Employer of Record vs. Own Entity: Hiring Engineers in Europe

The short version: use an Employer of Record (EOR) when you are hiring fewer than roughly five people in a country and you are not yet sure you will still be there in two years. Incorporate when the headcount, the tenure, or the function — a country lead, a data-handling team, an R&D unit eligible for local incentives — makes the entity cheaper, safer, or necessary. Most companies get this wrong in one direction: they stay on an EOR three hires too long because the alternative looks like paperwork, and then pay for it in per-head fees, equity problems, and a messy conversion.

Here is how the decision actually works, market by market, and what breaks at the edges.

What an EOR does and does not do

An EOR is a company that already has a legal entity in the country, puts your hire on its payroll, and invoices you. It owns the employment contract, runs payroll and social contributions, handles statutory leave and sick pay, and absorbs the compliance exposure that comes with being the employer of record. You direct the work day to day.

What it does not do:

• Find the person. EOR pricing assumes you arrive with a signed candidate. Sourcing, assessment, and closing are a separate problem — and in competitive markets, the harder one.
• Give you a clean equity story. Stock options granted to someone employed by a third party are awkward in most jurisdictions. Some plans do not permit non-employee grants at all; where they do, the tax treatment for the recipient often differs from what your domestic employees get. Engineers at senior levels notice.
• Make you a credible local employer. Candidates comparing three offers read the contract header. "Employed by [provider] on behalf of [your company]" costs you something in the final conversation, especially with people who have been through a client's withdrawal from a market before.
• Cover every country equally. Pricing is usually a flat monthly fee per employee or a percentage of gross salary, plus a deposit against termination liabilities. The fee is predictable; the deposit and the severance exposure often are not.

The threshold where an entity wins on cost alone

Run the arithmetic rather than the intuition. An entity has a fixed cost base — incorporation, registered address, local accountant, annual filings, payroll software, possibly a statutory director — that barely moves whether you employ two people or twenty. EOR cost scales linearly with headcount. There is a crossing point, and in most Western European markets it lands somewhere in the three-to-six employee range, earlier if salaries are high and your provider charges a percentage.

But cost is rarely the binding constraint. These usually are:

• You need to hire a country lead. Someone who will represent you to local customers, sign things, and build a team under them will ask who they actually work for. Hiring directors and country managers through an EOR is possible and frequently a bad trade.
• Enterprise procurement is in the loop. Banks, insurers, and public-sector buyers in the EU increasingly ask where the people touching their data are employed. "A third-party employer in Warsaw" generates a questionnaire you did not budget for.
• You want local incentives. R&D tax credits, Turkey's technology development zone regime, IT-sector reliefs in parts of Central and Eastern Europe — these generally attach to a local entity carrying out qualifying activity, not to a headcount rented from someone else.

Where country law changes the answer

The EOR model is not uniformly legal, and the differences matter more than vendor marketing suggests.

Germany. Supplying workers to another company's direction is regulated as labor leasing under the AÜG and requires a license, with limits on assignment duration and equal-treatment obligations. Reputable providers work within that framework; the duration limits mean an EOR in Germany is structurally a temporary arrangement, not a permanent one. Termination protection under the Kündigungsschutzgesetz also kicks in with tenure and employer size, so "we will just end it if it does not work" is not a strategy. Plan the entity before the first German hire hits their second year.

Poland. A large share of senior developers prefer self-employed B2B contracts for tax reasons and will quote you rates on that basis. That looks like it solves the problem — no EOR, no entity, just an invoice. It solves it only if the relationship genuinely is a contractor relationship: no fixed hours you set, no exclusive engagement, no integration into your line management. Where it is not, reclassification exposure sits with you, and it compounds with every month of arrears. The practical rule: contractor contracts for genuinely autonomous specialists and agencies, employment (EOR or direct) for people who sit in your standup every morning.

Turkey. Employee leasing is tightly restricted, so the pure EOR model that works in Lisbon does not transplant cleanly. The common routes are a local entity — often lighter to set up than founders expect — or a services arrangement with a partner who employs the team and delivers defined work. The second route is what most companies mean when they say nearshoring, and it is the basis of how dedicated engineering and operations teams are usually structured in the market.

France, Spain, Netherlands. Statutory severance formulas, collective bargaining agreements that set minimum salary bands by role and seniority, and inventions-of-employment rules that may require extra compensation for patentable work created by employees. None of this disappears under an EOR; it is simply administered by someone else, and you pay for it through the deposit and the exit invoice.

Intellectual property is the quiet failure mode

If the EOR is the employer, the employee's work product vests with the EOR by default in many jurisdictions, not with you. Good contracts chain the assignment through to the client. Weak ones leave a gap that nobody notices until a due diligence lawyer reads the stack of agreements during your Series B. Ask for the IP assignment clause in the employee contract, not just in your master services agreement, and check whether the country in question recognizes assignment of future works at all — several civil law systems restrict it.

How to sequence it

A sane pattern for a company entering a new European market:

1. Hire the first one or two people through an EOR. You are testing whether the talent pool, the time zone, and the salary expectations work.
2. Decide at hire three or four, not hire eight. By then you know your monthly run rate per head and whether you have a team or an experiment.
3. Incorporate while the team is small. Converting five employees from an EOR to your own payroll is a two-month project with continuity-of-service and benefits questions. Converting twenty is a quarter of someone's job.
4. Preserve seniority on transfer. Accrued tenure affects notice periods, severance, and vacation entitlement. Candidates will ask, and if you reset it, you deserve the attrition.

The real constraint is almost never the legal wrapper. It is whether you can find and close the engineers in that market at the level you need — which is the part no EOR does for you, and the part worth getting help with before you pick a vendor. If you are weighing two or three markets at once, it is worth comparing what technical hiring actually looks like on the ground in each before you commit to a structure for any of them.