The notion of the employer-employee relationship has been put to test with the emergence of non-conventional and binding relationships brought about by the gig and platform employees and their controllers. As a result, governments were forced to regulate these arrangements. The Co-employment and the Employer of Record concepts that emerged from the west have yet again challenged the traditional employer-employee relationship. This blog post aims to shed some light on these promising concepts and at the same time, identify the risks and benefits of applying them.
Employer of Record
Most businesses and companies outside India are looking to engage human resources in India for a multitude of reasons. Traditionally a business would look at setting up a new legal entity or a subsidiary to employ resources. This would involve incurring costs for infrastructure, maintenance services, and allied operational expenditure. Instead, foreign companies are now looking for services that could largely look after the compliance requirements without having to set up a legal entity or a subsidiary.
These services are available in the Indian market and are commonly referred to as Employer of Record (EoR). When the company uses an EoR, they rely on the provider to hire staff on its behalf and take on all the legal responsibilities for complying with all the local payroll and employment laws. The EoR onboards local staff with complaint contracts, remits salaries, taxes, and benefits, and supports local HR needs, while the original employer enjoys the supervisory and management control and monitors work done by such staff.
On the other hand, co-employment is an arrangement wherein two companies jointly exercise rights and liabilities as an employer. While one company maintains responsibilities for the employees’ job duties and day-to-day functions, the other manages personnel-related functions such as payroll. In this way, the employee is technically co-employed by both companies. The co-employment arrangement is predominantly practised in the US as the employment requirements vary significantly between states and regions. In the US domestic model, co-employment is recognised by the legislature and so has a formal basis in law.
The reasons these businesses are looking at such services are to test the waters before surfing into the tide of Indian compliances. They are using these services as a vehicle to explore new markets, guard against independent contractor non-compliances, stopgap before setting up shop, and manage workforces because of the acquisition in new countries.
While the original employer can focus on R&D & expansion, the EoR or co-employer can look at:
- Employee tax matters
- Compliance with labour laws & regulations
- Hiring employees
- Management of employee benefits & expenses
- Management and distribution of payrolls,
Issues to consider:
- The contract between the original employer and the service provider must be watertight. If the EoR defaults on any obligations on its part towards the employees, the original employer faces significant reputational risk.
- Accurate assessment of social security payouts
- Tax deductions and payments to tax authorities should be local laws compliant.
- Risk of protecting confidential information proprietary to the original employer.
- The original employer may face a challenge in enforcing restrictive covenants post-employment.
- Ownership or vesting of intellectual property created by the employee in the course of employment needs to be looked into.
- If the original employer looks at providing employee stock options, appropriate regulations need to be adhered to.
- If an existing employee of the original employer moves to the EoR arrangement, the issue of continuity of service needs to be considered.
In India, there are neither regulations nor express prohibitions concerning the aspects of co-employment or EoR arrangements. With the emerging future of work possibilities in the post-pandemic environment, companies can embrace these arrangements.
While there are no regulations, using these arrangements with necessary precautions and legal backing will mitigate the risks that may arise.
Advocate & Senior Associate