United Kingdom Labor Market and Immigration Forecasts for January 2023
Streamlining Global Hiring with Employer of Record (EOR) Services: Navigating Regulatory Challenges
Employer of Record (EOR) services have become a popular choice for businesses looking to expand internationally, hire remote workers, or access global talent. However, the regulatory landscape for EOR services is complex, and companies must be aware of the potential risks and considerations.
EOR Compliance Responsibilities
EORs act as the legal employer in the target country, handling payroll processing, tax withholdings and filings, benefits administration, employment contracts, terminations, and ensuring compliance with local labor and employment laws. This reduces regulatory complexity for companies, allowing them to hire internationally without setting up a local legal entity [1][4].
Tax and Regulatory Risks
While EORs can help mitigate risks related to local tax compliance, companies must ensure the EOR is reputable and fully compliant to avoid indirect exposure to tax evasion investigations or penalties. Some countries have harsh tax audit regimes and penalize late corporate tax registrations or filing failures [2].
Another important consideration is the Permanent Establishment (PE) risk. EOR arrangements help reduce PE risk by legally employing workers via the EOR company, avoiding direct establishment. However, if the company exerts too much control over workers or uses them as de facto local branches, tax authorities may claim PE status [2].
Recent Legal Changes
Changes in employment and tax law directly affect EOR engagements. For example, new labor laws in Illinois effective January 2025 impose new employee rights and employer record-keeping requirements that EORs and clients alike must heed [3]. Similarly, emerging corporate tax regimes in places like the UAE require businesses using local services (including EORs) to register and comply or face penalties [2].
Due Diligence and Risk Management
Companies leveraging EOR services should conduct rigorous due diligence on the EOR provider’s regulatory compliance, reputation, and capability to manage tax and labor law obligations accurately. This minimizes the risk of non-compliance that can lead to investigations or double taxation issues for expatriates [2].
In summary, while EOR services provide a streamlined path to global hiring compliance, companies must remain vigilant about local tax registration and filing requirements, permanent establishment risks, and evolving labor laws. Choosing compliant EOR providers and understanding country-specific regulations are critical to mitigate tax evasion and PE risks effectively [1][2][4].
For more detailed information on each topic, please refer to the articles in the Regulatory Outlook series. It's important to note that the legal landscape for EOR services is complex, and compliance can be unclear. Users of EORs should ensure that ownership of intellectual property, confidentiality, and data protection are addressed in contracts with the EOR.
As the use of EOR services grows, businesses can expect to see more individual and collective grievances and new ways of working impacting on Employment Tribunal claims. The government has also announced further legislative reform on industrial action and strike law to enforce minimum service levels in vital public sectors.
In some countries, the use of EOR services may breach local regulations, and some EORs serve as a front for tax avoidance/evasion. Businesses are advised to conduct thorough due diligence on EOR providers to understand the risks involved.
The government has committed to reviewing workforce participation to understand the rise in economically inactive individuals, particularly among those aged over 50. In the UK, using an EOR poses a risk of criminal liability under the Criminal Finances Act 2017 for failing to prevent tax evasion by suppliers.
In the coming year, businesses can anticipate redundancies due to the difficult economic climate. The government is expected to introduce regulations for umbrella companies this year, aimed at ensuring compliance and licensing umbrella companies to help organizations pay their temp workers and contractors.
The UK government has consulted on proposed changes to the statutory regime for calculating holiday entitlement for part-year and irregular hours workers. The consultation closed on 9 March 2023. The Supreme Court is expected to make an important decision on the ongoing holiday pay litigation, which could have significant repercussions for many employers.
The Health and safety topic is also included in the Regulatory Outlook series. There has been a lot of publicity about staffing supply chain risk, particularly regarding the use of contingent workers and umbrella companies. Businesses are advised to be aware of these risks and take appropriate measures to ensure compliance.
- In the process of choosing an Employer of Record (EOR) provider, businesses should ensure that ownership of intellectual property, confidentiality, and data protection are addressed in their contracts.
- To minimize tax evasion and Permanent Establishment (PE) risks effectively, companies must conduct rigorous due diligence on the EOR provider's regulatory compliance, reputation, and capability to manage tax and labor law obligations accurately.
