Agency workers are a great option for high-growth companies looking to expand globally. It gives access to the best talent irrespective of location, and lets companies test new markets and remain flexible without the burden of establishing a location in every country. However, there are risks and liabilities when using an agency to tap into foreign labor. Here’s what you need to be thinking about before bringing agency workers onboard.
Before engaging with an agency, consider the benefits and costs associated under the typical agency worker model. Here, individuals, typically called agency workers, are employed by an established third-party staffing agency and are assigned to work for the benefit of the company, in most cases through a local subsidiary or affiliate of the staffing agency.
Note, the model generally may involve high markup cost but can reduce the administrative burden for the company, as it allows them to quickly hire without needing to establish a local entity in-country, and with less risk of being deemed to have established corporate presence. However, using this model is also not without any of the risks that come when hiring outside the US such as co-employment, misclassification, and local labor liability.
These risks can be mitigated through the contractual relationship with the agency. For example, measures like strong indemnification for the company against any tax, labor, or employment compliance claims, strict licensure, local tax, social security, and registration requirements for the agency, as applicable, should be included and negotiated in any master services agreement. Note that labor courts and authorities in most countries outside the U.S. are generally labor friendly and actively seek to minimize the inappropriate use of the agency structure. Complaints or allegations raised by agency workers and the termination of agency workers should be managed carefully in close consultation of the company’s legal team.
The legal and administrative requirements applicable to a labor leasing relationship will differ by jurisdiction. These differences can impact the length of engagement, or type of positions that agency workers can be hired to fill. It is important to consult legal counsel to assess the applicable labor laws before the engagement begins.
At the outset, in nearly every jurisdiction, the local staffing agency must be registered with the applicable tax authorities, social security office, and ministry/department of labor and their employees will be registered locally on their payroll. Any contractors or subcontractors that perform work will also need to be properly set up and licensed under applicable local law.
Local law may also limit the purposes for which agency workers can be engaged. For example, in some countries the engagement may be limited to seasonal or temporary work (notably this is common to labor law in Latin America). Some countries go even further and limit agency worker engagement only to those positions that are not part of the core business of the company, prohibiting hiring for roles that would be deemed essential to the infrastructure and development of the company’s primary services and operations, or under the direct control of the company’s core teams. Every company is different, so it’s important to analyze and determine what roles and responsibilities could be “essential” before engaging with agency workers in a given jurisdiction.
The risk of misclassification and co-employment isn’t absolved, even after signing a carefully negotiated contract. There is a high risk that companies benefitting from the services of agency workers can still be considered “dual” or “joint” employers when they direct the day-to-day activities of agency workers or even tell them when to take a break. As a general matter, the agency should handle day-to day worker performance issues and terminations. Agency workers should not be overseen or managed primarily by company employees and should be left to exercise independent discretion in their day-to-day duties.
Generally speaking, it is also recommended to limit the duration of the agency worker’s engagement to minimize de facto employment claims and the extent of benefits that could be claimed. Engagement renewals should be reviewed with legal counsel to assess whether a break in service should be put in place.
Where co-employment or direct employment is found, a company may be considered by the courts, labor authorities and/or the tax authorities to have a direct employment relationship with the individuals. Therefore, an agency worker who alleges a claim may look to sue both the company and the staffing agency. The primary claim an agency worker may have against a company would be for entitlement to the same benefits that a company employee would receive.
The co-employment or direct employment risk is especially high where local laws limit the use of agency workers to temporary labor needs (e.g., seasonal work increase or back-fill for leaves of absence). Where co-employment or direct employment is found, the company be held responsible for any non-compliance with tax, social security, and labor law requirements.
Additionally, in some countries, there may be fines to be paid either to the agency worker or the government for illegal labor leasing/hidden employment. There may also be liability for taxes not timely withheld and remitted (where withholding and/or employer social security contributions are required for employees), including interest and penalties, as well as backpay (e.g., minimum wage and overtime pay). The agency workers may also be entitled to employee benefits, e.g., paid leaves, termination protections, employment retirement contributions, etc. Finally, the company could be liable for violations of applicable labor laws, which may include civil penalties and/or notice requirements imposed by the government agency.
Compensation should be administrated by the agency itself, however, be mindful of pay parity/equity issues when negotiating payments with the agency. Payment in many countries is required to be, or as a matter of best practice should be, equivalent to what an employee doing the same or similar role at the same or similar level would be paid.
Finally, it is generally not recommended to grant equity compensation (e.g., stock options, RSUs, etc.) because of the co-employment risks mentioned. However, if a company feels strongly about granting equity as part of a compensation package and accepts the possible risks and obligations and/or penalties with respect to tax withholding and reporting, then be sure to consider whether there are any country-specific securities law, foreign exchange, and other requirements or limitations that may apply.
If you have questions about the requirements and potential risks for engaging an agency worker in a particular jurisdiction, granting equity to an agency worker, or need assistance with reviewing a master services agreement with a hiring agency, please contact [email protected].