Employer of Record Provisions: Explained

Sometimes an Employer of Record (EoR) is used to hire employees who have returned to their home country after the pandemic and want to work remotely from there permanently. Or a company can broaden the candidate pool by recruiting overseas staff to work remotely.

EoR models range from basic payroll services only to full HR support. Typically, the individual will have an employment contract with the EoR, under which they agree to work for the underlying employer.

Key issues

There are legal and practical issues for a company considering using an EoR agreement, and specific legal advice in the relevant jurisdiction should always be obtained on employment, tax and regulatory considerations. In particular, there might be other options that are preferable to the EoR arrangement, such as a consultant/contractor arrangement, or even direct employment.

Key considerations when setting up EoR arrangements typically include:

  • Privacy and post-termination restrictions. Is the underlying employer’s confidential information properly protected? The EoR employment contract may not contain appropriate confidentiality obligations in favor of the underlying employer, and even if they do, enforcement may be difficult. It may be advisable for the individual and the underlying employer to enter into a separate confidentiality agreement. Similarly, should the individual be covered by post-termination restrictions, such as non-competition or non-poaching clauses? If so, these should usually also be contained in a separate agreement, and payment may need to be made for them.

  • Intellectual property. Will the individual create intellectual property (IP); for example, copyright or design rights, and if so, will they be adequately protected? The intellectual property will not automatically vest in the underlying employer, as the individual will not be its employee. It may be necessary to have a separate agreement from them to assign any intellectual property rights they create in their role – which is particularly important in the technology, creative and science sectors.

  • Advantages. If the individual will be receiving benefits specific to the underlying employer, such as stock options, then consideration will need to be given to the appropriate mechanisms and documentation required for these to be granted effectively.

  • Continuity of service. If the individual moves from their employer to an EoR, will this break their continuity of employment? If so, they can request a one-time payment to reflect the loss of service.

  • Rules for Hiring Temporary Workers/Employees. Many jurisdictions have specific rules or even prohibitions regarding the use of agency workers or the hiring of employees. Responsibility for these rules may lie with the underlying employer, so it is important to check whether the proposed arrangements are permitted by local law and whether any particular documentation is required.

  • Tax. It is important to ensure that local tax and social security are assessed and accounted for correctly by the EoR. Sometimes EoR arrangements may be designed to attempt to avoid the creation of a permanent establishment in a particular jurisdiction. However, the use of an EoR will not always solve these problems, and it is essential to take specific independent tax advice in the country concerned.

  • Immigration. Is immigration clearance required? If the person is to be sponsored by their employer, this may not be possible under an EoR agreement (for example, UK immigration rules only allow employers to sponsor people who work for them) .

  • Business transfer rules. If the individual moves from their employer to an EoR, or moves from one EoR to another EoR, business transfer rules may apply, such as under the TUPE or equivalent rules of another country , depending on a variety of factors, including how the individual’s services are provided. If these rules apply, the person transfers to the EoR his contractual rights and all existing claims, and certain information and consultation obligations may apply.

Future developments

EoR deals are expected to continue to increase in the new cross-border post-pandemic world, and many companies are trying to address the skills shortage. If companies strengthen their presence abroad in due course and end up switching from using an EoR to establishing their own local branch, this will give rise to new problems (including tax) for professionals. of HR, in what for many is increasingly becoming an international role.

Adam Wyman is a Partner and Anna West a Knowledge Advocate on the Travers Smith Employment Team