Global workforce restructuring: Employers of record - A new era of worker engagement

Why should I read this?

Businesses are increasingly turning to Employer of Record (EOR) and Professional Employment Organisation (PEO) models to engage talent.

Although EOR and PEO arrangements have gained popularity, these models can lead to unintended legal and tax implications if they are not managed with due diligence from the outset, as well as other legal risks and complications.

In this briefing, we consider the legal and strategic considerations for engaging workers through EOR and PEO models and explore practical tips for mitigating the risks.

What do I need to know?

An EOR serves as the formal legal employer of the worker, taking on responsibility for employment-related matters such as contracts, payroll, benefits administration, tax withholdings, social security contributions, and adherence to local labour laws. The EOR assigns the worker to the end-user client, who oversees the worker's duties but does not enter into a legal employment relationship with them.

In contrast, a PEO operates under a co-employment model, where both the PEO and the end-user client share employer responsibilities and workers are simultaneously employed by both the PEO and the end-user client. The PEO typically handles HR functions, while the end-user client retains control over the worker’s day-to-day activities and business operations.

The legality of using EOR or PEO arrangements varies significantly by country, depending on local labour laws, tax regulations, and corporate governance frameworks.

Legal considerations by jurisdiction

In many countries, EOR or PEO models are permitted, provided that the arrangement complies with local employment laws and tax obligations. However, some countries impose restrictions or require specific licensing.

In other countries, co-employment may not be legally recognised or there may be restrictions on its use, making the use of PEO models impractical or unlawful.

Labour leasing laws can also impact the legality of EOR arrangements, including when EORs are used to employ workers across borders.

Indicative restrictions on PEO and EOR models are set out in the table below for some sample jurisdictions.

Country	PEO	EOR	Notes
Brazil	✔	✔	Outsourcing laws apply; EORs are common
China	✔	✔	EORs must be licensed; labour dispatch rules apply
France	×	✔	Strict rules on co-employment and labour leasing. Justification required for using temporary workers, with maximum duration
Germany	✔	✔	Labor leasing (Arbeitnehmerüberlassung) requires a license. Maximum duration on agency assignments
India	✔	✔
Italy	✔	✔	Strict labour leasing laws, including use of licenced staffing agencies. Assignments to be temporary or project-based
Spain	×	✔	Co-employment is not recognized under Spanish labour law. Labour leasing (cesión de trabajadores) is permitted but tightly regulated
UAE	✔	✔	EORs must be licensed and registered in a free zone or have a local sponsor. Direct employment without a local entity is generally not allowed

 

Practical tips for mitigating risks

EORs and PEOs may offer a convenient solution for engaging staff, however their legality of use should be considered upfront, as well as the potential business protection and tax risks.

• Undertake due diligence - an end-user client may still be treated as the legal employer even when operating through an EOR if local laws do not permit the arrangement or otherwise place restrictions on it that are not adhered to. Effective due diligence should be undertaken upfront to understand the local laws, including whether any licence is required, whether the EOR has a legal presence in the country and whether the EOR is acting in accordance with any labour leasing laws
• Consider the contract - careful review of the contract with the EOR will be vital to understanding the allocation of liabilities between the parties, including employment costs, tax liabilities, payments on termination of the arrangement and the payment of legal costs and penalties in the event of litigation
• Protect business interests - Businesses should consider whether they need additional business protections, such as post-termination restrictions or the assignment of intellectual property rights. As a starting point, it will be important to understand what the EOR’s standard position is on such protections, the laws of the country on the use of such restrictions and how and by whom those provisions would be enforced in practice
• Assess whether the EOR aligns with the businesses’ culture and values - Even if the end-user company is at no risk of being deemed the employer, it will still be important to ensure that the EOR operates lawfully and in accordance with the company’s values. Failure by the EOR to comply with statutory requirements such as minimum benefits and wage requirements could result in reputational risk for the company, as well as impacting performance and its culture

Further reading

For further information, please see our more detailed briefing.

How we can help

Our extensive global footprint means that we are well placed to support global employers in their workforce engagement plans, wherever they have a presence. Our lawyers are not only experts in the complexities of different laws, but also in the management of projects spanning jurisdictions and driving those projects to maximise the strategic aims and benefits.