For many years, there have been providers offering to employ an individual on behalf of a client, taking responsibility for and relieving the client of all the legal, tax and administrative obligations of employment. These are known in the US as employer of record (EOR) services, a term that is becoming more widely used as the practice spreads.
Providers operating this service in countries outside the US often served a specific client need. For example, in the UK, umbrella companies emerged to take over the employment of temporary workers from staffing firms. In the Netherlands, payrolling firms employed workers recruited by clients on the basis that the client could take advantage of the flexible arrangements in the collective agreement for temporary workers. A change to the law in 2020 meant such workers were to be treated in all respects the same as permanent employees of the client, negating the benefit of using an EOR.
Since the pandemic and the increase in remote work and “work from anywhere” arrangements, there has been a boom in the use of global EOR providers offering companies of all sizes the opportunity to expand almost anywhere in the world without a local entity. Although the EOR is on record as the employer for administrative purposes, the individual acts on the instructions of the client.
This model appears to be a solution to the lack of a physical presence — but as with all things, if it looks too good to be true, it probably is. The EOR model brings with it all manner of legal and administrative complications, such as:
Restrictions on the use of such employees. The model of an EOR employing a worker whom they “lend” to a client that supervises and directs their work is the same as the triangular relationship described in many countries’ laws regulating the supply and use of temporary workers. Such regulations may impose tenure limits, contract obligations and — most importantly — restrictions on the type of work a seconded employee may undertake for you.
Licensing of providers. A legal requirement on temporary work agencies to obtain a license or register with a government body will also apply to an EOR provider. Receiving workers supplied by an operator without a valid license can lead to administrative fines for your organization, which may also be deemed by law to be the de facto employer of the worker.
Corporate tax implications. The “permanent establishment” (PE) threshold test contained in many countries’ domestic tax laws determines whether a business is operating in the country and thus subject to corporate tax obligations.
This can happen if a business has an agent in the country to act on its behalf and the agent habitually exercises the authority to contractually bind the overseas enterprise. If your organization engages an employee through an EOR and directs their work, giving them the authority to set up systems and enter into contracts with suppliers and clients, this could mean that your profits are taxed in the country where the employee is operating as well as the country where your business is established.
Employee obligations. As your company does not have a contractual relationship with the employee, you will not automatically benefit from any of the usual clauses in employment contracts that protect an employer. These may include confidentiality clauses, policies for the use of IT and non-competition and non-solicitation obligations that would be standard for most employees with the ability to act as the company’s representative. It is therefore necessary for the EOR to give you, as a third party, the right to enforce the terms of their contract that confer a benefit upon you. However, this right may not always be permitted and enforceable in local laws.
Intellectual property rights. As the employee is not legally your employee, any intellectual property rights created by the employee in the course of their work will not automatically belong to your company.
Data protection. Again, the fact that the individual is not your employee means that any transfer of personal data between the business and that individual is a potential breach of data protection laws. Adequate protection must be in place, such as entering into a contract with the individual using Standard Contractual Clauses if the individual is located in a country outside of the EU.
EOR may be sold as a simple solution to your international needs, but it is important to take stock of what you want the employee to do for your organization and consider if this model provides your business with the level of control and protection you need. It may be simpler and easier in the long run to establish a local entity and employ the worker directly.
If an EOR is the right solution for your business needs, you should also do your due diligence on the provider. In some more remote jurisdictions, global EOR providers will rely on local partners whose levels of compliance may be harder to confirm.