The pros and cons of employers of record
Using an employer of record (EOR) in new territories can be an effective way to start recruiting workers, but it could also lead to inadvertent tax and legal consequences. PwC can assist in identifying and mitigating risk.
When an organisation moves into a new country, using an employer of record (EOR) to engage staff often makes sense. Working through an EOR, the organisation does not need to establish a local presence of its own for employment law purposes. It has no liability to the worker as an employer, and it avoids all HR obligations such as having to provide benefits. Operating this way also enables the employer to consider using self-employed contractors in the new country without having to engage with tricky issues around employment status.
However, it is vital to do some homework on the new territory before going down the EOR route. Every country has its own taxation and legal rules around employing people, and there is no guarantee an EOR will meet all these objectives. Failing to address certain key issues can lead to significant financial and legal risk for the organisation.
Check key employment law issues
The first critical issue is whether the organisation might still be treated as the actual employer even when operating through an EOR. The key questions to ask are:
- Does the EOR hold any necessary licence to conduct its operations in the country?
- Does the EOR have a legal presence in the country?
- Is the EOR acting in accordance with any labour lending laws existing in the country?
In some countries, an EOR – such as an employment agency – must be registered with the authorities. Countries may also, or alternatively, require an EOR to have a subsidiary company registered there. Also, labour lending rules may prohibit one company from providing staff to act under the control of another entity.
Such laws do not just have an impact on the EOR alone. The result of a breach could be that the organisation is treated as the worker’s actual employer, either immediately or after a specified period. This would have significant tax and employment law consequences.
Ask the critical compliance questions
Another vital issue to consider is whether the organisation is confident that an EOR will comply with local employment law requirements and provide appropriate pay and benefits.
Even if the organisation is at no risk of being deemed to be the employer, it is still important from a reputational viewpoint that workers are engaged with proper terms and conditions. This will include questions such as compliance with any minimum wage and paid holiday requirements, working hours rules and pension provision, for example. The organisation must also be satisfied all tax and social security obligations are being met by the EOR.
One complication here is that if the organisation already has employees in a country where it plans to use an EOR, staff engaged through an EOR may be able to claim comparability of pay and benefits with those employees.
If the organisation has no experience or understanding of the relevant rules in a particular country, it should at least ask the EOR detailed questions about the checks made to ensure its employment model is compliant. The contract with the EOR may include provisions requiring compliance that can be monitored.
Making all these checks may even become a regulatory requirement. In future, organisations may be required to make disclosures of this information under environmental, social and governance reporting requirements including the EU’s Corporate Sustainability Reporting Directive.
Protect business interests when using employers of record
When an organisation hires an employee directly, the contract of employment usually includes business protection provisions. These might include, for example, clauses covering confidentiality of information, the assignment of intellectual property rights to the employer, or the return of company property at the end of employment. There may even be post-termination responsibilities, such as bars on poaching customers or clients.
If using an EOR, organisations will need to consider whether they need such protections – and, if so, how to secure them. This won’t always be necessary, but it could be important. If a worker is engaged on projects where significant intellectual property is created, for example, the organisation will need to be wary.
As a starting point, organisations should ask the EOR whether its contracts with workers include such provisions, and whether the provisions reflect the laws of the specific country. It will also be important to establish how those provisions will be enforced.
Consider immigration issues
Often, organisations look to recruit local staff when working in a new country. But where an EOR hires a foreign national who needs a work permit or visa, there will be additional considerations. In many territories, only an entity with a presence in the country can sponsor a visa, or the sponsor may have to be the entity for which the worker will actually be providing services. It is crucial to discuss this with the EOR ahead of time.
Get the basics right
Before deciding how to proceed, organisations need to talk to potential EORs to establish their understanding and approach to all these issues and risks. It also makes sense to undertake some independent research into the legal and tax frameworks of any new country. Corporate tax (permanent establishment) and personal withholding tax requirements will be relevant here.
In addition, it is vital to review the contract with the EOR to establish the allocation of liabilities between the parties. For example, which entity will pick up any termination costs or financial liability for failure to comply with mandatory employment rules?
How PwC can help
PwC has an international network of tax and legal specialists who can help identify and mitigate risk, and support organisations as they make decisions on the best way to proceed.
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