Employer of record arrangements: explained

Adam Wyman and Anna West set out what businesses need to know when using an EoR to engage staff from overseas to work remotely

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Sometimes an employer of record (EoR) is used to engage employees who returned to their home country following the pandemic and want to work remotely from there permanently. Or a business might widen the pool of candidates by recruiting staff from overseas 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 business that is considering using an EoR arrangement, and specific legal advice in the relevant jurisdiction should always be obtained on the employment, tax and regulatory considerations. In particular, there might be other options that are preferable to the EoR arrangement, such as a consultancy/contractor arrangement, or even direct employment.  

Key considerations when setting up EoR arrangements commonly include:

  • Confidentiality and post-termination restrictions. Is the underlying employer's confidential information properly protected? The EoR employment contract may not contain appropriate confidentiality obligations in favour of the underlying employer, and, even if it does, enforcement may be difficult. It may be advisable for the individual and underlying employer to enter into a separate confidentiality agreement. Similarly, should the individual be covered by any post-termination restrictions, such as non-compete or non-poaching covenants? If so, these would usually also need to be contained in a separate agreement, and it may be necessary to make a payment for them. 

  • Intellectual property. Will the individual be creating any intellectual property (IP); for example, copyright or design rights, and if so will this be properly protected? IP will not vest automatically in the underlying employer, because the individual will not be its employee. There may need to be a separate agreement from them to assign any IP rights they create in their role – which is particularly important in the technology, creative and scientific sectors. 

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

  • Continuity of service. If the individual is moving from their employer to an EoR will this break their continuity of employment? If so, they may seek a one-off payment to reflect loss of service. 

  • Agency worker/employee leasing rules. Many jurisdictions have specific rules or even prohibitions on the use of agency workers or employee leasing. Liability for these rules may rest with the underlying employer, so it is important to ascertain whether the proposed arrangements are permitted under local legislation and whether any particular documents are required. 

  • Tax. It is important to ensure that local tax and social security is assessed and accounted for properly by the EoR. Sometimes, the EoR arrangements may be designed to try to avoid creating a permanent establishment in a particular jurisdiction. However, using an EoR will not always solve these issues, and it is essential to take specific independent tax advice in the relevant country. 

  • Immigration. Is immigration clearance needed? If the individual needs to be sponsored by their employer, this may not be possible in an EoR arrangement (for example, UK immigration rules only allow employers to sponsor individuals who are working for them).

  • Business transfer rules. If the individual is moving from their employer to an EoR, or moving from one EoR to another EoR, business transfer rules may apply such as under TUPE or another country's equivalent rules, depending on various factors, including the way that the individual's services are provided. If these rules do apply, the individual transfers to the EoR with their contractual rights and any existing claims, and certain information and consultation obligations may apply. 

  • Future developments

    EoR arrangements look likely to continue increasing in the new cross-border post-pandemic world, and as many businesses are trying to address the skills shortage. If businesses in due course grow their presence overseas, and eventually move from using an EoR to establishing their own locally based branch, this will give rise to new issues (including tax) for HR professionals to consider, in what for many is becoming an increasingly international role. 

    Adam Wyman is a partner and Anna West knowledge counsel in the employment team at Travers Smith