The EOR Pricing Shell Game: Are You Paying for Phantom Employees?

Why “Simple” EOR Pricing Rarely Is

Your EOR bill should be easy to understand. You hire employees, you pay a per-employee fee. When your team grows, your costs go up. When your team shrinks, your costs go down.

That’s the promise.

But for many founders and finance leaders, the reality looks very different. Headcount drops, budgets tighten, and yet the EOR invoice stays exactly the same. You dig into the numbers expecting a mistake - only to discover you’re being charged for employees who no longer work for you.

This is the EOR pricing shell game.

It’s not a billing error. It’s not a temporary lag. It’s a contractual structure designed to protect the EOR’s revenue, even when your business needs change. And it’s quietly draining budgets at companies that believed EORs were meant to provide flexibility.

For CFOs trying to forecast runway, founders managing burn, and HR leaders planning responsibly, this pricing model turns what should be a variable cost into a fixed liability. It punishes agility. It discourages responsible resizing. And it creates a misalignment between your business reality and your EOR’s incentives.

In this post, we’ll break down how phantom employee billing works, why so many EORs rely on it, and how to spot it before it locks you in. We’ll also explain what transparent, pay-as-you-go EOR pricing actually looks like - and why it matters more than ever in uncertain markets.

This is Part 2 of our series on rebuilding the promise of global hiring.

TL;DR

• Many EORs charge based on your highest historical headcount, not your current team size
• This practice is known as high-water mark billing
• It results in companies paying for phantom employees who no longer work for them
• Downsizing, pivots, or restructures do not reduce your EOR bill under these contracts
• The only “escape” often offered is a multi-year contract extension
• This pricing model turns a flexible hiring solution into fixed overhead
• Transparent EOR pricing should scale up and down with your actual headcount
• If your EOR bill doesn’t shrink when your team does, the problem isn’t temporary - it’s structural

What Your EOR Bill Should Look Like

The Promise: Simple, Predictable, Variable Pricing

At its core, the Employer of Record model is supposed to make global hiring easier - not more expensive or harder to manage. Pricing should reflect that simplicity.

The standard pitch most EORs make sounds reasonable:

You pay a monthly fee for each active employee. That fee covers payroll processing, compliance, benefits administration, and local employment management. When the headcount changes, your bill changes with it.

This model makes sense for a few key reasons.

First, it aligns incentives. If your business grows, the EOR grows with you. If your team shrinks, the EOR’s workload shrinks too. Second, it enables accurate forecasting. Finance teams can model hiring plans, downsizing scenarios, and runway without guessing how vendor contracts will behave. Third, it supports agility. Companies can respond to market conditions without being penalized for making responsible decisions.

This is how modern SaaS pricing works everywhere else. You don’t keep paying for software seats after users leave. You don’t pay for inactive tools because you once needed them. EOR services should be no different.

The basic math CFOs expect is straightforward:

Current headcount multiplied by the agreed rate equals the monthly bill. No tricks. No legacy penalties. No surprises.

Unfortunately, many EOR contracts don’t work this way in practice.

The High-Water Mark Trap

How “Phantom Employee” Billing Actually Works

High-water mark billing is one of the most common - and least transparent - pricing structures in the EOR industry.

Under this model, your monthly EOR bill is calculated based on the highest number of employees you’ve ever had, not the number you currently employ. That peak number becomes your “high-water mark.”

If you grow to 50 employees and later reduce to 30, your bill is still based on 50. You’re paying for 20 employees who no longer exist. These are phantom employees - headcount that lives only in your contract.

Most companies don’t discover this structure during onboarding. The language is usually buried deep in the contract, framed as a “minimum commitment,” “stabilization clause,” or “contracted seat count.” Sales conversations focus almost exclusively on growth scenarios. Downsizing is rarely discussed until it happens.

When companies do notice the issue, it’s often during a difficult moment - after layoffs, restructures, or strategic pivots. Instead of reducing costs to match reality, the EOR bill becomes an added burden.

Why does this structure exist?

Because it protects the EOR’s revenue.

High-water mark billing insulates providers from customer contraction. It guarantees predictable revenue regardless of how much service they’re actually delivering. From the EOR’s perspective, it smooths revenue curves and reduces churn risk. From your perspective, it converts a variable service into fixed overhead.

And if you want out? Many EORs offer a “solution”: sign a multi-year contract extension to reset your pricing. In other words, lock yourself in longer to get billed fairly.

This isn’t flexibility. It’s leverage.

Why This Model Is Fundamentally Broken

How Phantom Billing Undermines Financial Planning and Agility

For finance leaders, high-water mark billing breaks one of the most basic principles of cost management: expenses should reflect reality.

When EOR costs don’t scale down with headcount, forecasting becomes unreliable. Burn rate calculations are distorted. Runway projections lose accuracy. What should be a controllable, variable cost starts behaving like fixed infrastructure - without delivering fixed value.

For founders, the impact is even more direct. Every dollar paid for phantom employees is a dollar that can’t be invested in product, hiring, or growth. It creates hesitation around necessary decisions. Leaders may delay restructuring or rightsizing because they know the EOR bill won’t change anyway.

This is the agility penalty.

Fast-moving companies need to adapt quickly. Markets change. Funding cycles shift. Strategies evolve. High-water mark billing punishes exactly this kind of responsiveness by locking in costs based on past decisions.

The irony is hard to ignore. EORs market themselves as flexible employment solutions. Yet their contracts often impose the most rigid pricing structures a company will encounter.

Under these models, growth benefits the EOR, but contraction does not affect them. The partnership is asymmetric. Your reality changes; their revenue does not.

That misalignment is the core problem.

Why Legacy EORs Price This Way

The Business Model Behind the Opacity

High-water mark billing isn’t an accident. It’s a deliberate design choice shaped by how many legacy EORs operate.

First, there’s revenue protection. Billing based on peak headcount ensures that revenue remains stable even when customers downsize. It shields the provider from volatility - by passing that volatility onto you.

Second, there’s investor pressure. Many large EORs are venture-backed and incentivized to show consistent revenue growth. High-water mark clauses help smooth financials and reduce visible churn, even if customer satisfaction suffers.

Third, there’s misaligned incentives. When pricing doesn’t adjust downward, EORs have little reason to help customers reduce costs or adapt. Success flows one way. Risk flows the other.

Finally, there’s lock-in. Complex contracts, long notice periods, and exit penalties make switching feel daunting. By the time customers realize what they’re paying for, they’re often months into the relationship and reluctant to disrupt payroll.

The result is a pricing system that benefits providers at the expense of transparency and trust.

What Transparent Pricing Actually Looks Like

Pay-As-You-Go: When Your Bill Reflects Your Reality

Transparent EOR pricing is simple by design.

You pay only for active employees. Billing is based on current headcount, not historical peaks. When your team grows, your costs increase. When your team shrinks, your costs decrease. Immediately.

There are no high-water mark clauses. No phantom employee charges. No renegotiation required to access fair pricing.

This model aligns incentives. Your EOR grows when you grow and adjusts when you adjust. Both sides operate in the same reality.

At Toku, this philosophy extends beyond headcount. Pricing terms are clear. Currency conversion policies are explicit. There are no hidden setup fees or per-country surprises buried in the fine print.

For crypto-native teams, transparent pricing also means flexibility in how payroll is funded. Stablecoin payroll options remove FX markups and add predictability without layering additional fees on top of an already complex system.

The core idea is simple: flexibility in hiring should come with flexibility in costs. Honest partnerships don’t require contractual gymnastics.

The One Question That Exposes Everything

Before You Sign Any EOR Contract, Ask This

“What happens to my bill if my team size changes?”

This single question reveals whether you’re dealing with a partner or a predator.

Transparent providers answer clearly and immediately. They show you the contract language. They explain how billing adjusts both up and down.

Opaque providers deflect. They talk about tiers, commitments, or future conversations. They avoid specifics. They promise flexibility later.

If an EOR can’t explain how your bill decreases when headcount decreases, that’s your answer.

Follow up with direct questions. Ask about high-water marks. Ask for examples. Ask to see the clause. If the answers are vague, the risk is real.

Making the Decision

Evaluating Your Current Situation

If you’re choosing an EOR, pricing transparency should be a non-negotiable requirement. Ask the hard questions early. Get written confirmation. Don’t assume fairness is implied.

If you’re already in a contract, review it carefully. Calculate whether you’re paying for phantom employees. Understand your exit terms. Compare your current costs to what transparent pricing would look like.

Switching often feels more disruptive than it actually is. Modern EORs can transition employees smoothly, without payroll interruption. In many cases, the cost of staying exceeds the cost of moving.

Conclusion: Partner or Predator?

High-water mark billing transforms your EOR from a partner into a fixed drain on your business. It penalizes agility, obscures true costs, and undermines trust.

Your EOR bill should reflect your current reality - not your historical peak.

At Toku, we believe transparent, pay-as-you-go pricing is the only honest approach. Before you sign any EOR contract, ask the question. The answer tells you everything.

Up next in this series: Part 3 explores what happens when EOR support disappears exactly when you need it most.

See exactly what you’d pay with Toku - transparent pricing with no phantom employee charges.

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