Employer of record (hereafter: EOR) is a service aimed, among other things, at helping entrepreneurs to develop their business beyond the borders of one country without creating new organisational units such as branches or subsidiaries. In simpler terms, the term external employer can also be used.

What is an EOR?

An EOR service consists of a worker performing work in a country other than the country in which the entity using the worker’s work is based. The worker is not employed by that company (the actual employer), but by another entity (the employer of record/external employer), which is based in the country where the worker performs the work.

A company dealing with EOR employs its own employee in its local company or branch in the country. Such an employee is registered as a member of staff for tax and social security purposes. It even happens that the EOR takes care of the initial medical examination. And the remaining tasks related to the introduction of the employee are carried out by the actual employer.

In addition, the real employer trains the employee on its internal procedures, carries out health and safety training, gives instructions, holds the employee accountable for his or her tasks, and decides on leave and dismissal.

EOR in Polish law

This form of employment is not regulated in Polish law due to the fact that the employment relationship cannot be divided between employee – formal employer – actual employer, unless the provisions on temporary employment apply.

Therefore, EOR services do not regulate many issues such as, i.a.: the protection of the employee’s rights and interests. They also do not protect the employer from the risk of costs that arise when employees take parental leave or are subject to long-term termination protection.

The EOR service assumes that all costs arising from the employee’s employment are paid by the actual employer. Such costs include but are not limited to: wages with overtime allowance, sick pay, compensation for unused leave, severance pay and other entitlements under local labour legislation – plus applicable margins. This is set out in the contract between the actual employer and the EOR.

This means that the EOR, at the level of the contract with the client, does not, in principle, assume any liability related to any damage caused by the employee to the client. The service offered to the client is to carry out the administration of the employment relationship and, most often, the EOR excludes its own liability to the client for damage beyond this.

Risks associated with the establishment in Poland

• Definition of a permanent establishment – CIT

Pursuant of the Corporate Income Tax Act (hereinafter: CIT), a permanent establishment is considered to be a place of business (hereinafter: PE) where business activities are carried out by a foreign entity. This may include branches, representative offices, offices, factories, workshops, building sites (e.g. for construction, assembly, installation) and subsidiary agents.

• Definition of a permanent establishment – OECD Model Convention

In the commentary to the OECD (Organisation for Economic Cooperation and Development) Model Convention {hereafter: OECD Model Convention] on Article 5(1) provides information on the definition of a permanent establishment, which includes several key criteria. The first is the existence of a ‘place of business’, which can be represented by physical premises such as buildings, premises and sometimes even machinery or equipment. It is important that this place of business must be ‘permanent’, meaning that it is separate from other places and permanent in nature. In addition, an establishment can be understood as a person who, in the name and on behalf of an entity having its registered office or management in the territory of another State, acts through a power of attorney, for example: concludes contracts on behalf of the entity.

• Risk of PE (plant) in Poland

From our practice, the risk of PE in Poland may be in the following situations:

1. on the territory of Poland the entity owns a property from which it derives rental income (there are employees, the entity that manages the property and other documents confirm the active operation of the entity on the territory of Poland),
2. an employee performs remote work in Poland, but is employed by a foreign company,
3. the employee is delegated to work in Poland,
4. a foreign company purchases logistic and warehouse services in Poland,
5. a foreign enterprise carries out construction and assembly works in Poland.

In view of the above, it should be pointed out that the EOR concept does not allow the exclusion of PE risk. This is because the main purpose of this construction is to replace the formal employer in order to enable savings as well as to reduce risk.

• Dependent agent

According of the OECD Model Convention, a dependent agent is a person (whether natural or legal) who acts on behalf of an enterprise and has and customarily exercises the authority to conclude contracts in a particular country on behalf of the authorising enterprise.

In order to determine whether a company is acting through a dependent agent in another country, it is important that the agent is involved in the key stages of the conclusion of the contract, e.g. in setting the binding terms. The agent itself does not have to sign the contract directly, but it is important that the terms agreed by the agent are binding on the company.

The form in which the power of attorney to conclude contracts on behalf of the company is granted is not relevant for the recognition of a person acting in another country as a dependent agent. The authority to conclude contracts on behalf of a company may result from a power of attorney granted formally, as well as from an implied authorisation.

Not only an entity with its registered office on the territory of Poland, but also an entity not having its registered office in Poland, but formally or actually managed by a person or persons residing on the territory of Poland – if the current affairs of that taxpayer are conducted in an organised and continuous manner on the territory of Poland on the basis of, in particular: an agreement, a decision, a court ruling or other document establishing or functioning of that taxpayer, or a power of attorney granted – is deemed to be a Polish tax resident.

Consequently, a kind of ‘presumption of residence’ arises, as a result of which foreign companies may be deemed to have a management board in Poland and to be subject to Polish CIT only for the reason that a person residing in Poland will, for example, be a member of the managing or controlling body of that foreign company.

Summary

The EOR concept does not allow for the exclusion of EP risk. Given the main purpose of this construct – which is to replace the formal employer in order to allow for cost savings as well as risk mitigation – the EOR solution is usually intended as a short-term solution and is not applicable to increased employment.

According to the commentary to the OECD Model Convention, it is crucial to determine who is the employer in a given relationship. Relevant to such a determination may be whether an individual’s remuneration is directly invoiced by the formal employer to the company for which the services are provided. Where remuneration is paid to employees performing work in Poland by or on behalf of an employer who is not based in the country of work, the remuneration should be taxed in the country of residence of the person receiving the remuneration.

Under the meaning of this formulation, it can be thought that despite the existence of the EOR, as it will actually be acting ‘on behalf of the employer’, it can still be considered an economic employer. And as a consequence, a permanent place of business is generated.

This means that even if the EOR service is used, the tax authorities may verify the nature of the relationship between the Company and the Employees and, consequently, consider that a permanent establishment has been established. Therefore, if you have any doubts, we encourage you to contact us, as it is worth applying for an individual interpretation of tax law, which will allow you to secure the Company’s position.