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Introduction
There has been a notable increase in inquiries from both employers and employees regarding Employer of Record arrangements. This growing interest can be attributed to the flexibility these arrangements offer businesses, particularly those seeking to hire and expand in Ireland, without establishing a physical or legal presence here.
In this article, we explain what an Employer of Record is, why these arrangements are becoming increasingly popular in Ireland, the risks for Employers of Record and the difficulties that may arise for employees.
What is an Employer of Record?
An Employer of Record facilitates companies who are seeking to employ individuals in jurisdictions where they do not have a legal presence. The Employer of Record officially employs the employee on behalf of the company, assuming all employer responsibilities, paying the employees, dealing with employment contracts, payroll, taxes, visas and sponsorship, benefits and insurances. The Employer of Record then assigns the employee to work for the client company, the client company retains the ability to direct and supervise the individual on the ground, in exchange for a fee.
Although Employers of Record have become more prevalent in recent years, Irish employment law does not specifically recognise this arrangement, and there is some uncertainty as to how the Irish Courts, the Workplace Relations Commission (the “WRC”) and the Labour Court will interpret them.
Why Are Employer of Record Arrangements Gaining Popularity?
Employer of Record arrangements are particularly attractive to companies that wish to expand their workforce into Ireland but do not want to go through the complexities of setting up a legal entity or branch in the Irish market. Instead of registering as an employer and establishing a physical presence in Ireland, companies can hire Irish-based employees through an Employer of Record. The Employer of Record, acting as the legal employer, is responsible for ensuring compliance with all relevant Irish laws, including compliance with employment law, tax obligations and social security regulations.
This approach offers several benefits, particularly for businesses unfamiliar with Irish legal requirements or those looking for a quicker, more efficient way to hire talent here.
How is the Engagement Structured?
Usually there is a service agreement in place between the Employer of Record and the client that outlines the rights, obligations and responsibilities of both parties, including provisions for handling employment-related claims and liabilities. An employment agreement is entered into between the Employer of Record and the employee. There is no direct contract between the employee and the client company.
Key Risks to Consider
While Employer of Record arrangements have become increasingly popular in Ireland and it may seem like an ideal solution for many businesses, there are several risks that should be carefully considered before entering into such an arrangement which we have outlined below.
Employment Agency Classification
Though Irish law has not recognised the concept of Employers of Record, it is possible that these arrangements could be found to be in the nature of an employment agency arrangement. If an Irish court or the WRC were to determine that the Employer of Record is functioning as an employment agency, legal obligations could arise, including the requirement for the Employer of Record to obtain an Employment Agency Licence pursuant to the Employment Agency Act 1971.
Additionally, if the workers were deemed to be agency workers under the Protection of Employees (Temporary Agency Work) Act 2012, they would be entitled to the same terms and conditions as if they were directly employed by the client company. This means that the client company could be considered the de facto employer for the purpose of employment rights, such as unfair dismissal claims or Health and Safety obligations.
Risk of Employees Being Deemed Clients’ Employees
Another potential risk is that employees working under an Employer of Record arrangement may assert that they are, in fact, employees of the client company, rather than the Employer of Record. If they were to succeed, the client company would be exposed to all of their employment-related rights and obligations, including statutory entitlements and other employment protections.
In determining the identity of the employer, the Irish courts, or revenue authorities would look beyond the contractual documentation and examine the reality of the relationship between the employee and the client company. Factors such as the level of control the client company has over the employee’s work and working conditions would be crucial in determining whether the client company should be considered the actual employer.
Permanent Establishment and Corporate Tax Risk
A further concern for businesses entering into Employer of Record arrangements is the risk of creating a permanent establishment in other jurisdictions for taxation purposes. If the employee’s activities in Ireland are deemed to create a taxable presence, the client company could be subject to Irish corporation tax on any revenue generated through those activities.
Before entering into an Employer of Record arrangement, companies should carefully assess whether their activities in Ireland, through the employee, could establish a taxable presence. Seeking expert legal and tax advice on the implications of creating a permanent establishment in Ireland is crucial to mitigate any potential tax liabilities.
Advice for Employers of Record, Clients and Employees
Given the complexities and risks associated with Employer of Record arrangements, Employer of Record service providers and client companies should take pro-active steps to protect their interests. Below are some best practice guidelines to follow before entering into an Employer of Record arrangement in Ireland:
Advice For Employers of Record
Assess Employment Agency Classification: Consider whether your services could be viewed as operating as an employment agency under Irish law. This may require obtaining a license to operate, and it is essential to clarify this at the outset.
Prepare Comprehensive Contracts: Ensure that both the employee and client have clear, detailed contracts outlining their rights and obligations under the arrangement. This includes addressing potential liabilities and responsibilities in the event of disputes.
Define Responsibility for Employee Issues: Clearly determine who will handle day-to-day employment-related matters such as performance management, leave approval and disciplinary actions. It’s important to specify who holds ultimate responsibility, particularly when it comes to dismissal or other employee-related issues.
Indemnities: It is important to ensure that adequate indemnities are in place for protection against legal actions taken by employees seeking to enforce their employment rights.
Advice For Clients
Understand Liabilities and Risks: Carefully consider who will be liable for various risks in the arrangement. Clients should ensure that the Employer of Record provides indemnity protection, particularly in cases where employment-related claims arise.
Assess Control Over the Employee: Be aware that if the client company exercises a high level of control over the employee’s work, there may be a risk of the employee being deemed a direct employee of the client. This can have significant legal and financial consequences.
Consider Permanent Establishment Risks: Seek legal and tax advice before entering into an Employer of Record arrangement to understand whether the activities of employees in Ireland could trigger a tax liability for the client company.
Advice For Both Parties
Consult Legal and Tax Advisors: Given the complex legal and tax issues involved, both Employer of Record service providers and clients should seek professional legal and tax advice before entering into and exiting from, an EOR arrangement in Ireland. This will ensure that all parties are aware of their obligations and risks.
Advice For Employees
Any employee who is employed by an Employer of Record needs to be aware of the difficulties that can arise where their employment rights have been infringed. We are seeing an increasing number of cases where employees have run into difficulties in asserting their rights where there is a lack of clarity as to the identity of their employer.
Care should be taken in bringing proceedings in the Courts or pursuing Complaints in the WRC to name the correct entity as the employer and often it is necessary to include both the Employer of Record and the Client company.
Conclusion
Employer of Record arrangements offer an attractive solution for companies looking to expand into Ireland without establishing a physical presence. However, as the model is not yet fully recognised by Irish law, businesses must be aware of potential risks, including classification issues, liabilities and tax concerns.
By carefully considering the legal, contractual, and tax implications before entering into such arrangements, both Employers of Record and client companies can navigate these challenges and ensure compliance with Irish law.
Further Information
For further details on Employer of Record arrangements in Ireland, please contact Partner Marc Fitzgibbon or Solicitor Nikita Kelly in our Employment Team.