An employer of record (EOR) is a company that legally employs a worker in a country where the worker's real employer has no company of its own. The EOR signs the employment contract, runs the local payroll, pays the taxes and provides the benefits there. The real employer directs the daily work and pays the EOR a monthly fee. It is the main product for hiring people abroad.
Why is it needed? To employ someone in India in the usual way, a foreign company needs a registered company in India, called a legal entity or a subsidiary. That company must run Indian payroll, deduct Indian taxes, pay into provident fund and file returns. Setting it up for one or two people can take months and cost a lot. An EOR already has a legal entity in each country it serves. So the foreign company can borrow it.
Consider a software start-up in Berlin, Germany, that wants to hire a data scientist who lives in Coimbatore. It has no company in India. So it signs a contract with an EOR. The EOR's Indian company becomes the data scientist's legal employer. It issues an employment contract under Indian law, with a salary of ₹2,50,000 a month. Every month, it deducts her PF and TDS, the income tax deducted at source, and credits her net salary in rupees. It enrols her in a group health insurance policy. Before she joins, it runs background verification on her.
The start-up never deals with Indian payroll at all. Each month, it receives one invoice in euros. The invoice covers her salary, the employer's PF share, the insurance and the EOR's fee. It pays through a cross-border payment network. Her manager in Berlin assigns her work every day, exactly as for a colleague in Germany.
The EOR is different from simply paying the person as a freelance contractor. A contractor has no PF, no paid leave and no employment protection. If a contractor in fact works like a full-time employee, the company may break the law of that country. The EOR avoids this risk, because the person is a proper employee.
The EOR model is an example of a managed service: the provider's own staff do the work, not just the software. Many EOR providers also run global payroll for companies that already have entities in several countries. If an employee later has to move countries, immigration management software handles the visa. Several EOR companies were founded by Indians. Many foreign companies hire staff in India, so India is one of the main countries that EOR providers serve.