EOR stops making sense at exactly this number

The math most companies run too late.

Most companies never do this analysis. They just keep paying EOR fees because it’s comfortable, the invoices are predictable, and switching feels like a project nobody wants to own. Then one day someone in finance asks why they’re spending $400k a year on employment overhead and nobody has a good answer.

The thing is, EOR is a great product for the right stage. It’s a terrible product if you’ve aged out of it and don’t realize it.

The basic EOR fee structure is pretty consistent across the market. You’re paying somewhere between $500 and $1,500 per employee per month on top of actual salary and benefits. Call it $800 as a working average for a mid-market provider in a Western European or APAC market. Some charge a percentage of salary instead - usually 15 to 25 percent - which gets painful fast if you’re hiring senior people.

Now run the other side of the equation. Setting up a local legal entity costs real money. Registered address, local accountant, payroll software, HR administration, legal fees to incorporate, annual compliance filings. Depending on the country, you’re looking at $15,000 to $40,000 to get set up properly, then $2,000 to $6,000 per month to run it. Germany and the Netherlands are on the higher end. Simpler markets come in lower.

So the math isn’t complicated. If you’re paying $800 per head per month on EOR, and your entity costs $4,000 a month to operate, you break even at five employees in that market. Above five, the entity is cheaper. Every month you wait past that point, you’re leaving money on the table.

The real question is why so few companies actually hit that trigger. A few reasons.

One, the upfront entity cost feels big even when the ongoing savings are obvious. $30,000 to incorporate and get compliant feels like a lot. The fact that you’ll recover it in under a year with six employees doesn’t land the same way emotionally.

Two, entity management is operational work that nobody owns. EOR is clean - one invoice, one vendor, their problem. Running your own entity means hiring or contracting a local payroll person, managing relationships with local accountants, and staying on top of regulatory changes. That’s real overhead.

Three, companies cluster their hires without realizing it. You don’t cross five employees in Germany all at once. You get to two, stay there for a year, add another, plateau again. The math technically tips in your favor but nobody notices because nobody’s watching it.

Here’s what I’ve seen over and over. Companies hit eight or ten employees in a market and they’re still on EOR because the original decision was never revisited. The person who set it up is gone, or they’re busy, or it just never came up in a quarterly review. They’re paying $8,000 to $10,000 a month when an entity would cost them $4,000 to run. That’s $50,000 to $70,000 a year in pure overhead waste.

Market density matters too. If your hires are spread across five countries with two people each, EOR makes sense indefinitely. Managing five separate entities for ten total employees would be a compliance nightmare that costs more than it saves. The breakeven calculation only tips toward entity when you have concentration - five or more people in a single market.

The other variable people ignore is employee seniority. A $200,000 base salary on a percentage-based EOR fee is $30,000 to $50,000 per year in fees alone. One senior hire in the wrong fee structure and the entity math shifts dramatically. I’ve seen single hires where the entity would have paid for itself in 18 months just from eliminating the fee on that one person.

There’s also a hidden cost to EOR that doesn’t show up in the fee line. You don’t control the employment relationship fully. Some providers restrict what benefits you can offer. Contract terms are standardized. If you want to do something non-standard - equity plans, unusual leave policies, custom bonus structures - you’re either fighting the provider or paying extra for customization. Your own entity gives you that flexibility without negotiating it every time.

The breakeven isn’t one number. It’s a function of headcount, market, salary levels, and how much you value operational control. But the rough answer for most markets is five to eight employees. Below that, EOR wins on simplicity and cost. Above that, you’re probably overpaying and the only reason nobody knows is that nobody checked.