When U.S. companies grow beyond their home state—or beyond U.S. borders entirely—one question comes up fast: who is legally responsible for the employee?
Employee classification is extremely important because getting it wrong can lead to payroll errors, compliance gaps, and unnecessary legal exposure—while getting it right allows companies to scale with confidence.
The difference between an Employer of Record vs common law employer comes down to who is the legal employer. An Employer of Record (EOR) becomes the legal employer on paper and manages payroll, taxes, benefits, and compliance, while a common law employer directly employs the worker and assumes full legal, tax, and employment responsibility.
This guide breaks down how the two models differ, when each makes sense, and what U.S. companies need to consider before choosing one.
Key Takeaways
An Employer of Record (EOR) allows companies to hire employees without setting up a local legal entity, while a common law employer must directly employ workers through its own registered entity.
The main difference is legal responsibility: an EOR becomes the legal employer on paper and manages payroll, taxes, benefits, and global compliance, while a common law employer assumes full legal, tax, and employment liability.
Speed and flexibility favor the EOR model—companies can hire in days using an EOR, compared to months required for entity setup and compliance as a common law employer.
A common law employer offers greater control, including full authority over contracts, benefits, and internal policies, but requires significant HR, legal, and payroll infrastructure.
Compliance risk increases with common law employment, especially across multiple jurisdictions, whereas an EOR centralizes and simplifies compliance management.
Many companies use both models simultaneously—operating as a common law employer in core markets while relying on an EOR for international expansion or smaller teams abroad.
What Is an Employer of Record (EOR)?
An Employer of Record (EOR) is a third-party organization that becomes the legal employer of a worker on paper, while your company continues to manage the employee's day-to-day work.
Key Characteristics of an EOR
Legal Employment: Becomes the official legal employer, issuing compliant contracts.
Payroll & Taxes: Manages payroll processing, deductions, tax filings, and remittances.
Benefits Administration: Provides and administers local statutory and optional benefits.
Onboarding: Handles compliant onboarding and offboarding processes.
Compliance: Ensures adherence to all federal, provincial, and local labor laws and regulations.
Tip: Assess your organization's compliance risks with Atlas HXM’s Global Compliance Risk Calculator.
For U.S.-based companies, EOR models are commonly used when:
Hiring workers outside the U.S.
Hiring across multiple states or countries without building local HR infrastructure
Needing faster onboarding without creating internal payroll, tax, and benefits systems
The worker performs services for your business, but the EOR assumes the formal employer responsibilities. This structure often includes third-party payer arrangements, where payroll taxes and filings are handled by the EOR rather than your internal finance team.
What Is a Common Law Employer?
A common law employer is a company that exercises significant control over what work is done, how, when, and where it's performed, setting schedules, providing tools, training, and having the right to direct the worker, making the worker a traditional employee, not an independent contractor, even if labeled otherwise
Key Characteristics of a Common Law Employer
Control: The business dictates the work details, not just the final result.
Behavioral Control: Sets work hours, schedules, provides training, and gives instructions.
Financial Control: Pays a set wage/salary, provides tools/equipment, reimburses expenses, and restricts the worker from working for others.
Type of Relationship: Offers benefits (like insurance), has a written contract, and the worker's services are integral to the business.
You are likely the common-law employer, and the worker may be classified as one of your common-law employees if your company:
Sets work schedules
Provides tools and equipment
Directs how tasks are completed
The IRS evaluates this relationship under the IRS common-law rules, which focus on behavioral control, financial control, and the nature of the relationship. A key part of this analysis is the IRS right-to-control test, which determines who truly acts as the employer.
Employer of Record vs Common Law Employer: Core Differences
Here are the most important distinctions between an EOR and a common law employer:
Category | Employer of Record (EOR) | Common Law Employer (Direct / Legal Entity) |
|---|---|---|
Who’s the Legal Employer | The EOR becomes the official, legal employer | Your company is the direct legal employer |
Core Responsibilities | Handles payroll, taxes, benefits, compliant contracts, and local labor law adherence | Manages hiring, HR, payroll, taxes, benefits, and all legal compliance |
Client’s Role | Manages the employee’s daily tasks, performance, and projects | Manages everything from recruitment through termination |
Key Difference in Liability | Assumes liability for many compliance failures (e.g., tax errors, termination compliance), helping protect the client | Holds all responsibility directly, including fines, penalties, and employment-related lawsuits |
Best Use Case | Quick global hiring, testing new markets, short-term projects, or when no local entity exists | Permanent, large-scale operations where full control and long-term investment are priorities |
Entity Requirement | Not required | Required in most countries |
Benefits & Compliance | Local compliance handled through EOR | Company must ensure its own compliance |
Speed of Hiring | Fast — often days | Slower — setup may take months |
When a Common Law Employer Model Makes Sense
The common law employer model can be the right choice when:
Your company has established internal HR, payroll, and legal teams
You want full control over employment policies
You operate primarily within the U.S. or a single jurisdiction
Many U.S. companies with stable, centralized operations prefer this model because it provides direct oversight and internal alignment. However, it also requires a strong understanding of IRS common-law rules, payroll filings like Form 940 and 941, and ongoing compliance monitoring.
Common-law employer advantages include:
Full control: Direct oversight of hiring, onboarding, policies, and termination
Stronger company culture: Employees are directly employed by your company
Lower costs at scale: Can be more economical for large, long-term teams in one country
Customized employment structure: Greater flexibility in contracts, benefits, and internal policies
Deeper local integration: Enables long-term market presence and brand establishment
Common-law employer disadvantages include:
High setup time and cost: Entity formation, registrations, and compliance setup can take months
Full legal responsibility: All payroll, tax, and employment-law risk sits with your company
Ongoing administrative workload: Requires internal HR, legal, and payroll expertise
Slower hiring speed: Expansion timelines are constrained by local setup requirements
Complex multi-country management: Scaling across jurisdictions multiplies compliance obligations
When an Employer of Record Is the Better Option
An EOR model is often the better fit when:
Hiring internationally
Expanding into new markets quickly
Managing workers across multiple jurisdictions
Reducing internal administrative workload
Using an EOR allows U.S. companies to stay focused on growth while employment administration is handled externally. When structured correctly, this reduces exposure to classification errors involving common-law employees and minimizes payroll reporting risk tied to form 941.
EOR benefits include:
Fast market entry: Hire in new countries in under two weeks instead of months with Atlas HXM
No local entity required: Avoid the time and cost of setting up a legal entity
Reduced administrative burden: Payroll, taxes, benefits, and compliant contracts are handled externally
Lower upfront costs: No entity formation, local HR team, or payroll infrastructure needed
Simplified global hiring: Ideal for remote teams and multi-country workforces
Compliance support: Local labor law requirements are managed by the EOR
EOR disadvantages include:
Less policy customization: Some employment policies follow standardized local frameworks
Third-party involvement: Another party sits between your company and the employee
Why Companies Choose Atlas HXM
When the decision comes down to EOR vs common-law employer, what matters most is confidence—confidence in compliance, payroll accuracy, and the people supporting your business.
That's where Atlas HXM stands apart. We are ranked as an established and recognized leader in the Employer of Record industry by independent analysts like Everest Group and NelsonHall.
Atlas HXM is not a platform-only provider; we operate as a direct Employer of Record model, meaning Atlas HXM owns and manages its legal employer entities instead of relying on third parties. This gives companies a single, accountable partner across every country they operate in, reducing risk and eliminating the complexity that comes with layered vendors.
With Atlas HXM, companies gain:
Access to the largest Direct EOR with compliant hiring across 160+ countries, without setting up local entities
Saving up to 82% versus setting up your own entity, with our per-employee rates dropping as your teams grow.
Upfront EOR costs with each service itemized before you sign, so your budgets are planned and your finance teams are happy.
Benchmark GDPR standard for all data protection requirements
ISO 27001, 27017, and 27018 for information security
Human expertise at software speed with expert-led support, not bots or ticket-based systems
Over 99% accurate global payroll, backed by rigorous compliance standards
Clear separation of responsibilities helps reduce co-employment risks
Strong employee experiences, with support in over 50 languages, premium global benefits for healthcare, life and travel insurance, EAP, and more, and access to thousands of learning and development courses
Whether you're expanding into new markets, hiring internationally for the first time, or managing a growing global workforce, Atlas HXM provides the infrastructure, expertise, and accountability to support your growth.
Contact Atlas HXM today to see how a direct EOR service provider can support your company's growth without unnecessary risk.
FAQs
What Is a 941 Form?
Form 941 is a quarterly payroll tax form that U.S. employers use to report employment taxes withheld from employees' paychecks to the Internal Revenue Service (IRS).
In simple terms, Form 941 tells the IRS how much payroll tax you owe and how much you've already paid.
Employers use Form 941 to report:
Federal income tax withheld from employee wages
Social Security tax (both employee and employer portions)
Medicare tax (both employee and employer portions)
Adjustments for sick pay, tips, and group-term life insurance (if applicable)
This form does not cover unemployment taxes—that's handled separately using Form 940.
What Is a 940 Form?
Form 940 is an annual federal payroll tax form that U.S. employers use to report and pay Federal Unemployment Tax Act (FUTA) taxes to the Internal Revenue Service (IRS).
In simple terms, Form 940 tells the IRS how much federal unemployment tax an employer owes for the year.
Form 940 reports:
FUTA taxable wages paid to employees
Federal unemployment taxes owed
Credits for state unemployment taxes paid (if applicable)
Unlike other payroll taxes, FUTA is paid entirely by the employer—nothing is withheld from employee paychecks.
When an EOR is used, payroll may operate under third-party payer arrangements, where the EOR files and remits payroll taxes on behalf of the employer.
What Is Co-Employment vs Joint Employment?
Co-employment is an intentional, structured relationship where two parties share employment responsibilities, with clear roles defined. One party (such as an Employer of Record) handles legal and administrative duties like payroll and compliance, while the other manages day-to-day work.
Joint employment happens when two entities both exercise control over the same worker, often without intending to. When this occurs, both parties can be held fully liable for wage, tax, and labor law violations.
Co-employment = planned, documented, and managed
Joint employment = unintentional, higher-risk, and often discovered during audits or disputes
What Is Co-Employment Risk?
Co-employment risk is the shared legal and financial liability between two companies for the same worker that arises when both exert control, leading to potential lawsuits over benefits, misclassification (treating contractors as employees), wage/hour violations, discrimination, or safety issues, even if roles are split.
It creates complexities because both entities can be held accountable for employment law compliance, leading to penalties, audits, and reputational damage if not managed carefully.
What Is the IRS Right-to-Control Test?
The IRS test is used to decide whether a worker should be classified as an employee or an independent contractor. There are three main categories of analysis: behavioral control, financial control, and the type of relationship.
The core idea is simple: who has the right to control how the work is done?
If the business controls what will be done and how it will be done, the worker is usually an employee under IRS common-law rules.