By Howard Levitt and Puneet Tiwari
Using a Local Employer of Record has potential drawbacks and risks, including a false sense of security on liability
Whenever there is an economic shift, there is a cascading effect on the employment bar. We witnessed it when the gig economy emerged, with the fight over the legal status of independent contractors versus employees. We saw it throughout the pandemic and are seeing it again in the post-pandemic era. With the ability to work from anywhere at our fingertips, we are now seeing a new term in the world of employment law: the Local Employer of Record (“LER”).
Our firm has seen many companies turn to LERs to expand their business operations into foreign markets. A company from California, for example, can now “rent” employees in Canada, Germany or elsewhere without a physical presence or directly hiring them. Why? Because the LER has done the heavy lifting in incorporating in these jurisdictions, hiring the employee, and then “loaning” the employee back to their client as a contractor.
From a legal point of view, what these companies are failing to consider is that they are considered “common employers.” This means any wrongful dismissal or other financial liability that arises while using an LER can lead to significant legal and financial risks for the associated company, which may result in additional costs, legal fees and financial penalties.
For American employers venturing into the Canadian employment landscape, this can mean hard lessons learned about Canadian employment law. For employment lawyers in Canada, it means two entities with money who may be footing the bill for their clients and, on the employee side, two entities to sue.
Lastly, it is important to consider the impact on employee relations when using an LER. When working with an LER, it can be difficult to build strong relationships with employees in foreign markets, as the parent company may have less direct communication with their employees. Using such an intermediary can make it challenging to address employee concerns and issues in a timely, effective manner. It can also lead to a lack of consistency in employment practices, resulting in other problems.
Additionally, it may be a good option for companies that do not have the necessary resources or expertise to manage employment matters in a foreign market.
However, it is important to be diligent and conduct thorough research on potential LER partners, including reviewing the terms of any agreements and conducting due diligence on the LER’s legal and financial standing. By doing so, companies can ensure they are working with a reputable and reliable LER to minimize the potential risks.