Employer of Record (EOR): What SMEs Must Understand Before Hiring Internationally in 2026

International hiring is no longer reserved for large multinationals. For small and medium-sized enterprises “SMEs”, hiring talent abroad is often the fastest and most cost-effective way to scale without the significant expense of setting up foreign legal entities. However, cross-border hiring brings legal, tax and compliance risks that are frequently underestimated.

Understanding how Employer of Record (EOR) solutions operate and where obligations and responsibilities truly lie, are essential before employing your first worker overseas.

Understanding the EOR Relationship in Practice

Consider the following scenario:

A growing company in Ireland wants to hire an employee based in Spain, but setting up a Spanish legal entity would be costly, time-consuming and disproportionate for one hire. The company chooses to engage an EOR with an existing legal entity in Spain.

The EOR employs the individual locally, issues a Spanish compliant employment contract, runs payroll and manages income tax, social security contributions and statutory benefits in line with Spanish labour law. From a regulatory perspective, the employment relationship is fully compliant. The Irish company pays the EOR a monthly service fee for providing this structure.

In practice, however, the employee works day to day for the Irish business. The company defines the role, sets objectives, manages performance and integrates the employee into its wider team. The EOR does not manage the work itself. The EOR manages the legal employment framework in Spain that makes the arrangement possible.

This distinction is critical. While the EOR is the legal employer on paper, the client company remains responsible for how the employee is treated in reality. Decisions around workload, pay increases and performance management, still sit with the business, with the EOR providing direction to ensure those decisions are implemented lawfully under local rules.

Cost is another area that requires careful planning. Employing someone abroad involves more than just the gross salary. Employer’s social contributions, mandatory benefits, pensions, healthcare obligations and country-specific entitlements all add to the total cost. There is also the EOR service fee itself, which varies by country and scope. In some jurisdictions, additional salary payments or long notice periods can further increase employment costs, particularly at termination.

When viewed in isolation, these costs can appear high. In context, they are typically far lower and far less risky than establishing and maintaining a foreign entity, managing local compliance independently and absorbing full legal exposure.

This is the EOR relationship in practice.

Local Labour Law matters more than you think

Employment rules vary widely between countries, and they’re becoming stricter. Key differences include notice periods, termination protections, mandatory benefits, working hours and pension contributions. What’s normal in one country can be unacceptable in another. This is why EOR contracts must be locally compliant and carefully reviewed. Mistakes can be expensive, particularly when it comes to terminations and dismissals where the expertise of a EOR local partner is essential in navigating this area.

EOR is not a workaround and it is not a transfer of responsibility. It is a structured partnership that allows companies to hire internationally in a compliant, controlled and scalable way, provided the roles and obligations are properly understood.

A Smarter Way to Hire Abroad

Felix Global helps businesses manage international employment costs and compliance risks without the complexity of setting up and maintaining foreign entities. For more information and guidance on the best solutions for your organisation, do not hesitate to contact us for assistance.

Written by Amanda Nicolaou

Legal Adviser