Legal Challenges in Emerging Markets

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Gino Peters

Written By:

Gino Peters

Reviewed By: Belinda E.

June 3, 2026 7:26 pm

Category Tag: News

The rise of remote work made international expansion much easier in recent years, but hiring abroad still comes with legal and administrative complexity, as every country has its own labour laws and payroll rules that must be followed. In addition, not many companies can open a new entity in every new market that they are expanding into. That is when the Employer of Record (EOR) solution comes in handy.

The EOR serves as the legal employer on paper, while the client company manages important activities related to the employees responsibilities and performance.

In this guide we will cover what an employer of record is, how it works in detail, how much it can cost and which business should consider an EOR solution.

What is an Employer of Record (EOR)?

An Employer of Record (EOR) is a third party service provider that legally employs a person on behalf of another company in the country where the employee officially resides. As an official employer the responsibilities of EOR include issuance of an employment contract, processing payroll and withholding taxes and necessary social security contributions, as well as preparation of offboarding documents or any documentation that need to be signed by the employer. In addition, EOR ensures the compliance with local labour laws and serves as a first point of contact for any legal disputes.

The client company that hired the employee through an EOR also has a list of responsibilities. As an Employer of Record does not have the visibility on operational activities behind the scenes a client company needs to provide direction and ensure proper team integration.

In simple terms, the EOR provider acts as a legal employer in the country of the employee’s residence, while the client company takes on day-to-day manager work.

Responsibility	Employer of Record (EOR)	Client Company
Employment contracts & any other official documentation
Payroll processing
Income tax & social security contributions
Compliance with local labour laws
Statutory benefits administration
Managing daily work and projects
Setting goals and performance expectations
Providing equipment and tools
Leading the employee’s team and workflow

Employer of Record solutions gain more and more popularity in the field of global expansion as they allow businesses to hire best candidates fast and easy while staying compliant with local employment regulations. More information about EOR service are available if you would like to understand more.

EOR Meaning

The term “EOR” is the abbreviation for Employer of Record.

Employer in this instance stands for the company that hires the employee and takes on duties related to it, such as onboarding and offboarding process, payment of wages and compliance with other legal requirements.

“Record” from the EOR perspective refers to official registration with government authorities. The name of the EOR provider is stated in all payslips and tax filings, and should also be listed by the employee in any documents where employer must be stated, such as mortgage or loan applications.

One might ask a question of why this legal structure exists. As it is not possible to provide an employment contract directly to a person that legally resides in another country, the business expanding abroad typically needs to establish a local entity. That involves legal registration, arrangement of local bank accounts and organisation of payroll structure, as well as compliance with local law.

EOR allows to simplify the global hiring and reduce administrative burden through their existing legal entity.

There are some other hiring models that can be confused with EOR.

EOR and PEO

Many sources online refer to EOR as “international PEO”, which may create confusion as these models have 1 important difference.

A Professional Employer Organisation (PEO) serves as a co-employer of a client company. In other words, a business must already have an established entity in the country. The hiring tasks are, therefore, shared between 2 companies, while legal liability stays only with the client company. In the EOR model all legal risks are being taken by the official employer. Read more about the difference between PEO and EOR here.

EOR and staffing agency

Staffing companies mainly provide assistance for short-term projects by providing temporary workers. If the client wishes to employ a person for a longer time, EOR approach must be chosen.

EOR and contractor model

Contractor agreements assume the involvement of independent workers rather than employees. This model is also often used for temporary, project-based assignments. It is important to remember that there is a big misclassification risk between a contractor and an employee in the company which can lead to potential legal issues. An EOR ensures that employment is legally compliant with local labour law.

How does an Employer of Record work?

While it may sound complicated at first, a process behind the employer of record model is relatively straightforward.

The operating company selects a candidate

The client company recruits the employee they want to hire in another country

The EOR becomes the legal employer & local employment contract is issued

The Employer of Record uses its local legal entity to prepare and issue an employment contract that complies with labour law of the country where the employee is based. Depending on case-by- case situation, the work visa might need to be secured beforehand. Our company provides immigration services, more details can be found here.

Payroll and taxes are managed

The EOR takes on recurring responsibilities related to a payroll and ensures correct processing of income tax, social security contributions etc

Benefits are administered

Paid leave, sick leave, pension contributions and any other statutory benefits are being managed by the EOR.

Ongoing compliance and HR support

It is the responsibility of the EOR to monitor changes in local labour law and ensure ongoing compliance.

Example:

Imagine a UK-based tech company found a perfect candidate in Germany for a position of a software developer.

Instead of going through the administrative burden of opening a legal entity in Germany, the company chooses to work with an Employer of Record. The EOR hires the developer under a German employment contract and manages payroll and taxes. At the same time the UK company welcomes the new employee in the team and manages the daily work of a developer.

What services does an Employer of Record provide?

The Employer of Record does more than just providing an employment contract to the employee. Typically a wide range of HR and compliance services is included in the EOR offer. For example, read about the services included in our EOR package here.

Employment and HR administration

Locally compliant employment contracts and support with other documents requested by authorities
Employee onboarding
Employee record management. For example, control over PTO

Payroll and tax management

Regular payroll processing
Tax withholding and reporting of social security contributions with authorities
Payslip generation and creation of annual wage tax certificates

Benefits administration

Management of statutory benefits
Pension contributions (where required)
Support with benefits such as maternity leave allowance, sick leave allowance etc

Compliance and risk management

Insuring compliance with local labour law
Management of onboarding and offboarding processes
Representation in difficult legal and court cases

Additional services:

Some EOR providers ( such as ThisWorks EOR Services) provide additional services such as:

Work permit and dependent visa support
Background checks
Relocation support
Value added services: support with housing, company car, banking, etc ( depending on the country).

This vast list of services allows businesses to manage international teams, while staying compliant and avoiding complex local employment administration.

Benefits of using an EOR service

There are multiple advantages the businesses can get from working with an Employer of Record provider.

Faster global hiring

Setting up a new entity can take up to several months. With an EOR the hiring process can take several days.

Reduced compliance risk

A trustworthy EOR provider ensures the compliance with all local regulations. As the labour law varies greatly between countries, having a knowledgeable party to rely on can make a big difference.

Lower expansion costs

Establishment of a new entity is not only a time-consuming process, but also costly. With EOR services these costs can be avoided.

Access to global talent

The location of a remote candidate is not a problem if the company uses Employer of Record services. In other words, the best candidate for specific business purposes can be chosen.

Scalable hiring model

EOR services are ideal for organisations that want to scale international hiring quickly. They are particularly useful in the following situations:

Remote-first teams and organisations
Companies testing new markets abroad
Startups expanding internationally

How to choose the right Employer of Record

Choosing between several EOR providers is important, as it influences not only compliance, but also employee experience for new hires and how your company is perceived on the job market.

Here are some important things to keep in mind when deciding on your EOR partner:

Geographic coverage

Make sure that EOR provider can cover the country where you want to expand globally. Read about our EOR coverage here.

Pricing transparency

Check that EOR provider does not have any hidden costs and the pricing is clearly outlined in your MSA.

Compliance expertise

A strong EOR provider should have a team of experienced local HR specialists who understands all in and outs of a national labour law.

In-house vs partner model

Some EOR providers rely on their third-party partners, while others manage employment directly through their own local entities.

Customer support

It is important to find a EOR partner that helps with any questions or concerns in a quick and professional manner. That can be crucial when dealing with employee offboarding or any legal disputes.

Warning signs

Understanding the importance of choosing a right party, your company should be cautious of providers that lack local expertise and cannot give clear answers to your labour law questions. In addition, companies with slow response times can prove to be unreliable in critical situations. Furthermore, providers with complex pricing models with many hidden fees can create a lack of cost transparency and result in unforeseen expenses.

By selecting a provider with strong expertise in local labour law and reliable support from dedicated teams, your company can ensure a smooth international growth. Learn why companies choose ThisWorks as their EOR partner.

How much does an employer of record cost

The vast coverage of services the employer of record provides makes many businesses ask how much an EOR costs.

Pricing models vary greatly on the provider and the country of coverage, but most EORs use one or more of the following structures.

Flat monthly fee per employee.

The EOR provider charges a fixed monthly fee for each employee they have on the payroll from the client.

Percentage of salary

While not being a popular approach, some EOR providers charge a percentage of the employee’s salary, typically ranging between 5%-15%.

Setup fees

Some providers charge onboarding or offboarding fee for each employee.

The fee that the business needs to pay to an EOR provider also depend on the location of a service. Local labour law complexity of some countries can influence the fee. In addition, some countries have specific statutory benefits and payroll administration requirements. Furthermore, employee headcount in the specific location can influence the fee.

EOR vs setting up a legal entity

To establish a new entity the organisations needs to go through legal and tax registration. In addition, accounting support and ongoing compliance costs such as the fees for local labour lawyers can make setting up a legal entity significantly more expensive.

An EOR allows companies to expand globally without these upfront investments.

EOR vs hiring contractors

Some businesses decide to hire international workers as contractors. However, this approach can often lead to a misclassification risk, which can cause legal and tax liabilities.

A professional EOR provider ensures that the new starters are compliantly onboarded under local employment regulations.

EOR FAQs

Is an EOR the same as a PEO?

No. PEO model assumes co-employment and requires the business to already have established local entity, while EOR employs new talents through its own entity only.

Can an EOR hire contractors?

While some EOR providers can support hiring contractors, it is important to remember that main function of EOR is the employment of full-time workers legally in a country. A risk of misclassification between EOR and contractor should be also considered carefully.

Is an employer of record legal?

Yes, when established and structured properly, Employer of Record entities are legal and widely used for international expansion by many companies.

When should you use an EOR?

The most common reason for using EOR include:

Hiring employees located in another countries remotely
Testing new markets before establishing an entity
Expanding internationally

Can you switch from EOR to your own entity?

Yes. Many companies initially hire through an EOR for the ease and speed of expansion and later transition employees to own legal entities upon their establishment. It is important to remember that some countries require specific procedure to be followed in such a scenario.

Get in touch with ThisWorks

Expanding your team globally does not need to be long and administratively complex.

With the use of Employer of Record the businesses can have access to the best talent from around the world while ensuring full compliance with local labour laws.

ThisWorks can support your global expansion with our compliant Employer of Record services.

Contact our team to find our how we can help your international team glow fast and compliantly!

EOR Compliance Experts in Emerging Markets

For companies venturing in the emerging markets, the nuances of local compliance is daunting. Misclassification penalties and abrupt legal changes are some of the big risks companies take when they scale quickly. Enter Employer of Record (EOR) that provide a streamlined solution, enabling companies to maintain their global operations while reducing their legal exposure. This article examines EORs as compliance consultants, guiding companies through the lawless landscape and growing with confidence in difficult markets.

The Emerging Market Compliance Minefield

Moving into new and emerging markets presents enormous opportunities in growth markets but also introduces businesses to a variety of regulatory risks. There tend to be complex legal frameworks there, and laws can change on short notice there, too. Global employers who attempt to manage these challenges without local expertise risk making very expensive mistakes. Employer-of-record (EOR) are critical to keeping organizations in compliance while they grow rapidly in disparate, ever-changing geographies.

Top Risks: Misclassification, Sudden Changes, and Local Partner Pitfalls

One of the greatest threats that companies doing business in emerging markets will encounter is misclassification. In Brazil, for instance, firms can be fined as much as 150% of back pay for workers denied full rights, an expensive miscalculation that can hit the bottom line very hard. The reformed 2024 labour code of India added new complications by making the employee severance and retrenchment process more stringent. Some shifts may come as a surprise to companies, particularly if they do not have local legal expertise.

Another well-known challenge has to do with relationships with local partners. In places like Nigeria, businesses can face challenges such as ghost payrolls, where fictional employees are added to payroll systems, resulting in both financial and reputational loss. In Vietnam, too, fake contracts can result in quarrels with the authorities. All of these challenges reinforce the need for a trusted, well-formed voice at a local level to help keep businesses legal.

Stark Reality: Compliance Lawsuits and Risks

The truth of the matter for many companies who are newcomers to emerging markets is that lawsuits for compliance are not exceptions. Nearly seven out of every ten companies 68% experience compliance-related legal problems within the first 18 months of market entry, according to PwC’s 2023 report. This number underscores the importance of knowing local labour laws and ensuring you are set up for compliance before hiring employees or contractors.

When companies are left to navigate these waters on their own, they run the risk of exposure to the crosshairs of massive fines, delays, and reputational harm. EORs enable organizations to limit these risks by offering the expertise required to make sense of local laws and regulations and ensure companies do not make the same mistakes as others do when they step up to the global stage.

Why EORs Are Essential in Emerging Markets

EORs are far more than just paper pushers that clients use to pivot around these regulations. They provide services that include making sure workers are classified correctly, handling payroll off of local books, and updating employment contracts as regulations change. Leveraging their skills and local insights, EORs act as barriers against the numerous risks associated with growing into developing markets.

By helping businesses stay compliant, they allow operations to run more smoothly and decrease the risks of costly errors, as companies can scale up suddenly without sacrificing legal safety.

How EORs Solve the Unsolvable

As companies expand into emerging markets, they are often hit by a labyrinth of legal and regulatory challenges that can seem impossible to navigate. EOR address these complex issues so that organizations can scale quickly without falling foul of local employment laws. EORs are key for pre-entry legal firewalls, real-time compliance switching, and for that muscle when unforeseen needs arise.

A. Pre-Entry Legal Firewalls

Businesses must be wary of regulatory risks before they enter a new market. EORs assist in creating legal pre-entry firewalls, which curb the prevention of firms entering into blacklisted countries or sanctioning risky territories. The firewalls also look at whether a country’s labour and employment laws and regulations coincide with the company’s desired parameters for classifying workers, providing benefits or establishing contract terms.

For example, EORs can help them stay in line with Saudi Arabia’s 2024 Nitaqat quotas, a labour law that stipulates businesses must employ a minimum proportion of Saudis in certain industries. Not only can EORs help companies determine whether they already comply with these quotas, but they can also offer alternate solutions to guarantee compliance and avoid possible sanctions.

B. Real-Time Compliance Switching

Once a market is penetrated, a company must remain in compliance on an ongoing basis. EOR systems enable compliance switching in real-time to stay ahead of new or surprise regulations. Integrations and automation with contracts and payroll solutions These can auto-update based on new laws on labour, tax or benefits with no need for manual processes.

Indonesia’s new formula for entitled severance pay would also animate in the EOR system, requiring companies to pay three times the global average for severance, for instance. Likewise, Turkey’s unexpected forex payroll regulations, which mandate to pay salaries in foreign currencies, can be simply handled through a compliance switch, that avoids fines and sanctions.

C. Contingency Muscle

No matter what kind of systems you have in place, there are always unforeseen legal problems, particularly in countries where the laws are in a state of rapid flux. EORs lend backup muscle by providing pre-vetted local lawyers on call. These attorneys respond, on average, in 2 hours so that businesses can make decisions in a timely manner. Whether it’s timely labour disputes, contract breaches, tax laws, or more, businesses are never left surprised when they employ an expat employer of record.

Its worth noting that not every EOR offers the same degree of legal backup. Some EORs without in-country litigators might even open businesses up to unexpected legal battles. With local litigators on the ground, companies can safely navigate some of the toughest legal terrains.

Why EORs Are Essential for Scaling Fast

In developing markets, where the legal territory can change at a moment’s notice, EORs offer the necessary flexibility and depth of expertise companies need so they can scale at speed while meeting all their obligations. They de-risk by providing answers to the legal headaches of pre-entry to post-entry. EORs allow companies to scale their international workforce and scale globally without getting bogged down in complex legal regulations and changes.

Service	Benefit	Example
Pre-Entry Legal Firewalls	Protects against entering blacklisted or sanction-heavy regions	Shielding against Saudi Arabia’s 2024 Nitaqat quotas
Real-Time Compliance Switching	Automates compliance updates in response to regulatory changes	Adjusting to Indonesia’s severance formulas
Contingency Muscle	Provides access to pre-vetted local lawyers for quick legal resolution	2-hour average response from local litigators

Battle-Tested Frameworks

In fast-changing emerging markets, businesses must do much more than just comply with the law: they need battle-tested frameworks that enable them to not only monitor risk but also adapt to the times and maintain compliance over time. EORs give companies a 4-phase playbook for an emerging market that has been practised in real logic. This playbook helps companies address the legal risks and plays a key role in continuing a robust operation as they grow their presence across borders.

Phase 1: EOR-Run “Shadow Payroll” Trials (90 Days)

The 90-day shadow payroll audit is the first component of the battle-tested program. In the process, businesses can experiment with how their payroll system will operate in a new market without having to make large-scale investments. Shadow payrolls allow employees to be paid per local laws and regulations without having to create a legal entity in the country. This stage gives organizations a comprehensive understanding of the logistical needs when paying employees and ensures companies abide by in-country tax and labour laws.

Phase 2: Compliance Stress Tests (Mock Labor Audits)

During the second phase EORs perform compliance checks simulating a labor audit. These audits are equivalent to labour inspections that can be performed at a municipal level and assess a company’s capability of responding to compliance questions. With the mock audit, businesses can find potential liabilities, like misclassified employees or insufficient benefits packages, as well as incorrect tax filings. Applying security stress tests in advance of an audit can help companies plug compliance gaps and be better equipped to handle real-life inspections.

Phase 3: On-the-Ground Culture Checks

The third level is about culture checks on the ground. Compliance is not only about maintaining the right side of the law; it is about knowing and working within local business climates. Those EORs allow businesses to evaluate cultural fit and avoid some common pitfalls, like the liquidación traps in Argentina, where companies can be penalized for making improper severance payments. Speaking the local culture helps your company run seamlessly and prevents costly legal battles when things go wrong due to misunderstandings or cultural faux pas.

Phase 4: AI-Driven Regulatory Monitoring

With the rapid movement in regulation going on in emerging markets, businesses have to be plugged into the latest changes in laws and rules. EORs track regulatory updates and flag changes that might affect a company’s activities. This proactive posture enables companies to stay ahead of regulation, maintaining compliance will little heavy lifting.

Cost of Getting It Wrong

Opportunities in developing markets are abundant, but entering them also has risks. EORs are important partners for businesses to help manage these risks, maintain compliance, and avoid expensive errors. The pitfalls of getting compliance wrong can also be severe, nothing less than reprisals or harm to an organization’s reputation and operations — as well as steep fines or financial hits. Businesses which do not manage their compliance correctly may find growth and industry expansion stymied.

Financial Impact: Lawsuits and Penalties

The financial impact of lawsuits and penalties The financial implications of lawsuits and penalties are arguably one of the most significant costs associated with non-compliance. In Mexico, for instance, a misclassification lawsuit can cost a company at least $250,000 on average. That includes fines, back pay and legal fees, which can be catastrophic for a business, especially when working in a low-margin industry. Misclassifications of workers, or keeping employees off the books to avoid local labour law requirements, can lead to more fines and penalties, exacerbating the financial crisis.

EORs can help avoid these costly problems by ensuring businesses comply with local labour laws and don’t fall into expensive traps. Using legislative expertise at the local level, EORs make sure that the right staffing quality is respected, that contracts are fulfilled correctly, and that payroll is handled according to the law.

Reputational Damage: Hiring Freezes and Public Scrutiny

Aside from the financial costs, companies stand to lose face when they fail to comply. For instance, if a company is convicted of not following local labour laws, it could suffer hiring freezes or other hits to its reputation. Companies were found flouting labour laws in Ghana, which led to hiring freezes for 9 months everywhere. Such delays can stall growth and erode investor confidence, especially in scaling operations.

In addition, EORs protect a business’s image by ensuring that labour practices are not only morally sound but are also transparent and uphold local laws. Not only does this protect a company’s good name, but it also allows them to develop good relationships with the local authorities, staff and customers.

Operational Delays: Unwinding Bad Entities

An additional, significant price of non-compliance is the operational loss of time and energy in trying to separate bad entities. Without robust compliance models in place at the start, a company could find itself 6 to 12 months later dealing with misclassified employees, bad contracts, non-compliant entities, and all of the associated issues. Such delays can invalidate business flows and cause severe operational inefficiencies.

Through an EOR, organizations can side-step the need to unwind failed entities, resulting in compliant, seamless operations from day one. With the right legal and compliance assistance, businesses can scale rapidly and efficiently without operations being hindered.

The 2025 Compliance Arms Race

With companies increasingly looking to penetrate new markets, the need for advanced compliance applications is on the rise. By 2025, the EOR landscape will feature an arms race for the best tools and technologies businesses need to stay competitive and compliant. Advanced AI, blockchain, and predictive analytics will be cornerstones of the next-gen EOR managing the rising tides of regulatory complexity.

Next-Gen Tools: Blockchain and AI

And then there are promising future uses of blockchain technology, such as proof of work permits and other important documents. Trialled in the UAE, the use of blockchain for work permits is seen as providing a solution to clamp down on fraud and make verifying workers more efficient. The technology secures work permits and employee credentials in a way that makes verification easy, tamper-proof and portable, a huge advantage for worldwide hiring.

Further, AI judges are being trained as models to predict the results of labour court cases using both historical as well as contemporaneous (real-time) data. These are AI systems that can read tens of thousands of labour disputes and forecast the chances of success in legal proceedings. For those doing business in complicated legal settings, AI-based insights can also help businesses steer clear of expensive legal fights and make sure they’re following the law.

Compliance-Light EORs at Risk

But, businesses must also be careful in hiring an EOR provider. EORs, such as compliance-light ones that do not fully adhere to emerging regulations, will struggle under tough laws such as the EU’s Corporate Sustainability Due Diligence (CSD) regulations. Regulations that force companies to undertake and report on due diligence in respect of human rights and environmental sustainability, or risk significant sanctions.

EORs as Your Corporate Immune System

In today’s incredibly complex international human capital management environment, EORs are more than vendors — they are your corporate immune system. EORs offer knowledge of compliance, legal and modern technology solutions to enable businesses to grow rapidly, minimize risk, and succeed in new markets.

Final Thoughts

With businesses expanding in emerging markets, the need for EORs as compliance specialists has never been more important. Leveraging tech-driven solutions such as AI, blockchain and predictive analysis, EORs assist companies in negotiating difficult legal terrains, keeping them compliant and minimizing risk. Looking towards 2025 and beyond, EORs are going to be indispensable allies, like the corporate white blood cell that protects companies from the killers and ensures swift, long-term growth.

FAQ

What legal challenges do companies face in emerging markets?
Companies are often upended by unexpected labor law, tax or severance policy changes that may be attenuated by EORs that can provide up-to-the-minute compliance reporting.