Employer of Record Arrangements: Opportunities, Risks and What Employers Need to Know

The Employer of Record (EOR) model has become one of the most talked about tools amongst businesses with an international footprint that are looking to expand - but it is not without significant legal complexity. 

This article will explain what the EOR model is, and key issues employers should have on their radar.

The Rise of the EOR Model

The EOR model has firmly entered the mainstream of international workforce planning. The concept is straightforward: a third-party organisation acts as the legal employer of an individual in a given country, allowing the end client to benefit from that person's work without needing to establish its own local legal presence. It is a model that has gained considerable traction in recent years, fuelled by the growth of remote working, the globalisation of talent pools, and the desire of fast-growth and scaling businesses to move quickly into new markets without the cost and complexity of setting up a local legal presence.

The global EOR market has grown rapidly and is estimated to be worth several billion dollars, with industry commentators expecting it to more than double over the coming decade. That growth is particularly visible in the Middle East, where large-scale economic diversification programmes (such as Saudi Arabia's Vision 2030 and the UAE's renewable energy strategy) are attracting significant international investment and, with it, creating a pressing need for compliant hiring solutions. The model is typically used by fast-growth and scaling businesses, including technology companies, that need to build a workforce quickly across multiple jurisdictions without the delay of setting up local entities in each one.

When Does an EOR Work Well and When Does It Not?

An EOR can be an effective solution in the right circumstances. It tends to work well when a business is exploring a new territory for the first time, hiring a small number of individuals on a temporary or project basis, or simply looking to reduce the upfront costs and administrative burden of local compliance in respect of tax and employment rights. It can offer speed, simplicity, and a degree of insulation from unfamiliar regulatory environments.

However, an EOR is not a one-size-fits-all answer. The model has a number of inherent limitations. Most fundamentally, because the EOR (not the end client) is the legal employer, the end client's ability to manage performance, take disciplinary action, or terminate the relationship directly is significantly constrained. There is also a risk of co-employment, and the end client may still be exposed to liabilities in areas such as discrimination, working time, and health and safety. An EOR arrangement may therefore be less suitable where a business has a significant or growing headcount, is looking to build a longer-term local presence, requires bespoke or complex remuneration packages, or is recruiting for roles that could trigger a permanent establishment risk. Complex immigration requirements can also be problematic, since in many jurisdictions only the entity responsible for the individual's day-to-day work can sponsor a visa. It is also important to be aware that EOR arrangements must comply with local labour leasing and temporary staffing regulations, which vary considerably from country to country and where, in some jurisdictions, non-compliance can constitute a criminal offence.

The Regulatory Patchwork

One of the most important and most frequently underestimated aspects of EOR arrangements is the sheer variation in how they are treated from one jurisdiction to the next. There is no single, harmonised legal framework governing EORs internationally.

At one end of the spectrum, jurisdictions such as the UK take a comparatively light-touch approach though, even here, the regulations regarding agency workers and employment agencies can create obligations that should not be overlooked. At the other end, countries such as France, Germany, Italy, and Spain impose highly restrictive requirements on the supply of labour and, in some cases a non-compliant EOR arrangement can constitute a criminal offence. 

For any business considering an EOR, what matters is the regulatory position in the country where the individual will be based not where the end client is headquartered.

Spotlight: The Middle East

The Middle East, Saudi Arabia, the UAE, Oman, Qatar, and Kuwait in particular, presents a particularly interesting case study. The region is one of the fastest-growing markets for EOR usage, driven by major investment programmes such as Saudi Arabia's Vision 2030 (as noted above), the UAE's push into renewable energy and technology and Dubai's own economic agenda, which aims to double the size of the Dubai economy by 2033. For businesses looking to tap into these markets, an EOR can seem like an attractive route in, but the operating environment is distinctly complex.

One of the first things employers encounter is the web of nationalisation programmes that exist across the Middle East. Each country has its own scheme requiring businesses to employ a minimum proportion of local nationals. The quotas vary by sector and company size, and the consequences for falling short can include fines, restrictions on hiring, and limitations on the ability to obtain visas for expatriate staff. For businesses using an EOR, it is important to understand how these requirements apply in practice and the role the EOR plays in meeting them.

Visa and immigration processes add a further dimension. Across the Middle East, work permits and residency visas are closely linked to the sponsoring employer, and the rules differ between countries. Whether an EOR can sponsor visas on behalf of the end client and whether the end client's own activities might create separate obligations will depend on the jurisdiction and the specific arrangement in place.

Payroll is another area where Middle East countries take a particularly hands-on approach. Several countries operate government-monitored wage protection systems that require employers to process salaries through approved channels and report payments in prescribed formats. Getting this wrong can have serious consequences, from fines to restrictions on business operations.

Finally, most Middle East countries states require employers to pay end-of-service gratuity which is a lump sum calculated by reference to length of service and final salary. The formulas for calculating this differ across the region, and where employees have been transferred or seconded from another country, there is a real risk of them acquiring entitlements in both the home and host jurisdiction. Getting the contractual arrangements right from the outset is therefore essential to managing that exposure.

Key Legal Risks for End Clients

Even where an EOR arrangement is lawful and well-structured, several legal risks remain with the end client:

Employment status: There is a risk that the EOR arrangement is looked through, and the end client is found to be the true employer, particularly where the end client exercises significant day-to-day control over the individual. The substance of the relationship, not just the contractual labels, is what will be scrutinised.

Intellectual property: IP created by an EOR-engaged individual will, by default, belong to the EOR as the legal employer. Without proper assignment provisions in the commercial agreement, the end client may have no automatic right to the work product.

Confidentiality and restrictive covenants: The enforceability of post-termination restrictions and confidentiality protections in EOR employment contracts is a largely untested area of law and may not be enforceable by or on behalf of the end client.

Immigration: In several jurisdictions, including the UK, an EOR cannot sponsor work permits because the sponsoring entity must be the organisation responsible for the individual's day-to-day activities. This can significantly limit the model's usefulness for overseas hires.

Permanent establishment: Using an EOR does not necessarily eliminate the risk of triggering a taxable presence as tax authorities can look behind the arrangement. It is the end client's activities in the relevant jurisdiction that will ultimately determine whether a permanent establishment exists.

Alternatives Worth Considering

An EOR is not the only option. Businesses may also consider engaging individuals as independent contractors; establishing a local entity and hiring directly; employee leasing through a specialised intermediary; or using a Professional Employer Organisation (“PEO”) which operates on a co-employment basis and typically requires the end client to have a legal presence in the jurisdiction. 

Each model carries its own risk profile, and the right choice will depend on the business's headcount, time horizon, risk appetite, and strategic objectives in the relevant market.

Practical Takeaways

For employers considering or already using an EOR, a few key principles are worth keeping in mind:

• Carry out thorough due diligence on the EOR's local licensing, legal presence, and compliance track record. 
• Review the contractual terms before entering an arrangement and ensure the service agreement with the EOR contains clear provisions on termination cooperation, indemnities, and the division of responsibilities in the event of disputes or litigation.
  Do not assume that a model which works in one jurisdiction will be lawful or appropriate in another. The regulatory position must be assessed on a country-by-country basis.
• Pay close attention to how IP, confidentiality, and post-termination restrictions are dealt with, and consider whether separate agreements with the individual are needed.
• In the Middle East specifically, ensure the EOR can navigate nationalisation quotas, wage protection system obligations, and the employer-linked visa sponsorship framework.
• Consider whether an EOR is genuinely the right long-term solution, or whether an alternative structure would better serve the business's objectives.

This is an area of law that is developing rapidly. EOR-related employment litigation is expected to increase, and regulatory scrutiny, both in the UK and internationally, is likely to intensify. 

If you are considering using an EOR, currently operate through one, or would like to review your existing international hiring arrangements, we would be happy to help. Please get in touch with the author to discuss how we can support you.