What is an Employer of Record?
20 July 2023
An Employer of Record (EoR) is a service provider that engages an individual employee on behalf of a client, where the individual is based in a different country to the client.
In this arrangement, there is a contractual commercial relationship between the client and the EoR and a contractual employment relationship between the EoR and the individual employee, but there is no contractual relationship between the client and the individual employee. As the EoR is the legal employer of the individual employee, it is responsible for compliance with all employment law requirements and is liable for all employment-related issues. Theoretically, this negates the risk of employment-related issues arising for the client. The client retains the power to direct and manage the day-to-day operations and workload of the individual employee.
Why are EoRs on the rise?
The COVID-19 pandemic catalysed the demand for flexible employment solutions to engage employees internationally and EoRs emerged as a frontrunner of the services available. Continuing to grow in popularity, EoRs allow employers to unlock global talent without having to undergo the expensive and arduous process of establishing a corporate entity in a foreign country.
Some of the benefits and advantages of EoRs include:
- Cost – engaging an EoR in relation to one individual or a small number of individuals can be far more cost-efficient than setting up your own entity in a foreign country.
- Risk – as the employer-employee relationship exists between the EoR and the individual employee, the client usually avoids primary liability for employment-related issues.
- Simplicity – with an EoR facilitating all employment arrangements, the administrative burden of engaging employees overseas is reduced significantly.
However, some of the risks/disadvantages of EoRs include:
- Cost – while engaging an EoR in relation to a small number of individuals can be more cost-efficient than setting up your own entity in a foreign country, the cost benefit dwindles quickly when you start to build a ’team’ in a country by using an EoR. EoRs typically charge annual fees of around 20-40% of each employee’s salary. A helpful analogy is comparing using an EoR to renting versus buying a house; after a certain point, it is more cost-effective to simply commit to the latter, or to set up your own entity instead of using an EoR.
- Availability – in certain jurisdictions, EoRs may be unlawful or ineffective. Seek specialist advice tailored to the country you are considering engaging an EoR in.
- Enforceability of contractual obligations – as there is no direct contractual relationship between the client and the individual employee, obligations relating to confidentiality, intellectual property, data protection and restrictive covenants/post-termination restrictions cannot be directly enforced against the individual employee by the client. While the contract between the EoR and individual may purport to bind the employee to obligations owed to the client, the enforceability of such obligations is untested and therefore unreliable.
- Jurisdictional issues – a UK client is likely to want both its own contract with the EoR and the contract between the EoR and the individual employee to declare that the laws governing the contract, and jurisdiction in which any claims should be pursued, is that of England and Wales. However, this may not be enforceable and the legislation and case law of the country in which the individual employee is based may take precedence over what is stated in the contract.
- Managing performance, disciplinary and grievance processes – as the client is not the individual employee’s employer, they are not legally able to instigate such processes. Rather, they would have to instruct the EoR to complete the process on their behalf, and there can be practical difficulties with this. For example:
- the individual employee may not cooperate with a process led by an EoR that has had no professional interaction with the individual employee in terms of performance and behaviour;
- the individual employee cannot raise a grievance with their employer (the EoR) about an employee of the client, as the EoR has no authority to investigate that individual; and
- the EoR may disagree with the client’s view that there are performance concerns with the individual employee, or that a particular allegation necessitates a disciplinary investigation. The EoR may therefore not meaningfully engage in a process the client wants.
- Termination – if the client wishes to terminate the employment of an individual employee, they must instruct the EoR to do so, and this may not always be straightforward if the EoR does not agree with the client’s reason for termination. Additionally, if the client is undergoing a redundancy exercise, the individual employee will not be included in that process as an employee of the EoR.
- Culture – there may be challenges around familiarising the individual employee with the culture of the client, particularly as they will be located in another country.
- Tax – the client should obtain tax advice from a specialist in the country where the individual employee is based: an EoR arrangement – specifically multiple EoR arrangements, where a “team” has been built – could trigger local corporation tax liability.
EoRs are a novel and untested concept, but their increasing prevalence means the UK Government may at some point look to intervene by way of consultation, legislation, or regulation. It may also be that case law will emerge which neutralises (or confirms) some of the concerns associated with EoRs.
EoRs can be a suitable option for particular commercial and employment ventures, with their utility depending on your goal: do you want to permanently establish a global network of employees with teams in various countries, or are you looking to quickly acquire specific high-talent individuals who happen to be based abroad?
Birketts has experience of advising UK-based clients engaging EoRs abroad, as well as international clients utilising EoRs in the UK. Our Employment and Immigration Teams are expertly placed to assist you in deciding whether an EoR is right for you, and our Corporate and Commercial Teams can support you if you opt to setup your own entity abroad.
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at July 2023.