An employer of record (EOR) is a provider whose own Indian company legally employs people on behalf of a foreign business that has no entity in India. The EOR issues the appointment letter, runs Indian payroll and statutory filings, and bills the foreign client, while the client decides what the employee works on day to day.

What the EOR’s Indian entity takes on

Because the EOR is the employer on paper, every registration is in its name, not the client’s:

• PF contributions and UAN linking, and ESI where the employee’s wages fall within the ESI ceiling
• Salary TDS under section 392 of the Income-tax Act, 2025 (section 192 of the 1961 Act until 31 March 2026), and Form 16 at year end
• Professional tax and labour welfare fund in states that levy them
• Gratuity, leave, bonus and notice obligations, plus the state shops and establishments registration for the work location

A US startup hiring three engineers in Pune can put them on the EOR’s existing payroll this way, instead of first incorporating a subsidiary and registering it with EPFO, ESIC and the state. The trade-off is a monthly fee per head on top of salary, and less control over policy, since the employee sits on the EOR’s handbook and benefits.

The risks that do not move to the EOR

Permanent establishment. Indian staff working for a foreign company can create a taxable presence for it in India. Law firm commentary flags staff who negotiate or conclude contracts, or generate significant local sales, as the classic triggers. An EOR does not remove this: the tax officer looks at what the people actually do, so keep EOR staff out of signing customer deals unless your tax adviser has cleared it.

Substance over form. If the foreign company selects, pays in substance, supervises and can dismiss the worker, the arrangement can be read as direct employment. AZB & Partners has noted it may then be treated as a sham and raise FEMA questions, since foreign companies may only operate in India through recognised routes.

IP and equity. Work created by the employee belongs first to the EOR as employer, so the EOR contract needs a clear assignment to the client. Granting the parent’s ESOPs or RSUs to someone who is not your employee also needs separate structuring.

Frequently asked questions

Is hiring through an EOR legal in India?

Yes, the EOR is simply an Indian employer meeting Indian law. The risks above are about the foreign client’s tax and regulatory position, not about the EOR itself.

Can an EOR hire contractors instead of employees?

Many also offer contractor payments, but a full-time “contractor” doing core work fails the tests described under independent contractor vs employee, whoever pays the invoice.

When should we set up our own entity instead?

When the India team becomes large or permanent enough that per-head fees and PE exposure outweigh setup costs, or when you need Indian contracts signed locally. Our global payroll and EOR guide compares provider pricing.

Still deciding between models? The PEO page explains how the PEO label is used in India and how it differs from an EOR.