Is Employer Of Record Legal?

If your business wants to hire employees in a foreign country without setting up a local entity, you can use the services of an Employer of Record (EOR). 

An EOR hires employees on your behalf, while you manage the day-to-day work of those employees. 

Meanwhile, an EOR handles everything related to payroll & taxes, employment contracts, compliance with local labour laws, etc.  

In many countries, it is legal to use an employer of record’s services to hire a talented workforce. That said, to be legal, an employer of record must comply with several laws. 

Such laws can vary from country to country. They can also vary from state to state in many countries, including India.   

Hence, if your business wants to sign up an employer of record, you should ensure that it is a legal entity. And, it has all the systems and processes in place to ensure compliance.

Are Employers of Record (EOR) Legal In All Countries?

In many countries, such as the US, the UK, Ireland, Finland, Canada, and India, it is perfectly legal to let an employer of record find a talented workforce for your business. 

However, even in these countries, an employer of record must follow several rules to be a legal service provider.

Legality of Employer of Record (EOR) in International Hiring in Prominent Countries

1. • United States: Employers of record are legal and recognized in the US. However, they have to comply with state-level regulations. This shows that compliance in the US varies from state to state.
   • United Kingdom: In many countries, you cannot hire an employee through an employer of record for an indefinite period of time. However, the UK does not impose such restrictions. That said, EORs must comply with the labour laws prevailing in the UK for this arrangement to work.
   • India: You can certainly avail the services of an employer of record to find employees in India. But, EORs must adhere to all national and state-level regulations in this regard. Certain guidelines can vary from state to state in India, which makes compliance a bit complex. For example, different states have different minimum wage rates for various sectors in India.
   • Germany: A company can hire an employee through an EOR for a maximum of 18 months in Germany. Besides, strict penalties are imposed in the event of non-compliance.
   • Singapore: You cannot employ foreign workers through an EOR in Singapore. So, if you want to employ foreign workers in Singapore, you have to establish a local entity.
   • Australia: Australia allows you to hire employees through EORs, but state-specific licenses are required to do so. 

Now that we know whether you can hire an employer of record from a legal perspective in many countries, let’s discuss the factors that can impact their legality.

Which Factors Impact The Legality of EOR?

In order to have a legal existence, an employer of record has to follow these laws:

• • Local labour laws: Different countries have different laws pertaining to working hours, leaves, wages, employee termination, etc. If you hire an EOR, you should ensure that it follows all the local labour laws regarding these factors. Otherwise, you may have to pay fines and penalties.

• • Country-specific restrictions: Many countries impose specific restrictions on EORs, which you must be aware of.
    For example, Singapore does not allow you to hire expatriates through an EOR.

• • Taxation-related laws: The rate of income tax varies from country to country. For example, the rate of effective income tax is different in India compared to Germany.
    Similarly, social security regulations are different across countries. EORs must follow such rules; otherwise, their activities can be restricted.

• • Time limit on availing the services of an EOR: Many countries have a time limit beyond which you cannot use the services of an EOR to hire employees.
    For example, this limit is fixed at 18 months in Germany. In France, the alternative to EOR is Portage Salarial, which limits this cap to 36 months.

• • State-level regulations within a country: In some countries, like the US, the requirements relating to EOR differ across states.
    Hence, what is legal in one state of the US may not be legal in another state. So, you should be aware of this aspect while finding an EOR in the US.

Is An Employer of Record (EOR) Legal in India? Key Laws Explained

Employers of record are legal in India, which means that a foreign company can hire employees through an EOR in India without setting up its own office in the country. 

While employers of record are legal in India, they have to follow many rules and regulations to remain compliant. Want to know some of the most important laws governing the functioning of EORs in India? Read the following:

The New Labour Codes of India

In a major change to simplify labour laws, the Government has consolidated several old labour laws into four labour codes, which will make it easier to follow labour laws in the country. This is how it will affect how EOR will manage employees:

• • Restructuring of wages: The basic pay of employees now has to be at least 50% of their total remuneration.
    This also impacts the calculation of the contribution towards the Employees Provident Fund, gratuity, and severance pay.
  • Statutory benefits are compulsory: An employer of record has to enrol employees in Employee State Insurance, Professional Tax, and Employees Provident Fund. These deductions are statutory and non- negotiable under labour laws.
  • Identical wages for fixed-term workers: Workers employed on a fixed-term basis now get the wages and benefits identical to those of permanent employees.
    Besides, they are eligible for gratuity after completing one year of service, compared to five years earlier. An EOR has to follow these rules.
  • Appointment letters are compulsory now: An EOR has to provide an appointment letter to all employees clearly mentioning their wages, designation, and social security entitlements. This is a must for all employees, irrespective of the nature of their employment. 

Which Rules Does an EOR Must Follow Regarding EPF & ESI?

An EOR needs to take care of the following contributions towards a worker’s salary:

• • Provident Fund (EPF) – An employer has to contribute 12% towards it.
  • Employee State Insurance (ESI) – This is applicable when an employee’s monthly salary is higher than or equal to ₹21,000.
  • Professional Tax (PT) – This varies from state to state in India.

Rules Related to Working Hours and Probation

You must ensure that an EOR follows regulations regarding working hours and probation.

As per the rules, the standard workweek in India is 48 hours. Besides, an employee can work for a maximum of 9 hours a day.

The employment contracts in India mostly have a probation period of 3 to 6 months. Both an employer and an employee can terminate the contract by giving notice.

That said, a contract must clearly define terms like probation period to avoid any confusion, which can arise later.

Does an EOR Need to Follow Termination Rules in India?

An employer of record can terminate an employee by following the appropriate termination rules. If such rules are not followed, it can lead to disputes.

Under Indian laws, performance issues, misconduct, and restructuring of an organisation serve as sufficient grounds for termination.

Kinds of termination permissible in India:

• • No notice period is required: An EOR can terminate the service of an employee for reasons like policy violation or misconduct.
    While an EOR has to follow the due process, no notice period is required in such a case.
  • Notice period is required: An EOR has to serve a notice of 1-3 months or pay severance pay for terminating the services of an employee in the case of a downsizing or restructuring.
  • Mass layoffs: Such layoffs require government approval for employers with more than 100 employees.
  • Voluntary resignation by an employee: An employee must serve contractual notice while resigning voluntarily.

An EOR must also clear all the dues of employees who leave an organization for whatever reason.

At the same time, an EOR should maintain the required documents, such as termination letters, records of exit interviews, and payment proofs.

 Leave Policies in India: What an EOR Must Follow?

An EOR has to follow certain laws about leaves so that employees can maintain work-life balance and have a decent quality of life. Here’s what an EOR must know about it:

• • Privileged /Annual Leave: Employees are allowed to take 12-15 days of paid annual leave. Based on an employer’s or a state’s rules, it can be carried forward.
  • Casual Leave: An employee can take 7-10 days of casual leave annually for emergency or short-term needs. It cannot be carried over, though.
  • Sick Leave: Typically, employees are allowed to take 7-12 days of sick leave per year, which is meant for health reasons.
    But, if an employee has to go on a longer leave, he/she may be told to provide a medical certificate. Such policies can vary from state to state and from company to company.
  • Maternity Leave: All female employees are permitted 26 weeks of paid maternity leave for their first two children. For subsequent children, they are allowed 12 weeks of maternity leave.

Employer of Record (EOR) Legal Issues: Key Risks and Compliance Challenges

Before selecting an employer of record, you must understand the risks and compliance challenges associated with them. 

While employers of record are legal, you still must understand the risks in their line of business. If such risks are not sufficiently addressed, they can affect your business as well.

Moreover, when you hire globally through an EOR, you do not have a local office in that country, which can make it extremely challenging to handle legal issues.

Risk of Misclassification

If an employer of record misclassifies a worker, your business may be required to pay a fine. Or, you may even get negative publicity.

At times, such mistakes happen in this line of work. For example, an EOR may onboard a worker as a freelancer when he/she is required to be onboarded with an employment contract. 

An EOR may be a third party, but your business will bear the consequences of such an error. 

To ensure that an employer of record is legal and can deal with such a risk, you need to check whether an EOR adheres to compliance protocols.

An EOR should have expertise in finding employees and preparing contracts. Otherwise, it will lead to legal disputes, which can affect your business.

Payroll Liability Risk

Even if an EOR is handling payroll, your business can still be made responsible for errors. In case of missed deadlines or incorrect payments, conflicts may arise at an EOR’s end.

Besides, the tax authorities of that country may pursue you for such issues. 

So, to avoid such issues, you need to find an EOR with audited payroll processes. Such an employer of record will be legal in the truest sense and will ensure that you don’t face legal hassles of any kind. 

Risks Related to The Ownership of Intellectual Property (IP)

IP-related laws can be quite complex to interpret. Moreover, such laws can vary from country to country. 

For example, in France, creators have ownership of their work, unless they agree to share their ownership with their employer.

So, there are countries where intellectual property does not transfer to an employer. 

In many countries, employers may lose rights in the work of their employees, unless contracts are written with appropriate terms and conditions.

If an EOR does not structure employment contracts correctly, it can lead to ownership disputes. Besides, it can also expose an employer of record and its client (your business) to litigation.

Hence, you need to find an EOR that knows how to prepare such contracts so that IP issues don’t arise.

Risk Related to Data Security

An EOR typically processes large sets of data related to employee information, like payroll, contact details, tax obligations, etc. 

If an EOR does not have security features to keep its data safe and secure, it may face penalties, which can also be imposed on you because the employees hired by that EOR are working for your business.

Hence, you need to find an EOR that ensures the safety and protection of data. It should follow best practices, like multi-factor authentication, data encryption, role-based controls, and security audits by third parties. 

Having discussed the legal issues an employer of record can face, let’s talk about how to find the best EOR in India.

How to Find The Best Employer of Record (EOR) In India That Follows All The Necessary Laws?

You may find the best EOR in India, but you also need to ensure that it follows all the necessary laws. In other words, an employer of record must be a legal entity. If an EOR is not legally compliant, it may cause issues for you.

Moreover, it can badly affect your business’s reputation. So, how to do it?

How an Employer of Record connects companies and employees in India compliantly.

Check Whether An Employer of Record Has A Legal Entity in India

An EOR has to follow many laws and regulations in India pertaining to aspects related to provident fund, ESI, professional tax, leaves, contract termination, etc. 

Typically, EORs that have their own local entity are better in terms of compliance than EORs that rely on third-party partners. 

So, you need to check whether an employer of record has a legal entity to prepare local contracts and ensure statutory compliance.

Check How An EOR Complies With All The Required Laws

India has a complex system of labour laws. Some of these laws vary from state to state. Hence, you must check whether an EOR understands both central government regulations and state-level laws.

Often, the Central Government or a State Government changes these laws. So, you should check how an EOR keeps itself up-to-date with the changes in labour laws. 

Learn about the processes followed by an EOR to ensure compliance and mitigate risks.

Check Whether An EOR Provides Visibility Into Compliance And Payroll

You need to find an EOR that provides visibility into how it follows all the laws and how it pays the people it employs on your behalf. Simply put, if an employer of record says that it is legal, it should back it with evidence.

Some EORs provide dedicated support to their clients and explain to them how they follow the rules prevalent in their country. 

At times, EORs also employ people with experience in their client’s industry, thereby building transparency and trust in their relationship.

Want To Find Talent in India Through A Legal Employer of Record? Remunance Can Help You

Are you trying to find an employer of record in India that is legal, meaning it follows all the mandatory laws and provisions? If yes, then Remunance can certainly help you. 

But, you may ask why Remunance. Let us explain:

• • Remunance believes in 100% compliance. Whether it is about tax filings or complex labour laws, Remunance follows all the rules and regulations.
  • We have a team of regulatory experts to ensure that you don’t ever face legal hassles of any kind.
  • We provide an entire gamut of services pertaining to EOR, including payroll management and compliance, so that you don’t have to go to any other provider.
  • Remunance has the best systems for managing salaries, benefits, and any kind of deductions. 

Related Posts