The services of an Employer of Record, or simply EOR, have become increasingly popular. Such global employment services providers coming from the US market often refer to themselves as a Professional Employer Organization (PEO). Regardless of the name, these businesses offer their clients essentially the same services. Companies currently have the possibility choose from a large group of such service providers, which can assist in administering the personnel matters of their employees, including those recruited internationally.

In their marketing materials, EORs (and PEOs) emphasize that they can help entrepreneurs develop their business beyond the borders of their home country—without the need to set up new organizational units (branches or subsidiaries). They entice clients by touting such benefits as cost savings, reduced operational involvement and a reduced administrative burden, all of which are compelling reasons for companies to use their services.

What an EOR can provide

Services offered to clients by an EOR typically include (i) preparing and concluding a local law employment contract with the job candidate (meaning, both the law of the employee’s place of residence and of the place where the work will be performed), (ii) onboarding the new hire (the preparation, signing and filing of the employment contract and other necessary documents) as well as (iii) seeing to the day-to-day administrative handling of the employment relationship.

The client usually selects the candidate it wants for the job while the EOR employs the candidate in its local company or branch, as its own employee. The EOR registers the employee as a member of its own staff for tax and social security purposes.

Sometimes the EOR will take care of the initial medical examination (depending on the contract with the client). Other employer responsibilities are handled by the client. These include training the employee in the client’s internal procedures and carrying out health and safety training. Most importantly—and from the first day of work—it is the client, not the EOR, that instructs the employees, holds them accountable for their tasks and decides on work leave as well as dismissals (should the employee not fulfill work duties to the client’s satisfaction).

EORs can employ individuals or entire teams, which can, and often do, include highly qualified employees and even executives. This can be useful in situations where the client is not yet sure whether it will stay in a particular market for the long term or grow the business to a size that entails the need to set up a company or branch.

Actual employer vs legal employer

EORs operating on the Polish market don’t hide the fact that their formula of client cooperation is not regulated under Polish labor law. Technically speaking, an employment relationship cannot be “divided” between three entities (employee, EOR, actual employer) except under the Labor Code’s provisions on temporary work. Nevertheless, despite not falling under any of the “classic” labor law structures or being temporary, the structure proposed by EORs has become increasingly common. Since Poland does not have legislation governing this kind of relationship, the only source of regulation of the rights, duties and responsibilities is the contract between the EOR (the legal employer) and its client, the actual employer.

From our observation of market practices in Poland, contracts offered to clients by EORs fail to regulate a number of issues that, for the client—the actual employer—are or may be highly relevant when it comes to protecting its own interests. Such contracts also typically do not protect the client against risks related to unexpected costs that arise if an employees takes parental leave or is subject to long-term protection against termination.

In an EOR relationship, the client, as the actual employer, assumes all costs arising from employing the worker, along with an appropriate markup. These costs include the base salary and bonuses as well as other components—overtime pay, sick pay (33 or 15 days per calendar year), compensation for unused leave, severance pay and other dues under local labor law, along with the EOR’s markup. In addition, the EOR’s contract with the client often provides for additional fees arising from nonstandard situations or for guarantee or indemnity fees to protect the EOR against the risk of losing the client before the expiry of a predetermined period of cooperation. For example, if an EOR-employed worker gets pregnant, takes an extended sick leave and then goes on maternity leave, followed by parental leave, all costs arising from this situation—often increased by a markup—will be invoiced to the client.

EOR-client contracts don’t usually regulate what will happen in the event that, after many months, the employee returns from a leave of absence, and the employer (EOR) is legally obliged to allow her to return to work, even when the client no longer has need of this employee and the EOR has no position for her. The contract will most often stipulate that the cost of the applicable notice pay and severance pay (including additional contractual severance pay) will be paid by the client—again, after it has been reinvoiced to the client with a markup.

A similar problem relates to the situation of employees who acquire special rights or enter so-called “pre-retirement protection,” which under ordinary circumstances makes it impossible to terminate their employment contracts for four years before reaching retirement age. The cost of parting with such an employee becomes incomparably higher, and if the contract with the EOR does not provide for any protection mechanism or risk-sharing between the EOR and the client, all the risk and costs will be on the client’s side.

Liability, IP and other issues to consider

Another point to keep in mind is that EOR-client contracts do not, as a rule, include provisions on liability, meaning any damage caused by an employee to the client is borne by the client. The service offered to the client consists of only administration of the employment relationship and, most often, the EOR disclaims its own liability to the client for any damage beyond this.

As already mentioned, the EOR does not give orders to employees or monitor their work and therefore contractually excludes its liability for damage that the employees cause by their acts or omissions. If the EOR were their actual employer (under a classic employment relationship) then the EOR’s liability towards the client would be shaped differently. According to the general rules of the Polish Labor Code, the employer is liable for damage that employees cause to third parties in connection with the performance of their duties. More often than not, the EOR is not willing to take on this obligation and will significantly limit its liability in the contract, transferring it to the client.

In addition to liability clauses, it is also particularly important to pay attention to the acquisition of intellectual property rights when using an EOR. If the client (actual employer) uses the work of EOR-hired employees who are creators (engineers, programmers, architects, etc.), safeguards should be put in place to protect your company’s IP rights—properly structured clauses for the transfer of economic copyright in the works created by such employees. In a typical employment relationship, the employer acquires these rights automatically. Here, however, there is a double-transfer of IP. First, the legal employer (the EOR) acquires the IP and then can transfer the rights to the client (the actual employer). This second transfer requires the inclusion of a properly worded provision in the contract, specifying precisely all relevant fields of exploitation. Otherwise, the client will not acquire the IP rights it needs in its own business.

There are more tricky issues involved in EOR relationships; this stems from Polish law (among others) not having legislation in place to address the EOR-client structure of cooperation. These concern, in particular, the processing of employees’ personal data, regulation of remote work, employer confidentiality, etc.

It follows from the above that, before entering into a contractual relationship with an EOR, it is worth considering all the advantages and disadvantages of this arrangement and ensuring that the contract safeguards (as much as possible) the interests of the actual employer.