain processes are handled. If you need fast policy changes or highly customized workflows, an external provider may be less flexible than an in-house team, particularly if changes require additional fees or turnaround time.

Contract limitations can also be a factor. Depending on the agreement, your business may be bound by specific terms even if circumstances change. That can reduce room for negotiation later and limit how quickly you can adjust the arrangement once it is in place.

Compliance complexity still exists as well. Reputable Employer of Record providers aim to follow applicable labor regulations, but legal frameworks vary significantly across countries and regions. When multiple jurisdictions are involved, the risk of misunderstandings or errors can increase, potentially leading to fines or penalties. For that reason, many businesses review key compliance decisions internally rather than relying solely on the provider.

Comparing Employer of Record and Common Law Employer

When hiring employees, companies often choose between two models: Employer of Record and Common Law Employer. Both can work well, but they come with trade-offs that matter depending on your goals.

With an Employer of Record, a third-party provider becomes responsible for core employment administration. This commonly includes payroll taxes and deductions, benefits administration, workers’ compensation coverage, and compliance processes related to labor laws. This can reduce administrative burden and support faster hiring across locations. However, because employees are technically employed by another entity, employers may feel they have less direct control over certain employment processes. In some places, additional legal requirements may also apply to ensure the Employer of Record arrangement remains valid, so it is common to consult legal counsel before entering into an agreement.

With a Common Law Employer model, the business assumes direct responsibility for its employees from day one. This approach can offer greater control over policies and day-to-day operations, plus more flexibility in how employment processes are structured. The trade-off is that it often requires more effort upfront and ongoing, particularly when managing compliance across different jurisdictions. Additional costs may also arise because you will not have access to the bundled administrative support that comes with outsourcing models.

Conclusion

Employer of Record and Common Law Employment are both viable options for hiring employees, but they serve different needs.

An Employer of Record can help reduce administrative workload and expand access to broader talent pools, but it may come with higher long-term fees and less direct control over certain processes. A Common Law Employer approach provides more direct control and flexibility, but it typically requires more internal effort and can lead to added complexity and cost, especially across multiple jurisdictions.

If you are weighing the pros and cons of an Employer of Record versus a Common Law Employer setup, start by mapping your priorities around budget, speed, compliance capacity, and how much control you want to keep in-house. If you would like, share where you are hiring and your team size, and I will help you think through which model best fits your situation.