Employer of Record and its Legality in Spain

In an increasingly connected and evolving world, a figure emerges that is still relatively unknown in Spain.

The 'employer of record' although is not yet legally recognised in Spain, this figure offers companies the opportunity to access employees in other countries efficiently and in compliance with labour regulations.

Technological progress has broken down geographical barriers in the job market, allowing companies to find talent anywhere in the world, giving rise to new hiring models, albeit also posing challenges in terms of regulatory compliance.

Economic globalisation has sparked debates about the relocation of business activities and the viability of international remote work. Companies seek to hire employees globally, which previously involved creating entities in destination countries. However, an interesting alternative has emerged: the EOR.

But what exactly is an Employer of Record?

These are companies that handle hiring, payroll, contributions, and other administrative tasks, enabling client companies to expand without the need for local administrative infrastructure. In other words, they take care of outsourcing employer obligations.

The Employer of Record assumes the role of the formal employer, handling contract subscriptions, quotations, salary payments, and withholdings. However, the client company remains the real employer, responsible for organising the employee's work and reaping the benefits of their labour. In essence, while the Employer of Record handles administrative tasks, the real employer remains ultimately responsible for managing and directing the employee.

Despite the undeniable advantages offered by the Employer of Record in terms of agility and process simplification, it is essential to bear in mind that its application may entail certain legal challenges. As mentioned earlier, while in other countries this practice is entirely legal, in the Spanish context, it could be considered a form of illegal labour leasing unless associated with a duly authorised Temporary Work Agency.

This situation underscores the importance of understanding and complying with the specific labour regulations of each country when considering the adoption of the Employer of Record as a hiring model.

The Implications of Illegal Labour Leasing in Spain

Illegal labour leasing in Spain is a practice prohibited by current labour legislation. It occurs when a company pretends to be the employer of workers but actually leases them to another company for use. This type of linkage between companies has the sole purpose of providing workers from one entity to another. The only entities authorised to carry out this practice are Temporary Work Agencies (ETTs), and only in specific and temporary situations.

Illegal labour leasing in Spain carries a series of significant legal and financial consequences for the companies involved. Some of the most relevant implications include:

• Economic sanctions: Companies found guilty of engaging in illegal labour leasing may face substantial economic fines imposed by the competent authorities. These fines may vary in amount but are usually considerably high, ranging from €7,501 to €225,018, depending on the severity and frequency of the infringement.
• Legal liability: In addition to economic sanctions, companies may also face legal actions from affected workers and other interested parties. This can lead to lawsuits, labour claims, and other legal proceedings that can have a negative impact on the reputation and financial stability of the company.
• Reputational damage: Involvement in illegal labour practices can severely damage the company's reputation among clients, suppliers, investors, and the general public. This can negatively affect the company's perception and undermine trust in its business ethics and ability to comply with labour and ethical standards.

In summary, illegal labour leasing in Spain can have devastating consequences for companies, both financially and reputationally. It is crucial for companies to operate within the established legal limits and adopt ethical and responsible labour practices to avoid facing these serious consequences.

In this scenario, what options are available to international companies wishing to bring or hire employees in Spain?

This question is common among our clients, mostly with international presence, who often show scepticism about the potential restriction that our labour regulations could represent compared to those of other countries.

Our response always focuses on a key concept: to employ someone in Spain, it is essential for the real employer to be registered in the country under one of the legally permitted forms.

The most direct option would be to register the employing entity as a non-resident entity in Spain, commonly known as a representation office or entity without establishment. However, it is crucial to assess beforehand the risk of this entity being considered a Permanent Establishment by the Spanish tax authorities.

In cases where the risk of being considered a Permanent Establishment is high, it will be necessary to explore other alternatives, such as establishing a branch or subsidiary in Spain. For temporary hires, another valid option would be to use the services of a temporary work agency.

If you find yourself in a similar situation and wish to obtain more detailed information, do not hesitate to contact our Baker Tilly Employment Advisory team, who are specialists in these matters.