Are employers of record on the way out?

Employers of record, or EORs, are popular because they’re a relatively quick and easy way to set up operations. In fact, some companies are now using them to employ many workers — including expat workers — for long stretches. This rapid growth and the expanded scope of many EOR engagements has drawn scrutiny from regulators in many jurisdictions, and there are now signs that EORs may be wearing out their welcome.

Authorities across the globe — concerned about immigration and losing tax money from EORs that are being misused — are imposing new restrictions. Singapore, for example, recently imposed a rule forbidding EORs from hiring foreigners. Similarly, the UK is proposing new legislation that targets umbrella company arrangements, with funding for thousands of new tax officers.

Multinationals should take heed of the cooling atmosphere and adjust their global strategies and operations accordingly. This article explains how EORs should and should not be used and why many companies are wisely turning to establishing their own legal entities and to other compliant employment arrangements as less risky alternatives.

What EORs do and how they’ve evolved

An EOR serves as the legal employer of local workers for international businesses. It hires employees, oversees compliance with labour laws, and administers compensation and benefits, but traditionally does not manage employees’ specific job duties or performance.

EORs allow companies to set up operations quickly, and they can be used as a stopgap measure when transitioning local workers in a carve-out acquisition. EORs, however, were never intended to be permanent arrangements, but rather a pathway that allows businesses to try out new markets before establishing a legal entity.

For that reason, companies are limited in the activities they can engage in when using an EOR. Most countries don’t allow workers to engage in “core business activities” that create value for the company. Many countries also impose time limits on employment terms. And a company using an EOR cannot supply employees with visas and work permits or scale operations very far without triggering a permanent establishment (or taxable presence), and all the reporting and other requirements that entails.

Even in the face of these restrictions and related risks (including steep fines, penalties and potential double taxation for their clients), many EOR providers have been expanding their services. For example, they are entering into single engagements that might involve 20 to 50 local workers, instead of the handful of workers in years past.

Furthermore, many are employing not just local workers, but expats, and employing them on their own (that is, the EOR’s) visas and work permits. Some EORs even offer assistance in obtaining visa and work permit sponsorships, to the consternation of countries trying to control immigration. Some authorities also complain that EORs are opaque and may be allowing supposedly temporary and restricted operations to overstep their bounds without attracting notice.

Mounting restrictions

Countries around the world are introducing new legislation to limit the use of EORs and more closely monitor their operations. Multinational organisations considering expanding should understand existing EOR rules in their target countries and keep abreast of new and changing regulations to remain compliant. The following are brief country-specific examples of some current restrictions that affect EORs.

• Singapore: To promote transparency and protect local jobs, the country’s Ministry of Manpower recently announced that EORs cannot be used for hiring non-Singaporean nationals. To hire expats, including those from the home country, companies must now set up a representative office or incorporate in Singapore.
• Belgium: An EOR provider and the companies it works with must complete a written agreement specifying the type of instructions companies can provide to employees who are managed by the EOR. Ultimate authority over these employees must rest with the EOR, not the companies. This is a significant departure from the de facto operations of many EORs.
• Italy: EORs must be established through an authorised employment agency with a labour-leasing contract.
• Germany: Generally, employees may not be employed through an EOR for over 18 months. After that, they must be hired by the company through its own legal entity or the assignment must be terminated, at least temporarily.
• France: The government has tightened EOR regulations, requiring stricter compliance with labour laws and tax regulations.
• United Kingdom: Post-Brexit, the UK has introduced new employment laws affecting EORs, including changes to the National Minimum Wage, statutory pay and redundancy rights.
• India: The Indian government has implemented changes to hiring and firing practices.
• Australia: New regulations clarify the definition of employees and employers, affecting worker classification and the application of labour laws.

Transitioning to a legal entity

The proliferation of EOR-related regulations reveals governments’ growing frustration with companies’ use of EORs as a status quo for in-country operations — in other words as a way to skirt traditional international expansion involving establishing a local legal entity and payroll. Considering the risks of non-compliance, multinationals should reexamine their global strategies and limit EORs to their original purpose, which is serving as a temporary bridge to a legal entity or to exiting the market.

Establishing a legal entity is the most flexible alternative to employing workers through an EOR and provides the best way to ensure short- and long-term compliance with local labour, tax and immigration laws. If you do plan on or are using an EOR, reviewing factors such as the number, function and length of service of EOR employees in a jurisdiction, as well as future business plans for the location, can help you determine when to transition to a legal entity.

Legal entities give organisations more latitude in assigning job duties and more options for expanding operations. While they are viewed more favourably by authorities than EORs, companies still need to monitor legal entities to ensure they align with corporate strategy and to keep up with compliance obligations, such as corporate tax filings and any related payments. Growing companies — especially those that grow quickly and through acquisition — should conduct legal entity rationalisations to ensure that their structures are fit for purpose and that all of their entities are compliant and providing value. Organisations typically hire third-party global tax experts to conduct rationalisations, and a reputable global services provider can also review EOR operations in light of tax, labour law, immigration and other risks.

EORs remain popular, can still be used effectively and compliantly in many expansion scenarios, and are not likely to disappear any time soon. But given proliferating regulations and increased scrutiny from authorities around the world, multinationals should strongly consider updating their international expansion and operations strategies to account for growing risks arising from the use of EOR arrangements.

For a detailed look at EORs, download our ebook “Hiring across borders with an employer of record: Understanding the benefits and risks.”