Worklife 2.0: Employers of record – the sky is the limit? Part 3 – Employee leasing

With recent improvements in digital opportunities and against the backdrop of an increasing shortage of skilled professionals in certain jurisdictions, many companies are interested in expanding their pool of potential employees and hiring internationally. Employment, tax and social security issues arising in this context can be quite complex because several legal systems are involved.

As we previously discussed (here), the “employer-of-record” (EoR) model is being used by more companies to help address the challenges they face when employing their workforce globally, from setting up a legal entity to taxes, social security, running the payroll and compliance with local employment law.

This blog post explores potential employee leasing restrictions in Europe to be considered when partnering with EoRs. While this blog post mainly focuses on Germany as an example of employee leasing restrictions, it also touches on other European jurisdictions, including Spain, Italy, and France.

The Employer of Record (EoR) model

An EoR is the formal employer "on record". The EoR hires the employee in the employees’ country of residence through a local entity. The employee, however, actually works exclusively for the customer of the EoR (the End User Company).

The EoR does not exercise an employer's right to issue instructions but transfers this right to the End User Company based on a framework agreement. The End User Company is therefore authorized to issue instructions to the employee and is effectively in the employer's position although there is no formal employment relationship between the End User Company and the employee. The EoR fulfils the formal duties of an employer and, through its local company, provides payroll services, applies for residence and work permits, ensures compliance with local employment law, and communicates with local authorities.

In Germany, employee leasing restrictions can potentially be applicable in two different EoR scenarios: either the End User Company is based abroad and wants to hire an employee in Germany via an EoR, or the End User Company is based in Germany and wants to hire an employee abroad via an EoR. Similar considerations apply elsewhere in Europe, including in Spain, Italy and France as set out below.

What is “employee leasing”?

Employee leasing is defined as the leasing of employees by their employer to a third party for work in return for a fee.  The employees must be integrated into the hirer's work organization and be subject to the hirer's instructions.

In certain European jurisdictions, employee leasing is highly regulated. We have set out some examples of this below.

Employee leasing in Germany may only take place for a maximum period of 18 months and an employee leasing company generally needs a leasing permit (Arbeitnehmerüberlassungserlaubnis).

Similar restrictions apply in Spain, where any employee leasing may only take place on a temporary basis (depending on the individual case, but also usually for a maximum of 18 months) and a permit is required as well.

While there is no maximum period under Italian law, it is always mandatory for the leasing company in Italy to be enrolled in a specific register (Albo delle agenzie per il lavoro).

Strict regulations also apply in France where leasing employees for profit is, in principle, only allowed in certain limited cases. While French law basically allows employee leasing (portage salarial), the French Labour Code (Code du Travail) sets out specific conditions for employee leasing to be lawful. Notably, the leasing companies (entreprise de portage salarial) need to be registered and get appropriate financial warranties, the leased employee needs to have specific know-how, qualifications and autonomy and the End User Company can only use employee leasing for the performance of occasional tasks which are not related to the normal and permanent activity of the company. In addition, any employee leasing can only take place for a maximum period of 36 months.

All of the jurisdictions mentioned above have in common that any non-compliance with the respective statutory requirements can result in, amongst other things, fines for both the employee leasing company and the company that leases the employee.

EoRs and employee leasing 

At first glance, the EoR model seems to be a “new” way of hiring skilled workers abroad. At second glance, there is a risk that local regulators view an EoR arrangement as a “classic” employee leasing model. In Germany, Spain and Italy, the employment of an employee "through" another employer is generally considered to be employee leasing. This is likely to apply to many EoR models, since the EoR formally employs the employee while the End User Company shapes the content of the employment relationship – which means that the employee is usually integrated into the work organization of the End User Company and is subject to its instructions. Similarly, under French law, an EoR would generally be considered as for-profit employee leasing and as such would have to fall into one of the categories of lawful for-profit employee leasing.

While there is no case law on this specific question yet, since the EoR model is a relatively new form of employment, we discuss below some factors which courts are likely to consider in determining the applicability of domestic employee leasing laws.

The principle of territoriality

In Germany, the applicability of the German Employee Leasing Act – and the obligation to obtain a permit and to comply with the statutory maximum leasing period – is governed by the principle of territoriality (Territorialitätsprinzip).

According to this principle, the leasing of employees must take place within the territorial scope of the Act, i.e. within the territory of the Federal Republic of Germany. Only where the required domestic connection exists are the services of an EoR subject to the obligations under the German Employee Leasing Act.

Therefore, the German Employee Leasing Act does not generally apply if the End User Company is based in Germany and both the EoR and the employee are based abroad. As long as the employee works exclusively from abroad, a domestic connection is not established, even if the employee is subject to the End User Company’s instructions and might be "virtually" integrated into the End User Company’s work organization (e.g. through email or video conferences). Similar principles apply under Spanish law and most likely in Italy, although the Italian law is silent on this.

Nonetheless, End User Companies and employees should keep in mind that the domestic connection can inadvertently be established by occasional activities, such as when the employee travels to Germany on a business trip and works from the End User Company’s domestic office. The same applies under Italian law and in Spain where a certain (undefined) period of time is needed for employee leasing law to apply.

In Germany, the alternative scenario, i.e. where both the EoR and the employee are based in Germany and the End User Company is based abroad, is more complicated. While it might be argued that the mere "virtual" integration of an employee in Germany into the End User Company’s business abroad is not sufficient for the German Employee Leasing Act to apply, it is relevant that both the EoR and the employee are located in Germany. Considering that the purpose of the German Employee Leasing Act is to control the reliability of the leasing company (i.e., the EoR) and to ensure the protection of leased employees in Germany, it is likely that a court could assume a domestic connection in this scenario. In France, employee leasing law always applies when an employment contract is entered into between an EoR based in France and an employee working from France regardless of where the End User Company is located.

Case-by-case assessment required

As mentioned above, illegal employee leasing can result in high penalties for both the EoR and the End User Company. For this reason, each individual case should be examined on its facts to determine whether the applicable EoR arrangement is subject to the respective national employee leasing law – and if so, whether the specific statutory requirements are met. A decision on whether the EoR model is actually suitable for hiring workers abroad should therefore only be made on the basis of a precise legal assessment.

For our previous blog posts on EoRs, see here (equity-based incentives) and here (intellectual property). We will also be hosting webinars in February and March covering EoRs in more detail.