Hiring today often crosses state lines, industries, and employment categories. Compliance has grown more complex, and penalties for misclassification or payroll mistakes are severe. That is why many recruiters, staffing firms, and HR teams turn to an Employer of Record (EOR).
An EOR allows you to legally employ workers in places you could not easily support on your own. The EOR becomes the employer of record on paper, while you remain in control of recruiting, pay rates, and day-to-day direction. This article explains what an EOR is, how it works, who uses it, and why it matters.
What Is an Employer of Record (EOR)?
An Employer of Record is a service provider that takes on the legal and administrative responsibilities of employment. The EOR issues paychecks, withholds and remits taxes, manages workers’ compensation and unemployment insurance, provides benefits, and maintains HR records.
On paper, the worker is employed by the EOR. In practice, the worker reports to your managers and performs the work you assign. This structure helps businesses expand quickly, manage contractors compliantly, and reduce risk.
How Much Does an EOR Cost?
The pricing model depends on the provider, the industry, and the risk profile of the role. For example, a clerical contractor might fall near the low end of the range, while a healthcare role with higher compliance requirements may cost more. In the U.S., most EORs charge either:
- A percentage of payroll (typically 15–25%)
- A flat per-employee fee ranging from $200 to $600 per month
Hidden fees can include onboarding charges, off-boarding costs, bonus processing, or specialized benefits administration. For budgeting purposes, businesses should ask about these details up front.
While the cost may appear high at first glance, it is usually much lower than the expense of setting up a legal entity in each new state. It also reduces exposure to compliance penalties, which can be significant. The U.S. Department of Labor emphasizes that misclassifying employees can lead to liability for back wages, overtime, and taxes.
How an EOR Works (Legal and Operational Flow)
The relationship can be visualized as a triangle: you identify the candidate and decide their role, pay, and responsibilities. The EOR hires the worker under its own entity, completing onboarding, payroll, and compliance. The worker provides services to you, reporting to your managers and integrating into your team.
The process usually unfolds as follows:
- First, you select the worker. The EOR issues an employment agreement, completes I-9 and E-Verify, runs background checks, and sets them up on payroll.
- Second, the EOR processes payroll, withholds taxes, pays employer contributions, and enrolls the worker in benefits.
- Third, the EOR ensures wage and hour rules, workers’ comp coverage, unemployment insurance, and state leave requirements are followed.
- Fourth, the EOR maintains HR records, issues pay stubs and W-2s, and manages separations. Throughout this process, you remain in charge of projects, schedules, deliverables, and performance management.
While registering in a new state can take weeks or months, an EOR can usually onboard a new worker within two or three days.
EOR vs. PEO vs. Staffing Agency
An EOR is the sole legal employer. It is ideal when you want to hire in a state where you are not registered, or when you want to reduce compliance and administrative risk. A PEO operates under a co-employment model. You and the PEO share responsibility for employees, and a PEO requires you to have a legal entity and payroll registrations. A staffing agency specializes in recruiting and supplying talent. Agencies source candidates and may employ them temporarily, but their core business is finding workers.
The Internal Revenue Service defines an employer of record as the entity responsible for withholding and paying employment taxes . A PEO, by contrast, enters into a co-employment relationship, which means liability is shared. Staffing agencies provide workers but are not designed to serve as long-term compliance partners.
Who Uses EOR Services
EORs are widely used in several scenarios:
- Independent recruiters and small staffing agencies entering contract staffing without needing their own payroll infrastructure.
- Mid-sized and large staffing firms expanding into new states or industries without adding overhead.
- Corporate HR teams hiring remote employees nationwide while avoiding new entity setups.
- Contingent workforce managers reducing risks by converting 1099 contractors into W-2 employees.
Case example: A Texas-based software company needed engineers in New York and California. Instead of registering in both states, they used an EOR, cutting onboarding time from months to days and avoiding compliance gaps.
When Should You Use an Employer of Record?
Not every situation requires an EOR, but there are situations when the solution makes sense.
- Hiring in new states or regions: If you lack a registered entity or tax account in a state, an EOR lets you hire immediately.
- Managing contractors who may be misclassified: When a 1099 role looks like a W-2 employee, an EOR helps convert the worker safely.
- Client or compliance requirements: Some clients insist contractors be W-2 employees, or state laws may restrict certain classifications.
- Payroll funding or cash flow challenges: For small agencies or first-time contractors, an EOR that funds payroll bridges the gap until client payments arrive.
EORs are also valuable when businesses lack the infrastructure to manage payroll and compliance across multiple jurisdictions. According to the U.S. Small Business Administration, establishing a new entity in a state can take months and involve multiple layers of registration, reporting, and ongoing compliance. Using an EOR removes these hurdles. If your organization already has robust HR and compliance infrastructure in every location, an EOR may not be necessary. But for many recruiters, agencies, and mid-market HR teams, it is the most efficient way to expand hiring without adding risk.
Benefits of Using an EOR
The benefits go well beyond administrative relief.
- Compliance and Risk Protection
The Department of Labor’s Wage and Hour Division highlights that misclassification exposes businesses to back pay obligations, penalties, and legal costs. An EOR takes on this compliance burden. - Faster Onboarding and Scalability
Instead of waiting weeks or months to form new entities, businesses can hire within days. For recruiters, this means they can seize new opportunities quickly. - Predictable Costs
EORs provide a single partner for payroll, benefits, and compliance across states, which makes costs more predictable than juggling multiple vendors. - Centralized Oversight
The U.S. Office of Personnel Management has noted that centralizing HR functions reduces duplication and improves compliance monitoring. Universities and public systems that moved payroll and HR into shared service centers have reported more standardized processes and fewer compliance gaps (UNC HR Shared Services Report).
EOR and Multi-State Hiring
The rise of remote work has made multi-state hiring the new normal. Each state has its own labor rules, wage requirements, and tax registrations. Managing this patchwork directly can overwhelm HR teams and stall growth.
Each state in the U.S. has its own labor regulations. For example, California has strict rules on overtime and contractor classification, while New York requires detailed wage notice forms. The U.S. Department of Labor notes that employers must follow both federal and state laws, applying whichever standard is most protective of the worker.
An EOR is already registered and insured in all 50 states. That allows businesses to hire across jurisdictions without creating separate entities or monitoring dozens of state-specific requirements. For HR teams, this simplifies the compliance landscape considerably.
For recruiters and staffing agencies, the ability to say “yes” to clients needing workers in multiple states is a competitive advantage. For HR teams, it means access to broader talent pools without legal risk.
EOR vs 1099 Contractor Compliance
Many companies consider using independent contractors instead of employees, but this approach carries risk. The IRS states that a worker is generally considered an employee if the company controls what will be done and how it will be done. Misclassification can result in liability for unpaid taxes, back wages, and benefits.
A well-known case is Microsoft’s $97 million settlement for worker misclassification, documented in employment law scholarship (Berkeley Law, BJELL). An EOR prevents this by employing workers as W-2 employees. Payroll taxes are withheld, benefits are provided, and workers are fully compliant with employment laws. For businesses, this means fewer legal vulnerabilities and more predictable outcomes.
Challenges & Misconceptions
Some worry they will lose control. In fact, you remain responsible for directing the worker’s duties and outcomes. Others think EOR services are expensive. While fees may range from a few hundred dollars per employee per month, they often cost less than setting up entities and absorbing compliance risks yourself.
Another common misconception is that EORs recruit workers. They do not. They employ the workers you or your agency already found.
Finally, EORs are not always necessary. If your organization already has entities, payroll accounts, and HR expertise in every state where you operate, you may not need an EOR.
Industry & Compliance Context
The demand for EORs is driven by a tougher compliance environment. The Department of Labor’s 2024 rule tightened contractor classification, and 2025 guidance has kept the pressure on.
E-Verify use has grown. In fiscal year 2024, the system processed 43.5 million checks, with 98.3 percent confirmed within 24 hours, across more than 1.3 million employers. Twenty-three states now require some form of E-Verify.
States are also rolling out new programs. California enforces daily overtime rules and meal break laws, Massachusetts requires earned sick time, and New York mandates disability insurance and paid family leave contributions. More states are adopting paid family and medical leave every year. EOR providers monitor these regulations, update processes, and take on responsibility so clients do not risk fines.
Use Cases
- Staffing and Recruiting
A recruiter wins a client project requiring three IT contractors in different states. Without an EOR, they’d need registrations and insurance in each state. By using an EOR, they place the candidates immediately, invoice their client, and keep their margin while the EOR handles compliance and payroll. - Direct Sourcing Programs
Enterprises building internal talent pools often engage hundreds of contingent workers. An EOR provides standardized onboarding, benefits, and payroll for those workers, reducing co-employment risk and ensuring compliance across multiple jurisdictions. - Multi-State Remote Teams
A growing SaaS company hires remote employees in 10 different states. Instead of setting up tax accounts and monitoring every new law, they shift all compliance to an EOR. Employees onboard quickly, HR focuses on strategy, and the company scales faster.
Pros and Cons
EORs bring clear advantages. They reduce misclassification penalties, accelerate onboarding, cut administrative workload, and improve worker experience and retention. At the same time, they require vendor management. Fees may exceed do-it-yourself approaches if you already have entities and systems in place. Benefits flexibility can also be limited compared to in-house HR.
Why FoxHire
FoxHire is a U.S.-focused Employer of Record serving recruiters, staffing firms, HR teams, and contingent workforce leaders across all fifty states. Unlike global providers, FoxHire specializes in domestic compliance, payroll funding, and silent back-office support.
With flat, transparent pricing, partners keep control of client relationships and bill rates while FoxHire handles payroll, taxes, benefits, and liability. Our healthcare and education expertise makes us a trusted partner in regulated industries.
For more than thirty years, FoxHire has helped recruiters and HR leaders expand their businesses, reduce risk, and keep workers onboarded and paid correctly.
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