Employer of record (EoR) services are becoming increasingly popular for companies looking to expand rapidly internationally. This allows a company to enter a market and recruit workers in another country quickly, efficiently and at lower cost without setting up a subsidiary. As with any panacea, however, it is important to be careful.
What exactly is EoR?
Under the EoR service, the EoR service provider provides a workforce in a particular country for its client. The EoR service provider will be the employer of the workers recruited abroad, and the local legal and administrative obligations related to the employment will be borne by the EoR service provider. EoR services typically include recruiting workers, conducting background checks, onboarding workers, drafting and concluding employment contracts, administrative tasks related to payroll and taxation, administrative management of benefit packages and termination of employment.
For whom and why is the EoR service good?
In most cases, entering a foreign market is time-consuming and costly: finding the right legal form, setting up the company, renting offices, recruiting and training employees, setting up the administrative background all take time. This is where EoR helps, as it allows for virtually instant market entry, as a company wishing to serve a given market does not need to go through any of the above stages.
The EoR service is of particular interest in the tech world, for start-ups and other growth entities where there is either no definitive vision of entering and establishing a presence in a given market, or an urgent need to recruit people with knowledge of that market, for example because of a new project opportunity. Using the EoR service in such cases will not only make it easier and cheaper to start up the service, but also to potentially terminate it at a later stage.
What should be considered when designing the structure?
The EoR service is essentially based on a contract between the service provider and the customer. On the other hand, the EoR provider will conclude an employment contract with the employees concerned. In some cases, there may be a tripartite contract between the parties involved, or even a multi-country framework contract between the EoR provider and the client's parent companies for the provision of such services.
An important question in the design of EoR services is who has the power to instruct, manage and supervise workers and how the possibility of termination of employment is developed. In these areas, it is particularly important to define the liabilities of the parties. For example, it is often the case that the EoR provider is forced to rely on the grounds for termination provided by the client. If, however, a claim is subsequently made against the EoR provider for this reason, it is appropriate to shift the responsibility for this back to the client.
The application of certain provisions protecting the economic interest of the client is also important. For example, the customer may require that an employee employed through the EoR accepts a confidentiality or non-competition obligation. As the customer does not have a direct contractual relationship with the employee, the enforceability of this must also be ensured by the contract with the service provider.
Where are the dangers?
The biggest problem with EoR services is that they can be reclassified as temporary agency work, depending on the rules of the jurisdiction. Temporary agency work is a regulated service, the entities providing it are usually subject to registration, there is additional administration, authorities have increased control, and service providers are typically required to provide financial security. Furthermore, some countries' rules impose time limits on the possibility of temporary agency work. Therefore, EoR providers generally want to avoid that their activity slides into temporary agency work.
The dividing line between the two types of service should be examined on a country-by-country basis. In most cases, it is a question of how deeply the foreign employee is integrated into the client's organisation. The stronger this integration, the greater the risk that the contract can be reclassified as temporary agency work.
A number of other considerations may also be relevant to the question of reclassification. In particular, from whom and how the employee receives instructions, how similarly the employees perform their work compared to other employees of the client, who provides the work equipment. But equally important may be the extent to which the remuneration for the service is aligned with the client's wage costs: if it is essentially determined by the parties on a cost-plus basis, this would be an argument in favour of the temporary agency work nature of the agreement.
It is not all the same from a tax point of view
In addition to the reclassification as temporary agency work, the scheme may also carry tax risks. Even if the client does not want to establish a permanent establishment in the country of employment, the use of the service may give rise to a tax establishment. In such a case, the profits from the activity may be taxable in the country of employment abroad. This risk may arise in particular if the foreign employees are employed at a fixed place of business or if the foreign employees play a significant role in the employer's contracting with foreign customers.
Where does it work?
The extent to which an EoR service works well in a particular country is mostly determined by the economic and market conditions in that country, the regulatory approach and the weight of the risks involved. For example, within Europe, the market for EoR services is thriving in some countries, such as Denmark, Finland, Sweden or the Netherlands, where the legal risks involved are low. In other European countries (e.g., Germany, Spain, Italy, the Czech Republic and Poland), the need for caution and prudence is much greater and the options are therefore more limited. EoR services are also becoming increasingly attractive in a number of economically important countries outside Europe, in particular Australia, China, Singapore, Hong Kong and the United Arab Emirates.