The concept of local legal employer or employer of record gains momentum as a form of hiring

Ángel Olmedo Jiménez
Garrigues, Madrid
angel.olmedo.jimenez@garrigues.com

Introduction

Advances in technology combined with new needs following the global Covid-19 pandemic have not only given rise to new ways of organising work, but also to new ways of hiring personnel, where geographical borders cease to be an impediment.

In recent years, globalisation and business requirements, particularly in certain sectors, have meant that companies have been forced to try and expand their business internationally, inevitably requiring them to set up shop in new countries.

Faced with this situation, rather than using the traditional business expansion model based on setting up legal entities in different countries (branches, for example) and, consequently, formalising employment contracts or contracts for services, alternatives such as the employer of record (EOR), already widely used in English-speaking countries, are becoming increasingly popular.

The details

EORs are commercial entities that take on the formal position of employer and, consequently, assume the formal obligations incumbent on employers (hiring, registration of new hires and terminations for social security purposes, monthly payment of salaries and social security contributions), thereby enabling companies to expand internationally without having to have a minimum structure in place in another country or assume any kind of legal obligation due to having employees working for them who have been hired in a different country.

However, that being said, it is important to bear in mind that EORs are not permitted in all countries and it is, therefore, vital to confirm beforehand that the regulatory requirements in different areas, particularly labour laws, have been met.

Thus, we cannot ignore the fact that some legal systems consider that there can only be one employer and it is not, therefore, legally possible for two employers to co-exist (where one assumes the formal obligations deriving from the employment relationship and the other enjoys the fruits of the employee’s labour). What is more, these legal systems even provide for a range of consequences deriving from the use of this business model, including fines.

The situation in Spain

Specifically, and with respect to the Spanish legal system, hiring employees through an EOR could pose certain risks. In this regard, employees can only be hired by a different entity in very specific instances in which the company needs to outsource a service (and the service provider is the actual employer and is entirely responsible for organising the service provided) or, in very exceptional cases, to cover temporary needs, in which case employees can be hired through a temporary employment agency.

Accordingly, hiring employees through an EOR could be considered an unlawful loaning of workers in cases where the hiring company is merely acting as an employer of record and the only services it provides for the main company are the hiring of the employee and the making of the related salary, social security and tax payments. In other words, the employee is really employed and managed by the main company, not the EOR.

In view of the above, the legal consequences envisaged under Spanish labour law in the event of a declaration on the unlawful loaning of workers are that the employees hired through the EOR would be considered main company employees from the moment they started providing services through the EOR (both companies will be jointly and severally liable for the employment and social security obligations of the employees) and, most importantly, the companies involved could be penalised for the commission of a very serious infringement (with a fine between €7,501 and €225,018, to be decided by the labour and social security inspection authorities, depending on the number of employees involved, the revenue of the main company, wilful intent, etc). Once the penalty becomes final, the company could also be barred from entering into public sector contracts (contracts with public authorities in Spain).

Conclusion

In conclusion, while the opportunities offered by technology, which have seen a resurgence following the pandemic, and the new ways of working are giving rise to new models of working that promote business expansion and globalisation, for the moment we cannot ignore the need to confirm whether these mechanisms are lawful under different legal systems or rule out the need to make laws more flexible to continue to foster much needed globalisation.