Contractors, employers of record and local entities. Three ways to employ someone abroad, with different costs and risks.
12 min read · Level 5
The rules are set by where the person is, not where you are, and they differ substantially — notice periods, termination protections, statutory benefits and IP transfer all vary and all override whatever your contract says. Founders classify by convenience, and the liability sits with the company. The choice is really about scale: contractor, employer of record, or entity, in that order.
Three main routes to engaging someone in another country:
Contractor — they invoice you, handle their own tax. Simplest, and carries misclassification risk. Employer of record (EOR) — a third party employs them locally on your behalf, for a fee. Fast and compliant. Local entity — you incorporate there and employ directly. Most control, most cost and administration.
Because the rules are determined by where the person is, not where you are, and they vary substantially. Getting it wrong creates tax and employment liabilities in a jurisdiction you may not understand.
And because the choice has real cost implications: an EOR typically charges a meaningful monthly fee per person, while an entity carries fixed accounting and filing costs regardless of headcount.
This is educational information, not legal advice. Rules differ by country and change — get advice from a qualified professional in your jurisdiction before acting.
Sources: OECD — international employment and taxation
A rough decision guide:
One or two people, genuinely independent, project-based → contractor. Simplest, provided the relationship really is contractor-shaped. If they work full-time under your direction, the misclassification risk is real.
One to five people, employment-shaped, no entity → employer of record. They are legally employed by a local provider who handles payroll, tax and compliance. You pay a fee per person per month. Fast, compliant, and the standard answer for a small international team.
Five or more in one country, or a long-term commitment → local entity starts to make financial sense, because EOR fees scale per person while entity costs are largely fixed.
What people forget:
First-time founders often engage full-time international staff as contractors indefinitely because it is simple. It works until it is reviewed, and the liability sits with the company.
The second mistake: assuming home-country employment norms apply. Notice periods, termination protections and statutory benefits vary enormously and override your contract.
The third: not getting an IP assignment valid under the person's local law. An assignment drafted for one jurisdiction may not do what you expect in another.
Genuinely independent and project-based → contractor. Employment-shaped, small numbers → EOR. Five or more in one country → consider an entity.
Full-time, directed, exclusive work is employment in most jurisdictions, whatever the contract says.
Check it works under their law, not just yours.
Not when you need to end the relationship. They are frequently much stronger than founders expect.
EOR fees, statutory benefits and employer contributions. Gross salary is not the cost.
People in a country can create a taxable presence. One conversation with an accountant covers it.
Before engaging anyone outside your home country.
Do not set up a local entity for one or two people. An EOR is faster, compliant and cheaper at that scale.
An employer of record legally employs someone locally on your behalf and handles payroll, tax and compliance for a monthly fee. For one to five people in a country it is faster, compliant and far cheaper than incorporating — and the crossover to an entity typically comes at a handful of people.
Do not set up an entity for one or two people. Get an EOR quote first; it is usually the right answer for longer than founders expect.
An assignment drafted for one jurisdiction may not do what you expect in another, and this surfaces during diligence rather than at signing. The document looked fine; it simply was not effective where the person lives.
Check that IP transfer is valid under the employee's local law, not just yours. Same for notice and termination rules, before hiring rather than before firing.
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