Employee outsourcing / EOR – is it legal? What are the risks?

Foreign employers now have many options for hiring employees in Poland. Modern solutions are appearing on the market that make it possible to hire an employee while minimizing the foreign company’s responsibilities. However, new employment structures are not only benefits and convenience, but also risks – of which every conscious employer should be aware.

The shrinking of international workers – new opportunities

The labor market is constantly evolving, and with its development come new employment structures. Both around the world and in Poland, new solutions are emerging to enable employers to operate more efficiently internationally and expand their operations to other countries. Employers are looking for solutions that can easily help them hire employees outside the country, while minimizing the number of obligations and formalities under local labor laws. Structures of this kind are particularly popular in industries such as IT, where work can be done remotely, and employers are looking for staff in developing countries, where there is still an influx of highly specialized workers. One such country is Poland, where in recent years one can see an increase in the number of investors from abroad, as well as a growing number of specialized personnel.

However, the decision to use an atypical form of employment can, in addition to convenience, also carry risks – something every professional employer should be aware of. A professional employer should also know how to minimize these risks, which we explain for you in this article.

Formal and real employer – the problem of lack of regulation

Although new employment structures are appearing more and more frequently in Poland, Poland’s labor law has not kept up with changes in the market, which in some situations can create risks for employers using such forms of employment. Polish labor law distinguishes the concept of an employer. Under the provisions of the Labor Code an employer is: an organizational entity, even if unincorporated, and a natural person, if they employ employees.

This definition is very broad and can create problems, especially when dealing with a tripartite relationship between two entities, one of which is the employer indicated in the employment contract (the so-called formal employer), while the other actually manages the employee (the so-called actual employer). In this situation, it is difficult to assess which of the entities is the employer under the provisions of the Labor Code, and therefore which entity has the formal obligations to employ the employee.

Employer of record – employee outsourcing

One of the increasingly popular employment structures is becoming the so-called “employer of record” (EOR). What is an employer of record? It is nothing more than a “formal employer, ” employer on paper.” This is a service that, in its concept, is somewhat similar to cooperation with a temporary employment agency – it involves intermediation of a third party in the employment of an employee (employee outsourcing). However, this applies to types of work that are not temporary in nature, and whose premise is not short-term or seasonality of the work performed.

The “employer of record” structure creates, so to speak, a tripartite relationship between two companies and an employee. This involves foreign company A using company B acting as an EOR in a country where company A wants to hire an employee. In this situation, on behalf of company A, company B hires an employee and takes over all formal duties related to his employment, while the employee performs work for company A. Such an employee is selected in terms of criteria given by company A, which decides on the selection of the candidate, his salary and other aspects of his employment. The employee signs an employment contract with Company B, which acts similarly to a temporary employment agency, i.e. it takes care of the formal aspects of employment such as payment of wages and registration of the employee with the Social Security Administration. At the same time, the management of the employee’s work performance is taken over by Company A, which, although it is not the employer “on paper,” performs all duties related to the employee’s actual work performance.

Employers often ask us whether it is worth using “employer of record” services? This type of service is particularly useful for employers who are looking to hire specialists from another country, but want to avoid excessive paperwork and do not want to set up another company or branch. This service is not without risk, however. This type of service, although increasingly popular in Poland, has not yet been regulated in the Labor Code, which, given the current definition of an employer, can create significant risks for companies using this solution. The most significant of these is the risk of establishing an employment relationship, which is discussed later in the article.

Employment of an employee by a subsidiary company

Another popular form of employment is the solution of establishing a subsidiary by a foreign company, whose main purpose is to employ workers in Poland. While the registration of company itself is not questionable under Polish law, the complete subordination of employees to the foreign parent company may already prove risky for the foreign employer. When hiring employees in a subsidiary, in order to avoid risks, it is most important to properly organize the process of employee management and subordination.The question of who is the actual employer in the case of a subsidiary can be easily answered by analyzing the hierarchy and employment structure, such as checking under whom employees report, who gives them work orders, whether there is a human resources department in the subsidiary’s country of operation, and so on. The more autonomy the subsidiary has in the field of HR/employment law, the lower the risk that the foreign company will be considered the actual employer. In many cases, however, it turns out that the subsidiary is created solely for the purpose of employment, and the employees perform work for the foreign company’s clients, receive instructions from supervisors employed by the parent company, and their HR department is located there as well. If you are a foreign employer who wants to start a business in Poland by creating a subsidiary – this kind of mistake should be avoided.

Is the EOR legal in Poland? Risk of establishing an employment relationship

The lack of clarification of the definition of employer in the Polish Labor Code means that despite the existence of a formal employer “on paper” there is a risk of establishing that the employment relationship was in fact established between a foreign company, i.e., the actual employer and the employee. This is because what is important is not the content of the contract itself and the definition in it of who the employer is, but how the employment relationship is actually formed.

Determination of the employment relationship is a special labor law claim. Determination can be claimed in court by both the employee and the inspection authorities – e.g. State Labor Inspectorate, and in the case of filing a lawsuit by the inspection, it does not require the consent of the employee, moreover, it can take place even if the employee has no objections to the structure in which he is employed.

If such a lawsuit is filed and it is determined that an employment relationship exists between the employee and the de facto employer (a foreign company), that company will be treated as the employer from the beginning of employment. The most serious risk arising from this is the financial risk. This is because the newly established employer will have to pay retroactively any outstanding contributions and advance tax payments – along with interest. It will not matter that these contributions have already been paid – the formal employer will at this point receive a refund of any amounts paid as an undue benefit – as it is not possible to pay contributions for another entity. Moreover, if an employment relationship is established with a foreign company, the employee can claim equal treatment, for example, in terms of the provision of wages or benefits – such as other employees employed by the foreign company.

How can a foreign employer prevent the risk of establishing an employment relationship?

The employment structures described above, and the “employer of record” in particular, are a solution that foreign companies are increasingly using when hiring in Poland. Although EOR is not yet very popular at the moment, we can expect that it will soon become the subject of interest of control authorities, and we may even see new regulations in this regard.

Although the regulations at this point do not regulate restrictions arising from the hiring of employees through the use of “employer of record” services or the establishment of subsidiaries, foreign companies should be mindful of minimizing the risk of establishing an employment relationship. There is also increasing talk in the labor market of disputes already arising against this background. In view of this, foreign employers using this type of solution should focus on ensuring that the cooperation between employees and the company acting as an “employer of record” or subsidiary is properly regulated – in a way that emphasizes that the main aspects of employment are carried out by these very entities.This applies both to the creation of employee documents themselves and the proper organization of cooperation with the employee.

On the implementation of appropriate and simple solutions that minimize the risk of establishing an employment relationship when using the services of companies acting as “employer of record” or when hiring through a subsidiary, we recommend contacting specialists from the labor law department of our law firm. If you have any questions, write to us at: [email protected], and together we will discuss possible options for hiring employees in Poland.