Are you undertaking a project abroad and need to post workers internationally? If the answer is yes, it is likely that you will have to move your professionals to the country where the activity will take place. What you may not know is that these situations can lead to local legal obligations for the company in the destination country, either as a consequence of social security contributions in the destination country, or as a consequence of the changes brought about by the new Posted Workers Directive
One way to mitigate, or even eliminate these administrative obligations, is through the Employer of Record (EOR) figure, which allows us to comply with all the labor obligations we have as an employer without the need to establish ourselves in another country or assume corporate tax risks.
What is an Employer of Record?
It is a third-party contracted legal entity that is responsible for formal employment tasks. Specifically, they are companies that are dedicated to registering workers, paying their payroll, and carrying out the contributions and withholdings of a worker of the client company. To use a simple simile, it would be an outsourcing of the employer for formal purposes.
It would be the appropriate option for those companies that must transfer workers to other countries where they do not have a business activity, and cannot maintain the Spanish payroll, so they should open a work center in the destination country (with all the obligations that this entails).
The Employer of Record figure allows the real employer to be different from the formal employer:
- The Employer of Record is the formal employer: it signs the contracts, undertakes the contributions, pays the salaries, and carries out the withholdings. The Employer of Record does not act as the employee's manager or perform supervisory duties. In short, it takes care of administrative tasks. In Spain it would be the equivalent of a Temporary Employment Company but their services are only allowed in certain circumstances and are always of a temporary nature.
- On the other hand, a different figure from the Employer of Record is the real employer (the original company), which is who organizes the employee's work and who benefits from the fruits of the work performed by the employee.
Once the difference is clarified, it is really important to know that:
- The Employer of Record exempts the real employer from the obligation to register in the country of destination as long as the economic activity of the company in that country does not require it, thus greatly simplifying international operations.
- The Employer of Record stops the tax authorities from interpreting that the real employer has a permanent establishment* in the destination, again in the event that there is no economic activity.
- The Employer of Record has its own entity in the country where the client (real employer) wants to operate, which greatly facilitates compliance with local laws and regulations, to which it is already fully adapted.
*Important: the permanent establishment (PE) is determined by the activity of the company. If a company sends a worker to provide services to a foreign client (either by registering in that country or through an Employer of Record) there will be no risk of PE if there is no direct business activity in that country. On the other hand, if what takes place in the foreign country is a replica of the economic activity that takes place in Spain (selling, producing, or distributing), then, even if a vehicle such as the Employer of Record were used, there would still be a risk of PE because, as we mentioned, the determination of a PE or not depends on the activity carried out in the destination.
What are the benefits of having an Employer of Record?
Among others, we highlight:
- The real employer saves time and money by not having to worry about the hiring process and by not having to open a new entity in the foreign country of destination.
- Provides legal liability coverage.
- Simplifies the payroll process.
- The Employer of Record takes care of the administrative tasks, relieving the real employer of this burden.
- The real employer does not have to outsource payroll services and integrate them into accounting.
- The real employer has full freedom when it comes to managing and administrating the business.
- It is a good way of expanding in the international market.
However, we must take into account that as long as it cannot be framed within the activity of a Temporary Employment Agency, this figure of the Employer of Record is an illegal practice in Spain; it is considered an illegal assignment of workers.
On the other hand, this figure is operationally legal in other countries such as Russia, the United States, or Australia, and, as we have said, is a way of not having to generate a company structure in the destination country, with all the tax complications that this could entail.
Illegal assignment of workers in Spain: Jurisprudence
In Spain, this assignment of workers is one of the forms of labor provision prohibited by current regulations.
It consists of the fictitious maneuver of constructing the appearance of being in the position of employer to an employer who is not actually in such a position. In this situation, there is a relationship between companies whose purpose is solely to make workers from one company available to another. And why is this situation illegal in Spain? Because the only entities with the capacity to carry out this movement are the Temporary Employment Companies (ETT), with the transfer of workers by other legal entities that do not hold this status being considered illegal.
This is established by the Workers' Statute: “The hiring of workers to temporarily assign them to another company may only be carried out through temporary work companies duly authorized in the terms that are legally established” (Article 43.1).
In relation to Article 43.1 of the Workers' Statute, the Supreme Court has ruled in a judgment of May 16, 2019 that “for there to be illegal assignment of workers, three things must coincide:
- An agreement between the two employers (the real and the formal employers) for the second one to provide the first with workers that will be used by an employer who, however, does not legally assume the business position.
- A simulated employment contract between the formal employer and the worker.
- An effective work contract between the worker and the real employer, but disguised by the formal work contract.”
In conclusion, the Employer of Record is a valid and effective way to promote and develop professional activities in foreign countries as long as the legislation of said destination country allows the formal employer to be different from the real employer. Otherwise, it may lead to an illegal assignment of workers, a situation that could have negative consequences for both the assignor and the assignee companies.
Do you need to post workers to foreign countries?
GD Global Mobility can help you. Our professionals will be in charge of choosing the most suitable Employer of Record for your business and of managing all the necessary tasks to effectively carry out the posting; we are experts in advising on and managing the international mobility of workers. Get in touch with us and tell us about your needs.