Terminating an EOR arrangement does not have to disrupt an employee’s employment, provided you plan the transition carefully. The key lies in timely preparation: ensure that the legal employer status transfers to your own entity or a new EOR party at the right moment, without the employee experiencing any interruption in pay, employment conditions, or social security. In this article, we answer the most frequently asked questions about terminating an EOR contract and how to make that process run smoothly.
What happens to the employment when an EOR arrangement ends?
When an EOR arrangement ends, the formal employment relationship between the employee and the EOR as legal employer comes to a close. What happens to the employment afterwards depends on how the termination is organised: the employee transfers to a new legal employer, or the employment is actually terminated.
In practice, there are three scenarios:
- Transfer to direct employment: the company has since established its own legal entity in the employee’s country and employs them directly. The employment continues in principle, but a new employment contract is concluded.
- Transfer to another EOR: the employer switches EOR provider, whereby the employee formally enters into employment with another party. Continuity is possible here as well, but this requires careful coordination.
- Actual termination: if there is no succeeding employer, the employment ends. In that case, local dismissal rules apply in full, including notice periods, severance pay, and any reintegration obligations.
Regardless of the scenario, the employee retains the right to the employment conditions and social security that apply locally throughout the entire transition period. Terminating an EOR arrangement without safeguarding this can lead to claims from the employee and legal risks for the company.
When is the right time to terminate an EOR arrangement?
The right time to terminate an EOR arrangement is when your organisation is ready to take on the employer responsibilities itself, or when the business reason for the EOR arrangement has ceased to exist. Timing is crucial: stopping too early leads to compliance issues, stopping too late leads to unnecessary costs.
Typical triggers for planning the transition are:
- You have established your own legal entity in the employee’s country and are operational as an employer.
- The employee is moving back to the country of the original employer and can enter into direct employment.
- Business activities in the relevant country are being scaled back or ceased.
- The contract with the EOR provider is expiring and you do not wish to renew it.
Take into account the notice periods included in the contract with the EOR. Many EOR providers apply a notice period of thirty to ninety days. In addition, the takeover of the employer role must be legally and administratively prepared before the EOR formally steps down. Start well in advance, preferably three to six months before the desired end date.
How do you transfer an employee from an EOR to direct employment?
Transferring an employee from an EOR to direct employment follows a structured step-by-step plan in which the legal employer status transfers seamlessly. The goal is continuity for the employee and compliance for your organisation.
Step 1: Ensure your entity is ready as an employer
Before the transfer can take place, your organisation must be registered as an employer in the relevant country, including a payroll tax number, social security registration, and any sector-specific obligations. This process can take anywhere from a few weeks to several months, depending on the country.
Step 2: Conclude a new employment contract
The employee receives a new employment contract, this time directly with your organisation. Ensure that the employment conditions are at least equivalent to what the employee had under the EOR. In many countries, including the Netherlands, it is not permitted to worsen employment conditions during a transfer without the employee’s consent.
Step 3: Notify the EOR and coordinate the transfer
Notify the EOR of the termination in good time and make arrangements regarding the transfer of files, payroll history, and employment law documentation. Ensure that the final salary payment via the EOR is processed correctly and that no overlap or gap arises in the payroll administration.
What are the legal risks of a careless EOR termination?
A careless termination of an EOR arrangement entails significant legal risks, both for the employee and for your organisation. The greatest risks are continuity breaks in the employment, claims due to deterioration of employment conditions, and liability for non-compliance with local employment law.
Specific risks include:
- Wrongful termination of employment: if the EOR arrangement ends without a succeeding employer, this may be regarded as dismissal. In that case, local dismissal rules apply, including notice periods and any severance pay.
- Deterioration of employment conditions: if the employee receives less favourable terms upon direct employment, they may challenge this legally.
- Tax and social security risks: an interruption in the remittance of payroll taxes or social security contributions can lead to additional assessments and penalties from the tax authority or social security bodies.
- Permanent establishment risk: if the transition is not properly structured and your organisation is effectively already acting as an employer without the correct registration, this can result in an unintended tax presence in the relevant country.
Always have the termination guided by an employment law specialist in the employee’s country. Local regulations vary considerably, and what applies in the Netherlands may not apply elsewhere.
What costs are associated with terminating an EOR arrangement?
The costs of terminating an EOR arrangement consist of a combination of contractual fees to the EOR provider, one-off administrative costs, and possible employment law obligations towards the employee. The exact amount depends on the country, the length of the employment, and the terms in the EOR contract.
Take the following cost items into account:
- Termination fee to the EOR: many providers charge a fee if you terminate the contract before the end of the agreed term.
- Administrative transfer costs: some EOR providers charge a closing fee for transferring files, payroll history, and contract documentation.
- Severance pay for the employee: if the employment actually ends, the employee is entitled to severance pay in many countries. In the Netherlands, this applies from the first working day.
- Costs for employer registration: registering your own entity as an employer involves notary and registration costs, depending on the country.
- Legal advice: engaging local employment law specialists is strongly recommended and involves advisory costs.
Budget for the costs well in advance. A well-prepared EOR transition is almost always less expensive than a careless termination that leads to legal claims or additional tax assessments.
How do you communicate the transition to the employee?
Communicate the transition from an EOR arrangement to direct employment openly, in a timely manner, and in plain language. The employee must know what is changing, what is staying the same, and what they can expect from you during the transition.
An effective approach consists of the following elements:
- Inform early: give the employee clarity about the change at least four to six weeks before the effective date. Surprises in employment law situations cause unrest and can lead to a loss of trust.
- Explain what is changing: explain concretely who the new legal employer will be, what the new contract looks like, and when the transition takes place.
- Confirm what stays the same: emphasise that the daily work, the manager, and the team structure remain unchanged. This reduces uncertainty.
- Allow room for questions: schedule a meeting with HR or the line manager in which the employee can ask questions about the new contract, the employment conditions, and the practical implications.
- Written confirmation: record all agreements and the new employment conditions in writing, so that no ambiguity can arise about what has been agreed.
Good communication during an EOR transition is not only a matter of decency, but also of legal diligence. An employee who has not been informed in a timely and complete manner may later claim that they did not voluntarily agree to the changed employment relationship.
How Eastwing helps with terminating an EOR arrangement
At Eastwing, we guide companies that work with international employees through the entire process of EOR arrangements, including the transition to direct employment or another employer structure. We know the pitfalls and ensure that the transition is legally correct, administratively watertight, and as smooth as possible for the employee.
What we concretely do for you:
- Reviewing the existing EOR contract and the termination conditions
- Coordinating with the EOR provider on the transfer of files and payroll administration
- Assisting with the registration of your organisation as an employer in the relevant country
- Drafting or reviewing the new employment contract, including safeguarding existing employment conditions
- Advising on local dismissal rules, severance pay, and tax obligations
- Supporting the communication to the employee
Would you like to know how your specific EOR situation can best be wound down or converted? Contact Eastwing for a no-obligation consultation.
Frequently Asked Questions
Can an employee refuse to transfer from an EOR to direct employment?
Yes, an employee is in principle entitled to refuse to agree to a new employment relationship, even if the conditions remain equivalent. Technically speaking, it involves the termination of one contract and the entering into of a new contract, and no one can be compelled to do so. If an employee refuses, this may mean that the employment via the EOR formally ends under local dismissal rules. It is therefore essential to involve the employee early, communicate transparently, and take any objections seriously.
What happens to the employee's accrued rights, such as holiday days and pension, during the transition?
Accrued rights such as holiday days, holiday pay, and pension accrual must be carried over or paid out during the transition, depending on local legislation and the agreements in the new contract. In the Netherlands, for example, unused holiday days do not simply lapse upon a transfer. Make concrete arrangements about this with the EOR provider and record them in writing in the transfer agreement. Consult a local employment law specialist to verify which rights must legally be respected in the relevant country.
How long does an average EOR transition take from start to finish?
A carefully executed EOR transition takes on average three to six months, depending on the country and the complexity of the situation. The biggest time factor is typically the registration of your organisation as an employer in the relevant country, which in some countries can quickly take two to three months. In addition, you must take into account the notice period towards the EOR provider, which is often thirty to ninety days. Start well in advance with the preparation to avoid unwanted overlap or gaps in the employment.
Is it possible to transfer multiple employees from an EOR to direct employment at the same time?
Yes, that is possible, but it requires tight project planning and sufficient capacity in HR and legal support. With multiple employees at the same time, the risk of errors is greater, especially if they work in different countries each with their own local regulations. Consider making the transfer in phases, for example per country or per team, so that each case receives the proper attention. A specialised party such as Eastwing can help to ensure the process runs in a structured and compliant manner.
What is the difference between terminating an EOR arrangement and dismissing an employee?
Terminating an EOR arrangement does not have to constitute dismissal: if there is a succeeding employer, the employment continues in substance under a new legal structure. Dismissal only applies if there is no succeeding employer and the employment actually ends. In that case, local dismissal rules apply in full, including notice periods, grounds for dismissal, and any severance pay. It is important to communicate this distinction clearly to the employee to prevent unnecessary unrest or legal misunderstandings.
What should I do if the EOR provider goes bankrupt or suddenly ceases its services?
If an EOR provider unexpectedly ceases operations, you as the actual employer are responsible for the continuity of the employment and compliance with local employment law obligations. Act immediately: ensure payroll is maintained, inform the employee, and engage a local employment law specialist as quickly as possible. Consider simultaneously arranging an emergency solution via another EOR provider to safeguard continuity while you work out a structural solution. This scenario underlines the importance of due diligence when choosing an EOR provider and including clear exit clauses in the EOR contract.
Do I need to report the transition from an EOR to direct employment to the tax authority or other bodies?
Yes, in most countries there are reporting obligations upon a change of employer, even if the employment continues in substance. Think of registering the employee with the tax authority, the social security body, and possibly a sector-specific pension fund. The exact requirements differ per country: in the Netherlands, this includes among other things applying for a payroll tax number and registering with the Tax Authority as an employer. Have this process guided by a local specialist to prevent additional assessments, penalties, or interruptions in the employee’s social security.
