Employer of Record vs. umbrella company: what’s the difference?

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• Employer of Record (EOR) and umbrella companies are both third-party employment solutions, but EORs are designed for international hiring, while umbrella companies are typically used for domestic contractor payroll in the UK.
• EORs handle full employment responsibilities abroad, including payroll, tax, and compliance, whereas umbrella companies employ contractors under PAYE for short-term UK roles.
• Businesses can reduce risk, improve compliance, and streamline hiring by choosing the model that aligns with their workforce structure and global footprint—often with help from global payroll providers.

As the working world continues to evolve at pace, forward-thinking businesses are constantly seeking smarter ways to manage employment, payroll, and compliance, especially when operating internationally.

Two increasingly common solutions are Employer of Record (EOR) and umbrella companies. But while they may appear similar on the surface, the functions, legal frameworks, and use cases of these two options are significantly different.

So, what is an umbrella company? And how is it different from an Employer of Record or global payroll provider? This article explores the core differences between these two models, their advantages, and when is appropriate to use each.

What is an umbrella company?

An umbrella company acts as an intermediary between a contractor and an end client or a recruitment agency. It employs the contractor on behalf of the client, processes their pay through PAYE (Pay As You Earn), and ensures tax and national insurance contributions are deducted before the contractor receives their wages.

The contractor is technically an employee of the umbrella company, even though they are working on a contract basis for an external business. This setup is most common in the UK, especially for short-term or project-based assignments where the contractor doesn’t want to operate through a limited company.

Umbrella payroll services offer convenience, especially for contractors who work on multiple short-term projects, do not wish to manage their own limited company, and/or prefer the stability of PAYE employment status, including statutory benefits such as sick pay and annual leave.

While this model works well domestically, it’s not designed for international employee management, and its use is generally limited to the country where the umbrella company is registered.

For more information, visit our article What is an umbrella company?

What is an Employer of Record (EOR)?

An Employer of Record is a third-party organisation that hires employees on behalf of another company in a foreign country. The EOR takes on the legal responsibility for payroll, tax, benefits, and employment compliance, allowing the client company to manage the employee’s day-to-day work without establishing a local legal entity.

EORs are especially useful for companies expanding into new countries without setting up a subsidiary, hiring remote employees across borders, and managing risk related to permanent establishment and local labour laws.

EORs are often used in partnership with global payroll providers, forming part of broader contractor payroll services or global workforce management strategies.

For more information on Employer of Record, visit our Ultimate guide to Employer of Record.

Key differences between an EOR and umbrella company

Although both EORs and umbrella companies offer outsourced employment solutions, they are designed for different types of hires and markets. Here’s how they compare!

Scope

• Umbrella company: domestic.
• EOR: global.

Employee type

• Umbrella company: independent contractors, freelancers.
• EOR: full-time and contract employees.

Payroll

• Umbrella company: PAYE.
• EOR: Local payroll in each country, tax compliant.

Legal employer

• Umbrella company: umbrella company employs worker.
• EOR: EOR company employs workers.

Who manages work

• Umbrella company: end client.
• EOR: client company.

Case in which to use an umbrella company or EOR

• Umbrella company: simplifying contractor payroll.
• EOR: International expansion, cross-border employment.

What benefits are handled?

• Umbrella company: basic statutory benefits.
• EOR: country-specific benefits (including pensions, healthcare, etc.).

When should businesses use an umbrella company?

Businesses hiring contractors in the UK may opt for an umbrella solution when the contractor prefers PAYE status; the assignment is short-term or part-time; the business wants to avoid managing multiple individual contractors directly; or there is no intention to establish a long-term employment relationship

Umbrella payroll services are simple and compliant for domestic hires. However, they are not suitable for long-term roles, high-level employees, or international placements where local employment law applies.

When should businesses use an EOR?

An EOR is the right solution when you wish to hire talent in another country without setting up a legal entity; you need to ensure compliance with local employment laws and tax systems; your business is scaling fast and you wish to focus on growth rather than administration; or you're managing a distributed team across multiple regions.

EORs are often used by global companies, start-ups expanding into new markets, or organisations seeking to engage foreign employees compliantly. They can be particularly useful when testing new markets before committing to a full business presence.

Legal and compliance considerations

One of the main reasons companies work with payroll outsourcing companies or choose between EORs and umbrella companies is the need to remain compliant with employment laws and tax regulations.

Failure to classify workers correctly, either by treating an international worker as an independent contractor or failing to comply with domestic employment law, can lead to consequences such as misclassification fines, backdated tax liabilities, loss of employee benefits rights, and potential triggering of permanent establishment.

An EOR helps to reduce these risks by serving as the legal employer and ensuring full compliance with local tax and labour regulations. Umbrella companies similarly reduce employer risk domestically by managing PAYE and statutory benefits.

Costs and financial implications

Umbrella companies

The umbrella model typically involves a margin or administration fee, deducted from the contractor’s earnings. Contractors may also incur other deductions, such as the apprenticeship levy or employer’s National Insurance (NI) contributions, depending on how the umbrella operates.

EOR services

EORs charge businesses a monthly fee per employee, often calculated as a percentage of gross salary or as a fixed rate. This includes payroll processing, tax filings, benefits administration, and legal compliance.

Though EOR services can appear more expensive upfront, they often reduce long-term risk and administrative overhead, especially during international expansion.

Choosing the right model for your business

Ultimately, the choice between an Employer of Record and an umbrella company depends on your business needs, geography, and talent strategy.

Use an umbrella company if:

• You're hiring contractors in the UK
• You want to simplify PAYE for short-term or flexible workers
• The workers are not classified as employees of your organisation.

Use an EOR if:

• You’re hiring full-time or long-term workers in another country
• You don’t want to set up a foreign subsidiary
• You want to stay compliant with international employment law
• You’re working with global payroll providers to scale globally.

How Mauve can help

Mauve Group is a trusted partner for businesses navigating complex global employment landscapes. Whether you’re deciding between an umbrella company or an Employer of Record, Mauve’s three decades of global HR and payroll expertise ensures you receive tailored, compliant solutions for your workforce needs.

As a leading global payroll provider, Mauve supports contractor payroll services, EOR solutions, and full international HR consultancy.

With operations in over 150 countries, Mauve enables seamless expansion, compliant hiring, and payroll management, so you can focus on growing your business with confidence. Contact us to learn how we can help you.