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Employer of Record (EoR): offering share options to employees

Hiring employees to work for your business abroad can present a number of complex challenges, especially for early stage and startup companies. The costs can be prohibitive, not to mention the drain on executive time spent making sense of a tangle of overseas regulations.

That’s where an Employer of Record (EoR) can give your business a headstart, as you step up operations overseas.

Here, our employee share schemes team review the issues and challenges, and explain why it pays to plan ahead.

What is an EoR?

An Employer of Record or EoR has become an increasingly common approach in recent years to the legal and compliance challenges of engaging individuals to provide services in a different country to the country in which the end-user (the Company) is based.

A third-party EoR may operate as an “in country partner” for a UK based Company, taking responsibility for local employment law, immigration, payroll and tax obligations in relation to engaging remote overseas workers.

It may also offer a service to assist the Company with extending participation in the Company’s employee benefit programmes and share plans to the EoR employees.

Where an EoR arrangement is implemented, the Company will have a direct working relationship with the employee, and will generally regulate core functions, such as work assignment and supervision and performance management. However the EoR will be the legal employer and therefore the Company will not generally have a direct contractual relationship with the employee.

You may also come across references to Professional Employer Organisations (PEOs) in this context, which is the US term for providers of human resources and related functions for the end-user Company. Unlike an EoR, generally the PEO is not the legal employer of the individual.

Why offer company shares to an EoR employee?

EoR employees can feel disconnected from the Company and identify less with the success or failure of the business. Given these employees may be critical to business expansion into a new geography, this is not a desirable outcome.

Participation in an ESOS is one of the best ways to ensure EoR employees are properly incentivised; feeling they have a stake in the business, even though they’re employed by the EoR.

Also for many startup and early stage companies, equity can be a cost-effective means of delivering reward rather than expending cash.

Tax and legal issues

The EoR is the employer of record, but that doesn’t mean the Company has no part to play in the process.

Payroll and tax considerations

The tax consequences of the share award and the responsibility for any payroll withholding taxes and social security obligations in the country where the work is performed need to be considered and advice taken to ensure employer obligations are met to avoid sanctions including penalties and interest. In addition, any local tax reporting obligations of the employer entity need to be considered and appropriately discharged. The EoR may offer a service to withhold and report any payroll taxes and social security, similar to the process operated in relation to regular pay.

Tax advantaged share options

EoR employees will generally not be able to benefit from tax beneficial share plans as it is normally a requirement of these arrangements that the individual has an employment contract with the Company which is issuing the equity or a company in their group. Given the significant tax savings that tax-advantaged share plans can offer, it will be important to consider the suitability of the EoR model, particularly where a significant part of the package may be equity-related. It should still be possible to issue non-tax qualifying options under a share scheme to an EoR employee but eligibility needs to be checked.

Regulatory considerations

In some countries, in addition to tax filings, securities law filings and regulatory and/ or exchange control requirements will apply to the Company issuing the equity and it will be important for the Company to understand and comply with these requirements.

Making sure EoR employees are eligible under your ESOS

EoR employees might act to all intents and purposes like Company employees, but, as we’ve seen, they’re actually employed by the EoR.

That’s important because many share plans limit participation to the Company’s own and group employees and possibly service providers or external consultants working directly with the Company. An EoR employee, especially those working overseas, may not fall naturally into any of those groups.

You need to carefully review the wording of your plan to make sure an award of options or other share reward to EoR employees falls within the permitted scope of the arrangement. And check out too that there are no clauses which would actively prevent participation by a non-employee or an overseas employee.

What next?

Our employee share schemes team can help you manage the complex challenges of extending share plan participation to EoR employees. Working with our employment law team, we can make sure any regulatory issues in the territory into which you are moving are considered. Fill out the short contact form below and a member of the team will be in contact.

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