Third-Party Employment and Pay Transparency: Identifying Compliance Uncertainties

Many international businesses looking to expand into new jurisdictions might choose to engage individuals through a third-party employer, i.e. an Employer of Record (“EOR”) or a Professional Employer Organisation (“PEO”), rather than employ the individual directly. In essence, they are a business that offers to contract with an individual in one country to provide services to an entity in another country. Such businesses will often provide administrative services, for example, dealing with payroll, tax, benefits and insurance and other local employment requirements. However, the end-user company keeps responsibility for directing the individual’s day-to-day activities. 

The Pay Transparency Directive creates individual rights to pay transparency and information. This includes a right for workers to request written information on their pay level and the average pay level, broken down by sex, for categories of workers performing the same work or work of equal value. Such requests can be processed through workers’ representative bodies or equality bodies, and the information must be provided within two months. In addition, employers must remind workers annually of their right to such information, ensuring ongoing awareness of these entitlements. 

An interesting issue arises in relation to this particular incoming right in the context of companies (“user companies”) utilising EORs or PEOs. Specifically, who bears the compliance responsibility in those scenarios? The user company or the EOR/PEO? 

The answer is not clear cut 

Where this obligation would sit in this scenario will largely depend on how the Directive is transposed into local law. Under the Directive itself, the obligation to provide the information lies with the “employer”. However, this notion is not defined under the Directive and will (hopefully) be clarified when the Directive is implemented across EU countries, especially since the way in which PEOs or EORs are allowed (or not) to operate varies from one Member State to the other. It is possible that user companies in this particular situation will ultimately be required to comply with this obligation for PEO / EOR workers as well.

PEOs

As a general point, companies may use a PEO (i.e. a company that partners with businesses to handle HR-related functions) as a co-employer meaning that both the PEO and the user company exercise aspects of the employer’s authority and share employment liabilities. In practical terms, this means that the PEO often provides certain HR services (managing HR, payroll, tax, benefits, compliance etc.) for the benefit of the user company, while the employee will have a contract with the user’s letterhead and both the PEO and the user company share employment liabilities. 

In addition, it will also depend on how the parties (user company and the PEO) have outlined their respective liabilities with regards to various compliance issues, e.g. on matters such as pay transparency. 

Logically speaking, in the scenario of a PEO, one would assume that the duty to inform the workers of their wages will lie with the user company, since the decision on pay (rises) lies with them.  

EORs 

The above is different to the use of an EOR, which legally employs workers on behalf of the user company. To the extent that the workers only have an employment contract with the EOR, who is their legal employer, there is a stronger argument, purely based on the text of the Directive, that the obligation to inform lies with the EOR.

However, that being said, when seen through the lens of what the Directive seeks to achieve (i.e. “equal pay for equal work or for work of equal value”), it would seem that rather than an EOR ensuring that the workers engaged across multiple different user companies in different industries are paid the same remuneration (which would ultimately be a matter for free market competition), it should be for each user company to ensure that the workers within their respective companies are awarded equal pay for equal work, by requiring that those who are working “via an EOR” receive an “equal” remuneration to other workers engaged directly performing the same work or work of equal value. Further, the EOR will have a contract with each user company and whether bonuses or pay raises are to be awarded, is a decision that is ultimately made, not by the EOR, but by the user company which would be a relevant factor to consider in relation to compliance.

The issue is therefore not clear cut and hopefully may become clearer as the Directive’s implementation progresses across the EU.  While the Directive sets out to impose uniform rules that seek to strengthen the principle of equal pay within the EU, it does not deal with the matter of third-party employment, a matter on which individual Member States take a very idiosyncratic approach, ranging from explicit prohibitions (and considerable sanctions for illegal leasing of workers) to allowing PEOs or EORs to more or less varying degrees. Understanding the full impact of the Directive in each Member State will therefore require an in-depth analysis of local transposition legislation, rather than a “one-size-fits-all” approach. 

If the issues raised in this article are relevant to your business, or you would like to discuss the Directive more broadly, please reach out to your local contact in our International Employment team.