Letting Go of Ex-US PEO/EOR Workers? 7 Planning Steps That Can Help Manage & Mitigate Risk

August.18.2022

In recent years, strong economies across the globe led to substantial growth in opportunities for many companies, who increased headcount accordingly to meet new needs. As demand has slowed recently in some industries, many of these same companies are now reevaluating their businesses and their workforces in order to adapt to market changes.

When expanding in jurisdictions outside of the United States, in general, the best practice is to have a local entity that is set up to operate as a local employer, formally hire individuals as employees, and undertake the necessary employer obligations. That said, for companies looking to engage people for limited periods of time or when exploring a new location for potential business operations, many companies opt to engage workers hired by a professional employment agency (PEO) or employer of record (EOR). (Please see below for a quick primer on PEO/EOR worker structure.) These types of PEO/EOR workers can be a good option for companies who want to access a global local talent pool (ideally for a finite period of time) while avoiding the burdens of setting up a local entity or payroll in a wide range of jurisdictions. As companies reevaluate workforce and headcount needs, these workers are often the first to go.

In ex-U.S. jurisdictions, there is generally no concept of “at-will” employment. Further, employees are typically subject to the laws of the jurisdiction where they are working (which can often require specific (and lengthy) termination processes), which applies equally to ex-U.S. PEO/EOR workers. This can create administrative hassles and risk to the company when it comes to terminations and RIFs. All in all, this means that companies will need to have a separate process for ex-U.S. terminations/RIFs (that complies with local law and will generally require more lead time)—and for PEO/EOR workers, there are additional considerations as the process will have to be managed carefully with the PEO/EOR. Provided the company follows the right steps when exiting these PEO/EOR workers, the risk of doing so can usually be minimized.

The following are some key steps to minimize risk:

  • proactively identify on the RIF impact list any PEO/EOR workers outside of the United States;
  • identify locations where the PEO/EOR structure is subject to local legal limitations in order to identify where a termination may expose compliance risk for the company that will need to be managed and mitigated as much as possible (e.g., France, Germany, Brazil, Argentina, Japan);
  • determine local termination requirements and limitations and ensure that the PEO/EOR will be complying with such rules;
  • review the master services agreement (MSA) and Statement of Work (SOW) terms in place with the PEO/EOR regarding the parties’ obligations at the time of termination and the extent the PEO/EOR indemnities cover termination related claims;
  • request a clear termination process, notice periods, severance payments and draft termination documents from PEO/EOR to ensure process does not create risks for the company. (Remember in many countries, the company may be considered a de facto employer or joint and severally liable with the PEO/EOR so mistakes made during the termination process can create risk for the company);
  • in most cases, it will be advisable to get a release of claims from the PEO/EOR workers given the co-employment risks associated with the structure, and if any ex-gratia severance is paid in exchange for a release, ensure that the PEO/EOR will put in place an enforceable release that will also fully cover the company against claims;
  • align with the PEO/EOR on a communication strategy (given in many cases, the individuals at the company and not the PEO/EOR will have a relationship with the PEO/EOR worker and may be in the best position to ensure exit communications and/or negotiations go smoothly).

A Quick Primer on the PEO/EOR Worker Structure

When engaging PEO/EOR workers outside of the United States (what many in the U.S. may (incorrectly) refer to as a “contractor”), one option is to hire the individual via a PEO or EOR—the person is then assigned to work for the client company (end-user).

The Potential Pros

The PEO/EOR worker is otherwise managed by the end-user client on a day-to-day basis. If a company uses a reputable/properly licensed agency, this reduces risk to the client company as the agency should in theory be complying with applicable labor and employment laws and requirements, etc.

The Potential Cons

These arrangements can be subject to local restrictions on, for example, permissible uses of PEO/EOR workers and the duration/time limitation in which they can be engaged. There is also often a high risk of de facto employment/co-employment, whereby the relationship is challenged, and the company is deemed the direct employer (or co-employer with the PEO/EOR) of the worker. Terminations of PEO/EOR workers can also result in high costs to the client, depending on jurisdiction and length of engagement.

Ultimately, when hiring PEO/EOR workers, our team emphasizes the importance of having a strong MSA in place with the PEO/EOR that clearly puts responsibility for employment compliance on the agency and indemnifies the client for non-compliance and employment related claims, including claims relating to the termination of employment.