Key legal considerations when using an Employer of Record

• Engaging an Employer of Record (EOR) can accelerate hiring abroad and ease administrative burdens, but it does not eliminate your legal and compliance obligations.
• Key legal considerations include employment status and co-employment risk, tax and permanent establishment exposure, contract documentation, intellectual property, and termination procedures.
• Rigorous due diligence, well-structured service agreements, and clear role delineation between your organisation and the EOR are vital to minimise liability and protect your business.

You’ve decided it’s time to tap into overseas talent pool and, in doing so, take your business global. International hiring is an exciting step for any business. The only thing is: you don’t have a legal entity in your country of hire.

Never fear; this is where the Employer of Record (EOR) model comes in. So, what is an EOR and what are the legal considerations for using one when hiring abroad?

What is an Employer of Record (EOR)?

An EOR is a third-party organisation with a legal entity set up in the country where you wish to hire staff. The EOR becomes the legal employer of the worker or workers, on your behalf. It handles payroll, taxes, benefits and statutory compliance. Meanwhile, your company retains management of day-to-day work.

EORs have been around for some time. For example, Mauve Group has been in operation since 1996. However, the model has gained increased recognition in recent years. The pandemic normalised remote working and hiring remote or global teams.

Now, Employer of Record services are more popular than ever.

From a legal perspective, the model is well-established and permitted. For instance, UK law places no licensing requirement on an EOR. The government does not prohibit indefinite engagements under the EOR model.

Choosing to partner with an EOR is a savvy choice for any business wishing to remain agile in an evolving marketplace. As with any legal agreement, there are key considerations to take into account when working with an EOR.

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

Employment status and co-employment risk

One of the first legal questions is that of the true employer. Who is really employing your workers? Although the EOR is the formal employer, your organisation often retains control of the worker’s day-to-day activities. That dual-relationship raises potential co-employment or disguised employment risks.

A tribunal or tax authority may look behind the contractual labels to assess who has control, integration, and mutuality of obligation. You may face liability if the worker is found to be an employee of your business rather than just of the EOR,

Action to take

To mitigate this risk, it is essential to delineate roles in a services agreement with the EOR.

Clarify that the EOR is the legal employer. Ensure your internal policies reflect your client or manager-of-work role only, and monitor how work is supervised to avoid overly blurring responsibilities.

Tax liability and permanent establishment exposure

Another major legal concern is tax and entity risk. In the UK and overseas jurisdictions, the use of an EOR does not automatically shield your business from tax or permanent establishment (PE) exposure.

For example, the end-user company may still be regarded as the “economic employer” or be treated as having created a taxable presence in the jurisdiction through the worker’s activities.

The implications are significant. Payroll and withholding obligations, NICs, income tax, corporate tax, and potential penalties all need scrutiny.

Action to take

Simply using an EOR is not compliance solution you can just engage and forget about. Instead, you should:

• Review where the worker will operate, what tasks they will perform, and for how long
• Obtain specialist tax advice in each jurisdiction
• Document the arrangement carefully (both the master services agreement and worker contract), so liabilities are clearly apportioned.

Contract documentation and allocation of responsibilities

A well-drafted agreement is a cornerstone of EOR legal planning. Two main sets of contracts must be addressed: the service contract between your business and the EOR, and the employment contract between the EOR and the individual.

Ensure that your service contract covers:

• Scope of the EOR’s services (onboarding, payroll, statutory filings, insurance, terminations)
• Liabilities and indemnities (who pays if there is a claim, tax audit, or employment tribunal)
• Rights to audit the EOR’s compliance and reporting
• Clear exit provisions and transition planning (if you later set up your own entity).

Meanwhile the employment contract must align with local law, address termination, notice, benefits, working time, and duties. Many UK guides stress the importance of having “side-agreements” or assignable IP rights where the end-user retains the value created.

Intellectual property, confidentiality, and data protection

When hiring via an EOR, it is easy to assume that your company’s IP and data rights are covered. However, that may not be the case. Because the EOR is the legal employer, intellectual property created by the employee may, by default, vest with the EOR.

Action to take

Your business should ensure that:

• The service agreement with the EOR includes assignments of IP from the EOR to you
• Restrictive covenants and confidentiality obligations apply. These can be either via the EOR’s contract or a direct interface between you and the worker
• Data handling is compliant with the UK GDPR and the Data Protection Act 2018. It needs to cover joint processing and data sharing between you and the EOR.

Failing to tackle IP or confidentiality early can undermine ownership, inhibit enforcement, and raise post-termination risk.

Termination, employee rights, and liability

A common oversight is neglecting how termination and employee rights are managed under an EOR model. Although the EOR is formally the employer, you may still face claims if you effectively directed or influenced termination decisions.

In the UK, rights relating to unfair dismissal, discrimination, holiday pay, and working hours apply. You must ensure that:

• The EOR and your business agree who handles disciplinary, grievance, and dismissal procedures
• Your business provides input into performance management processes if you direct day-to-day work
• You monitor that the EOR is fulfilling its statutory obligations (holiday accrual, pension auto-enrolment, pay records).

Well-structured agreements, clear internal practices and oversight are vital to reduce risk.

Choice of jurisdiction and licensing issues

Although the UK has no restrictive licensing regime for EOR operations (unlike some other jurisdictions which treat EOR arrangements as “employee leasing”), global operations may raise more complex legal issues elsewhere.

Action to take

If your hire is outside the UK, you must check that the EOR model is valid under local law. For example, some countries require licensed agencies, restrict supply of labour, or limit contract duration.

Key due diligence questions include:

• Does the EOR have the required licence or registration in the country of hire?
• Are there restrictions on contract length or worker assignment?
• Are there unusual thresholds or rights in the host jurisdiction (e.g. work permits, social security obligations, visa sponsorship)?

These questions are essential to avoid regulatory red flags and unintended liabilities.

Exit planning and transition to a local entity

Using an EOR is often a stepping-stone to full local presence. You should build exit and transition planning into your engagement from the start. Many guides recommend reflecting this in your service contract.

Considerations include:

• At what headcount or timescale will you transition to direct employment?
• Who will carry over employee contracts, benefits, pension arrangements, or service continuity?
• How do you manage culture, policy alignment, and legal ownership of data and IP when moving out of the EOR model?

Having a roadmap ensures your business doesn’t become locked into the EOR model or face disruption when shifting to your own entity.

Due diligence and best-practice checklist

Before engaging with an EOR you should conduct thorough due diligence. Key items include:

• Compliance track record of the EOR: payroll accuracy, statutory filings, audits
• Contract quality: clear scope, liability allocation, IP and data protections
• Operational fit: how the EOR handles onboarding, performance management, exit support
• Cost structure: transparent fees, what happens on termination or scale-down
• Ongoing oversight: governance arrangements between you and the EOR, reporting, audit rights.

Following these steps helps ensure the EOR arrangement remains robust, transparent and aligned with your business goals.

The Employer of Record model offers an efficient route into new territories or rapid hiring in the UK without establishing a local entity. But it is not a risk-free “plug-and-play” solution. Legal liability, tax exposure, employee rights, intellectual property, and contract design all demand detailed attention.

By understanding the key legal considerations, conducting rigorous due diligence, and structuring the relationship properly, your business can harness the benefits of the EOR model while remaining compliant and protected.

How Mauve can help

At Mauve Group, we specialise in supporting businesses that engage with Employer of Record models. We offer bespoke legal and compliance advisory services tailored to UK and international hiring, helping you draft and negotiate EOR agreements, manage employment status risk, protect your intellectual property, and prepare exit strategies.

Whether you are expanding into the UK or hiring remote talent globally, Mauve provides pragmatic guidance, documentation review, and ongoing monitoring to safeguard your organisation and streamline your growth.

Frequently asked questions

1. Does using an EOR mean my company has no employment-law risk?

Not entirely. Even though the EOR is the formal employer, your business retains operational control of the worker and can be exposed to employment-law liability (including unfair dismissal, discrimination, holiday pay) if your operational practices suggest you act as employer.

2. Can the end-user company still create a permanent establishment by using an EOR overseas?

Yes. The mere fact of contracting through an EOR does not automatically prevent tax or permanent establishment risk. If the worker’s duties or your business activities satisfy local tax or PE criteria, you may still face liability.

3. What does my service agreement with the EOR need to cover?

The service agreement should clearly define the services the EOR will provide (payroll, taxes, employment contract); allocate liability and indemnities; set audit and reporting rights; cover intellectual property and data protection; include exit/transition terms; and ensure alignment with your internal operational controls.