Cross-Border Catch-Up: EORs and Their Impact on Global Workforce Management

Announcer: Welcome to the Ogletree Deakins podcast where we provide listeners with brief discussions about important workplace legal issues. Our podcasts are for informational purposes only and should not be construed as legal advice. You can subscribe through your favorite podcast service. Please consider rating this podcast so we can get your feedback and improve our programs. Please enjoy the podcast.

Diana Nehro: Welcome to the Cross-Border Catch-Up, the podcast for global employers who want to stay in the know about cutting-edge employment issues worldwide. I am Diana Nehro, and I am here today with my wonderful colleague, Patty Shapiro. We are cross border attorneys here at Ogletree, and today we’re going to talk about the evolving legal landscape of global employer of record or EORs. Patty, for those who may not be familiar, what is an EOR?

Patty Shapiro: An EOR is a third-party vendor that a company can use to employ local talent if it does not have a local entity or it doesn’t want to register a branch, set up a representative office, or in the few countries where it’s possible register as a non-resident employer. So, the vendor becomes the legal employing entity for all intents and purposes. But the work was still performed for the benefit of the company, very much like a staffing agency, but you pick the person. The industry really took off in response to the pandemic and increased remote work globally. And it’s appealing because it offers companies a relatively compliant way to engage talent abroad rather than treating everyone as an independent contractor.

Diana Nehro: Wait, which could also end up with large-scale misclassification risk, I’m sure. But why is it only relatively? I caught that word, and I hope I’m on it. What do you mean?

Patty Shapiro: So, historically, companies that wanted to engage talent abroad but didn’t have their own presence there would simply treat them as independent contractors and call it a day, even though those individuals were functioning as employees and doing that meant that those individuals were missing out on employment benefits and protections. So, at least by using an EOR, the individuals receiving those benefits and protections. But the EOR concept is so new that it is not expressly contemplated in most countries’ legal frameworks, and that has created a significant amount of ambiguity for both the vendors themselves and the companies using those services. But as we’ll talk about in a moment, we are starting to see other jurisdictions take a firm stance on some of the legal issues EOR arrangements present.

Diana Nehro: Interesting. Let’s dive a little more into that. What are the recent developments that you’ve seen in relation to EORs that are particularly new or new for our clients?

Patty Shapiro: The most interesting development and potentially the one with the farthest-reaching consequences is Kenya’s recent decision that it can assert jurisdiction over a foreign company using an EOR to engage local talent and hold it accountable as a joint employer. Many companies take comfort in the fact that when using an EOR, even though the nature of the arrangement is one of joint employment, they won’t have to litigate locally or ultimately have any obligation to the worker directly because not only is it difficult to bring a suit against a foreign company, but a local court is likely not interested in trying to assert its jurisdiction over a foreign company. But the tides have changed on that in Kenya, where local courts have expressly stated that a foreign company with no local presence using an EOR to hire local talent is subject to the jurisdiction of local courts and is a joint employer.

Diana Nehro: That’s really interesting. I mean, I’m just thinking about the tremendous amount of software development talent and other kinds of tech talent in that part of the world. Interesting. And I guess somewhat not surprising that we’re seeing that. So, is that likely to be the country’s stance now across the board?

Patty Shapiro: Interestingly, no. So, Kenya’s president has expressed concern that this decision will discourage big companies, especially big tech companies from hiring in Kenya at all. So, as a countermeasure, he has stated that he’ll introduce a bill that will make it more difficult to sue foreign companies, but we haven’t seen it yet.

Diana Nehro: And no sense of timing on that.

Patty Shapiro: Exactly.

Diana Nehro: How do you think this will impact policymaking globally?

Patty Shapiro: I think it’s going to be extremely influential. So, outside of the question of how EORs should fit into a jurisdiction’s tax framework, it’s been difficult to frame the potential issues with EORs enough to debate it. But Kenya’s decision captures the heart of the issue. And the question is, is it better to have foreign companies bringing jobs to your country even though the EOR structure causes those companies to have less skin in the game, if you will, or is it better to risk the quantity of jobs coming to that country in exchange for assurance that those that do bring jobs can be held accountable to employees? So now that Kenya’s kind of teed it up, I expect to see more jurisdictions taking a stance on that one way or the other.

Diana Nehro: Yeah, and it’s interesting, and I wonder if there will be a difference between more established markets and emerging markets that can I actually really genuinely mean this question? I wonder if you’ll see this more with emerging markets where historically, there hasn’t been as much foreign investment, and now that’s starting to pick up and really increasing the quality of life for the people that live in that country and giving them more cash and opportunity. You mentioned something about a tax issue you flagged. Tell me about that.

Patty Shapiro: So, in most places, a foreign company could use an EOR to hire locally, and the local government would basically have no idea that they have any connection to their country at all, which means there’s a risk to the country that they are potentially losing corporate tax dollars. So, within a country’s financial interest to force companies to truly invest in their country, whether that means giving them no choice but to set up a local entity to employ or by closely monitoring or investigating the work done in their country on that foreign company’s behalf in order to find a permanent establishment and then assess corporate taxes.
So, to be clear, though, they have the same issue when foreign companies engage local talent as independent contractors, but it’s a lot harder to find independent contractors. Interestingly, we’re seeing a trend in some countries where tax authorities are specifically targeting EORs for PAE-related investigations because they know a foreign company could be using an EOR to circumvent paying corporate tax locally. Of course, I don’t say that to suggest that companies are intentionally using EORs as part of some sort of grand tax adhesion scheme, but because the industry is so new, most countries’ existing laws and regulations don’t address a foreign company’s obligations to that country when using an EOR and whether that’s taxed or otherwise.

Diana Nehro: Yeah, it’s interesting. I mean, would these companies really look at this Kenya decision and say, okay, oh, now we’re going to establish an entity there where they would not have otherwise? I don’t know the answer to that, but it certainly seems like it could put a lot less money into the local economy if these jobs go away. And I know enough to know that I’m not a tax expert, and this is not tax advice, but it is interesting. I mean, you would assume even though there may be a larger company behind the EOR, they’re not generating revenue on the local country’s soil, and on the local country’s, it’s not the soil but the local country’s market whether it would even be taxable there in the first place.
And you would assume that if the EORs are doing what they’re supposed to be and are compliant, they’re at least paying some kind of corporate taxes on the fees that they receive from clients using them. So, it definitely is a lot of complicated issues. So, it also sounds like we’re really seeing different countries react and respond to the EOR industry, as we’ve anticipated, would be coming for quite some time, especially given how much it exploded during covid. Have you seen any other changes?

Patty Shapiro: Yes. So, immigration issues are starting to be impacted. Again, immigration laws largely do not contemplate EORs. So historically, EORs would secure visas for workers just as any other local employer would. However, we know that doesn’t line up with the legislative intent behind most visas. So, most of the time, the whole point is to bring skills or talent that do not otherwise exist in a country’s talent pool to a local company who will then grow and generate more jobs, pay more taxes, et cetera, in the local market.
In the context of an EOR, the ultimate work performed is often not for the benefit of the local market. Instead, the local talent performs work for the benefit of a foreign company, which then benefits that foreign country. So, to your point, Diana, even that though has some benefit for the local market in that it offers a job to someone locally. But if a contingent worker needs visa sponsorship, not only is this EOR arrangement not benefiting the local market, but it’s not protecting job opportunities for locals. So, in other words, there isn’t any upside to the country hosting this individual, and it could even be a strain on local resources like medical care. And we’ve now seen Singapore come out and explicitly say that EORs cannot sponsor work visas, and I expect to see the same from Canada, if not other countries in the near future.

Diana Nehro: Yeah, it is definitely an interesting phenomenon. It is an interesting time for sure in the EOR world. Well, I could talk about this all day long. We might have to do part two, but that’s our time for today. Thank you all so much for joining today’s episode of the Cross-Border Catch-Up, and follow us to stay in the know about cutting-edge employment issues worldwide. Thank you so much.

Announcer: Thank you for joining us on the Ogletree Deakins podcast. You can subscribe to our podcast on Apple Podcasts or through your favorite podcast service. Please consider rating and reviewing so that we may continue to provide the content that covers your needs. And remember, the information in this podcast is for informational purposes only and is not to be construed as legal advice.