5 Employer of Record Risks (EOR) and How to Avoid Them

Perhaps you’ve heard that an Employer of Record (EOR) comes with potential risks, and you want to learn more before committing. The truth is that they’re not inherently risky; they’re legitimate partners that can employ workers abroad to simplify compliance and support global expansion.

In fact, the whole point of an EOR is to absorb various threats to your business so you can hire abroad with confidence.

So what do people mean when they say EORs are risky? The challenge is that when global hiring is handled incorrectly, it can lead to tax, compliance, and operational problems. But these are risks of not having the right structures in place rather than problems associated with the model itself.

As a leading global EOR provider, Deel has encountered many of these pitfalls and developed proven strategies to eliminate them. We’ve also helped companies across hundreds of regions and industries.

Let us walk you through the top seven risks associated with EORs. We can show you how these are a fundamental part of international hiring and explain how the right partner can actually overcome these issues.

1. Aggregator model risk

Some providers aren’t true EORs. Instead of hiring workers through their own entities, they subcontract employment to local partners.

Aggregator models can create a range of issues:

• Varying service quality across locations
• No clear accountability
• Slower response times
• Communication gaps
• Inconsistent employee experiences

Bitpanda encountered this problem when it partnered with an aggregate service to support market entry. The quality differed across locations, making it impossible to scale international payroll effectively. “We felt like we were sold a lemon,” explained CHRO, Lindsay Ross. “They said they were a global solution, but they were just the middleman between local service providers.”

How to avoid: Confirm you’re working with a service provider that establishes its own entities rather than outsourcing to partners. You can check that they’re the only company mentioned in your contract and look at local business registries. For example, if you look up Deel in Germany, you can find this GmbH profile with our name and address.

Working with a single provider enables you to move more quickly. For example, after Bitpanda switched to Deel, they entered 20 new jurisdictions and saved 3 months on onboarding.

2. Misclassification risk

If whoever’s responsible for hiring at your company doesn’t do their due diligence, they may classify workers incorrectly. For example, they might onboard someone as a freelancer when the law requires an employment contract. But it doesn’t matter whether your own staff or a third party is arranging the contract - your business still ends up dealing with the fines, back pay, and negative press.

The penalties for worker misclassification are steep. For example, California charges up to $25,000 per violation.

How to avoid: Look for an EOR with robust compliance protocols that enable them to handle worker classifications with ease and take the burden from your team. They should have local experts in every country where they hire, and structured processes for vetting candidates and drafting contracts.

3. Permanent Establishment risk

Any hiring arrangements can unintentionally create a “taxable presence” in a foreign country where you have workers. The authorities may charge you extra income tax, VAT, and other levies.

Permanent establishment usually occurs when you aren’t structuring roles correctly or following safe business practices. This triggers tax obligations in the country where you’re operating. One common mistake is letting a manager sign contracts or negotiate deals instead of leaving it to third parties where you don’t have a legal entity established.

How to avoid: EORS can provide regular consultations on how to meet permanent establishment thresholds. Leading providers, like Deel, offer guidance as part of their services and proactively advise you on the risks. They can also provide ongoing support for your teams to prevent situations where workers cause permanent establishment risks.

See also: How EORs Protect Companies From Permanent Establishment Risk

4. Tax & payroll liability

Payroll is one of the most sensitive areas of global hiring. Requirements vary across jurisdictions, and you must file for income tax, social security, and other mandatory contributions on time.

Regardless of who’s handling payroll, you may still be liable for any errors. Tax authorities will often pursue the employer if there are any missed deadlines or incorrect remittances. In the US, for example, you could be on the hook for up to 25% of the unpaid amount.

Furthermore, you must still deal with any employees affected by payroll issues. If it concerns pay, they’re certain to find the situation stressful and may consider leaving if there are repeated mistakes.

How to avoid: Work with an EOR like Deel that has audited payroll processes and transparent reporting everywhere it operates. When you know an independent party is checking processes and ensuring they’re reliable, you have more confidence in their ability to handle finances.

Also, check that the EOR has experience with your tax setup. They need the local expertise and the resources to handle complex scenarios like new market rollouts, entity restructuring, and contractor conversions.

For example, EEG was having trouble managing a merger and acquisition until Deel stepped in and helped them absorb 30 employees across multiple countries and centralize payroll.

5. Intellectual Property (IP) ownership issues

In some countries, IP doesn’t automatically transfer to your company unless contracts are structured properly. French law, for example, states that the creator automatically has ownership of any works unless they agree otherwise.

That means businesses can lose rights to critical assets if contracts don’t include the right terms and conditions. This can complicate product development and delay fundraising, affecting your bottom line.

How to avoid: Great providers add clauses protecting your copyright in contracts that are consistent with local laws. This ensures you retain ownership of anything that employees and independent contractors create while they work for you. For extra peace of mind, Deel also includes non-disclosure agreements for anything you can’t secure under patent or copyright law.

6. Employment law & compliance risks

The legal employer is responsible for maintaining compliance with regulations across jurisdictions. This includes everything from working hours and mandatory employee benefits to notice periods and severance pay.

If whoever’s handling HR doesn’t apply these laws consistently, they’ll leave gaps in your compliance. You can face significant penalties depending on the violation.

And again, poorly handled compliance can damage trust in your company. Employees might leave over what they perceive to be unfair labor practices or missing benefits. If word gets out, public opinion toward your company may also turn negative.

How to avoid: Choose an EOR like Deel that actively monitors legal changes and proactively updates employment contracts and policies. They should be one step ahead of any regulatory updates to minimize the risk of compliance issues and disruption to operations.

Also, ensure they have the local expertise to navigate international laws. BBMSL was struggling to handle this task alone as they expanded because their HR team couldn’t keep up with all the various regulations. But once they partnered with Deel, which had teams stationed everywhere they needed, they quickly hired 15 roles across four countries.

7. Data security risk

International companies process large volumes of sensitive employee information such as contact details, payroll tax records, and identification documents. Weak security practices can leave this data vulnerable to breaches and leaks.

As the data controller, you’re liable for any penalties due to noncompliance. You’re looking at fines of around 20 million EUR or 4% of your annual turnover (whichever is higher) under laws like the General Data Protection Regulation (GDPR).

How to avoid: Use your EOR provider’s security features and protocols to bolster your own data privacy and protection. For example, Deel offers the following:

• Data encryption in transit and at rest
• Proactive monitoring
• Role-based controls
• Multi-factor authentication
• Regular third-party security audits and penetration testing
• SOC 2 Type II certification

How to Choose the right EOR partner

Finding the right EOR provider is the best way to eliminate these risks and reap the full benefits of the arrangement. Here’s exactly what to look for:

• Owned entities: No matter what a service promises you, only direct ownership allows you to maintain continuous compliance. Ensure your provider operates its own entities in every country rather than risking a fragmentary approach under an aggregator model
• Coverage in key markets: EORs must also have owned entities everywhere that you plan to hire. If they have significant gaps in coverage, you’ll end up adding more providers or trying to handle compliance alone
• Proven compliance track record: Look for evidence of past successes in handling a variety of scenarios. EORs should have customer case studies with data and testimonials to demonstrate their expertise
• In-house legal expertise: Laws can differ considerably between even small neighboring regions, so EORs must have legal, accounting, and finance experts stationed everywhere to assist with hiring, HR, and payroll
• Transparent pricing: Clear, upfront fees help you predict costs and budget effectively for the future
• Scalable infrastructure: Consider whether the EOR can grow with you and adapt to your changing needs. One good sign is if they have many existing customers who came to them as small businesses and have significantly expanded

Speaking of which, learn how Deel EOR helped Revolut create 450 contracts and move into over 16 countries.

See also: Best Employer of Record 2025: Insights from the G2 EOR Report

Expand globally without the risks using Deel EOR

EOR services aren’t a risk. They’re one of the most powerful ways to scale internationally and enter new markets. The real risk lies in trying to manage global hiring with the expert support of a trusted partner.

Plus, with a global partner like Deel, the benefits more than outweigh any perceived risks. Just like that, you get access to local compliance experts, owned entities, efficient payroll processes, and competitive benefits in over 150 countries.

Want to simplify compliance? Talk to Deel and find out how our EOR model can protect you from all the risks that come with international hiring.