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We have seen a significant increase in the volume of queries in relation to employers of record arrangements, from both employer of record service providers and end user clients in recent years. In this article, we explain what they are, why they are ‘on the rise’ and provide practical guidance on what you should keep in mind if entering such an arrangement.
What is an ‘Employer of Record’?
An Employer of Record assists companies who wish to employ individuals in countries where they have no legal presence. The Employer of Record employs the individual on behalf of the company and formally assumes the role (including all responsibilities) of an employer. The Employer of Record then in turn assigns the employee to work for that other company, their client, in exchange for a fee.
While Employers of Record have become commonplace in recent years, Irish employment law does not expressly recognise the concept of Employers of Record and it remains to be seen how these arrangements will be characterised by the courts.
Why are these arrangements attractive?
Employer of Record arrangements are an attractive offering for companies who do not have a physical or legal presence in Ireland and who are seeking to expand their workforce into the Irish market. Rather than establishing an Irish legal entity or branch and as an alternative to having the non-Irish legal entity hire the individual directly and register as an employer in Ireland, companies can engage the services of an Employer of Record to employ Irish-based employees on their behalf. As the employer, the Employer of Record is responsible for ensuring compliance with all applicable Irish legislation including but not limited to employment, social security and tax laws. This is particularly enticing for a company that may be new to the Irish market and unfamiliar with local requirements.
How is the engagement structured?
In a typical Employer of Record model, the Employer of Record will have separate agreements with both the employee and the client and there is no direct contractual arrangement in place between the employee and the client. A contract of employment is entered into between the Employer of Record and the employee only.
Separately the Employer of Record and their client will enter into a service provision agreement which sets out the respective parties’ rights and obligations, including in the event of any employment-related claims or liabilities
Too good to be true? What are the key risks?
An employer of record arrangement can appear a very enticing option for companies and while they have yet to be tested or assessed by the Irish courts, we consider that there could be some potential pitfalls on the horizon.
1. Employment agency
While Irish law does not (yet!) expressly recognise the concept of an Employer of Record, there is no question that the services offered by Employers of Record are similar in nature to employment agencies. If the Irish courts were to classify employers of record as employment agencies, a number of rights and obligations would automatically flow from such a classification.
The Employer of Record if categorised as an employment agency would be required to comply certain statutory requirements including the requirement to obtain a licence to operate as an employment agency where they have a premises in Ireland. The employees in question would in turn be categorised as agency workers and be entitled to the statutory protections afforded by the Protection of Employees (Temporary Agency Work) Act 2012. The 2012 Act provides, amongst other things, that agency workers are entitled to the same basic working terms and conditions of employment as if they were directly hired by the organisation for whom they are actually working.
It is important for clients to note that if employees in an employer of record arrangement were categorised as agency workers, pursuant to unfair dismissal and health and safety legislation, the client would be deemed to be their employer as the person or company for whom they are actually working.
2. Deemed employee of the client
There is a risk in Employer of Record arrangements, that the employees in question could claim that they are, in fact, employees of the client to whom they are assigned. In which case, the client will be liable for all employment related rights and obligations associated with these employees.
The Irish Courts (or Irish tax authorities) in assessing such a claim will consider the substance of the relationship in its totality rather than just its contractual form as labelled by the parties. While any agreement entered into between the parties and the categorisation of the role of each party is relevant, it is only one of a number of factors that are taken into account. While there is no single or absolute test, an examination will include an assessment as to the level of control exercised by the client over the employee.
3. Permanent establishment corporation tax risk
Finally, clients should always bear in mind the risk of creating a permanent tax establishment in Ireland and take appropriate advice as required. Clients need to consider whether (i) any activities carried out by the employees in Ireland on behalf of the client could give rise to a taxable permanent establishment of the client in Ireland and (ii) if so, whether any revenue should be properly attributed to that Irish activity) and be potentially taxable in Ireland.
Best practice guidance
The risks attached to Employer of Record arrangements will differ depending on whether you are an Employer of Record service provider or a client considering using these services. We have set out below our best practice guidance, which should be considered before entering into such an arrangement in Ireland:
For all your employer of record queries, please contact Aisling Muldowney, Partner, Aoife Clarke, Senior Associate, Tara Smyth, Associate, Sarah Linehan , Solicitor or any member of the ALG Employment team.
Date published: 18 July 2024
