Employer of Record: Flexible but risky – guidelines for HR

Especially in tense economic situations, many companies believe that the employment of personnel should be as flexible, project-related and resource-saving as possible. Globalized labor markets and the shortage of skilled workers here also raise the question of how workers can be employed abroad without having to set up our own structures there.

The so-called Employer of Record (EoR) promises a seemingly pragmatic solution. It can simplify the deployment of personnel, especially across national borders. However, its business model entails significant legal risks that companies must be aware of.

The EoR model: Formal and de facto employer

The EoR hires a specific employee, but then makes him or her available to the contracting company for work. For this purpose, the EoR authorizes the company to issue instructions to the employee. As a de facto employer, the company therefore benefits directly from the employee’s work performance. In contrast, the EoR only acts as a formal “employer on paper” and takes on administrative tasks such as payroll.

The EoR service is often cross-border: the employee is employed by the EoR either for a foreign company in Germany or for a domestic company abroad. The EoR concludes the employment contract for the employee, who usually works remotely, in accordance with the applicable law of the country of employment and ensures compliance with labor, tax and social security law requirements.

Potential benefits of an EoR service

Providers of EoR services advertise flexibility and low organizational effort. This may seem particularly attractive for companies that first want to “test” a new foreign market. Finally, they can employ individual employees on site without having to set up a company or branch there or at least have to do their own payroll. At the same time, the EoR takes over local compliance and thus closes a know-how gap in the company’s own legal department.

Practical example: A foreign company employs a sales representative in Germany via an EoR instead of setting up its own branch early on.

AÜG risk & hidden temporary employment

But the EoR service also carries risks. Under German law, there is a particular risk of so-called hidden temporary employment. The reason is the similarity of the structure and function of the EoR model for temporary employment: here as there, there is a three-party relationship in which a contract employer makes an employee available to a third party to perform work and transfers the right to give instructions.

In Germany, but often also abroad, especially in EU member states, temporary employment is strictly regulated and subject to sanctions. The German Temporary Employment Act (AÜG) requires, in particular, official permission from the lender and limits the temporary employment to 18 consecutive months. If an EoR service is classified as temporary employment and these requirements are violated, the operating company faces fines of up to 30,000 euros. In addition, the law creates an employment relationship between the employee and the employing company with corresponding wage, tax and social security obligations.

Whether the German AÜG applies depends on a “sufficient domestic connection”. This typically occurs if the EoR is located in Germany or the employee physically works in Germany. Even short work-related stays can be sufficient for this. EoR employees should therefore not carry out any professional activities in Germany without exception in order to reduce the risk of hidden temporary employment.

However, this risk is not limited to constellations with a German domestic connection. Even if the AÜG is not applicable, the EoR service can be considered temporary employment under foreign law and trigger corresponding legal consequences.

This is how HR can deal with the risks of the EoR service

Given the risks, particularly with regard to hidden temporary employment, companies are well advised to exercise particular caution before and during the use of an EoR service. The starting point is the distinction between two basic constellations:

Deployment of personnel abroad

In this constellation, hidden temporary employment represents the central risk. Companies should pay particular attention to the following:

• Look abroad: Restrictive regulations regarding temporary employment and occupational safety may apply in the country of deployment. The company should familiarize itself with this at least in basic terms and pay attention to local expertise when commissioning an EoR.
• Clearly regulate the place of work: If the appointment of an EoR is permitted under applicable foreign law, the employment contract between the EoR and the employee and the contract between the EoR and the company should clearly state that the employee will only work remotely from abroad.
• Exclude work-related stays in Germany: It should also be contractually stipulated that the employee is not allowed to carry out professional activities in Germany. In addition, a compliance process should ensure that in practice there are no work-related stays in Germany.
• Re-evaluate changes early: If a move to Germany or regular business trips is considered, the employee’s employment must be adjusted (e.g. direct employment, secondment or classic temporary employment).

Deployment of personnel in Germany

In this constellation, the EoR service can generally be qualified as a classic temporary employment agency under the AÜG. Companies should pay particular attention to the following:

Conclusion

The use of external personnel via an EoR promises companies a pragmatic solution, especially for short-term and flexible personnel needs in an international context. However, an EoR service involves legal pitfalls with significant liability risks. Companies are therefore well advised to examine the specific risks in each individual case and proactively take countermeasures.