Employer of Record (EOR) services can streamline international hiring, but businesses must be cautious when choosing providers. Without proper compliance, businesses may face blackmail risks, particularly during employee terminations. These situations often arise due to unclear contracts or a failure to adhere to local employment laws.
This article explores how blackmail situations develop, the pitfalls of working with unlicensed providers, and how businesses can protect themselves.
Understanding Blackmail Risks in EOR Arrangements
Blackmail risks in Employer of Record (EOR) setups often stem from a lack of structure or compliance, particularly during termination processes. When employment expectations and liabilities are unclear, businesses are vulnerable to disputes. Employees may leverage these ambiguities to exploit their rights, creating significant legal and financial challenges. Ensuring that employees' rights are respected from both an ethical and lawful standpoint is critical from day one.
Licensed EOR providers help mitigate these risks by adhering to strict compliance procedures. They clearly define terms and conditions in employment contracts, including notice periods and termination costs, ensuring transparency. By assuming responsibility for the termination process and maintaining legal compliance, licensed providers shield businesses from disputes and liabilities. This structured approach not only ensures smoother terminations but also eliminates opportunities for blackmail.
The Risks of Working with Unlicensed EOR Providers
Unlicensed EOR providers expose businesses to severe vulnerabilities, particularly during employee terminations. These risks typically include unclear termination rights, where inadequate contracts create ambiguity, and legal loopholes, which employees can exploit to their advantage.
Blackmail scenarios often arise in unlicensed EOR arrangements, typically following a predictable series of events:
A blackmail situation can unfold in the following steps when working with an unlicensed EOR
- Termination Instruction: The business instructs the unlicensed EOR provider to terminate an employee due to financial difficulties.
- Employee Consults Legal Counsel: The employee seeks advice from a lawyer and discovers that their contract is directly with the EOR provider—not the end client.
- Challenge to Termination: The employee argues that, since the EOR provider is not in financial distress, there is no valid reason for termination under local laws.
- Blackmail Demand: The employee demands excessive compensation—sometimes as high as €200,000—to avoid reporting the illegal setup to authorities.
- Consequences for All Parties: Both the provider and the end client face severe consequences, including fines, legal action, and reputational damage.
By following this pattern, unlicensed setups create vulnerabilities that can be exploited, leaving businesses with significant financial and legal risks.
Short-Term Gains vs Long-Term Risks
Many unlicensed providers prioritise rapid growth over compliance, often focusing on closing deals rather than addressing risks. This approach can lead to:
Hidden costs are a significant risk when working with unlicensed EOR providers. Although they may promise no upfront termination fees, businesses often encounter substantial expenses later. These costs can include claims for unfair dismissal, which may result in financial liabilities that far outweigh any perceived initial savings.
Another critical concern is the lack of HR expertise among unlicensed providers. These providers often rely on sales-driven teams with limited knowledge of local labour laws. This knowledge gap increases the likelihood of non-compliance, exposing businesses to legal disputes, operational disruptions, and reputational damage.
The Cost of Non-Compliance
Licensed providers typically cap termination liabilities (e.g., at three months' salary), while unlicensed providers leave businesses exposed to claims of up to three years' salary—the maximum for unfair dismissal in Italy. Short-term vs Long Term gain comes into question and needs to be fully understood before being committed to.
Steps to Protect Your Business
To avoid blackmail risks and ensure compliance, businesses should take the following precautions:
1. Work with Licensed EOR Providers
Licensed providers adhere to local employment laws, ensuring all processes are transparent and legally compliant. Always verify that the provider is licensed in the country of operation.
2. Review Contracts Carefully
Thoroughly assess agreements with EOR providers. Key points to verify include:
- Termination procedures and associated costs.
- Liability in the event of employee disputes.
- Clear caps on financial obligations for termination cases.
3. Set Expectations from the Outset
Discuss termination scenarios during the initial agreement. Establish clarity on:
- How employee disputes will be handled.
- The roles and responsibilities of both the business and the provider.
Protect Your Business from Blackmail and Liability
Prioritising compliance reduces the risks of employee blackmail, financial liability, and legal disputes.
Key Action:
- Partner with licensed providers who adhere to local labour laws, ensure transparent contracts, and establish clear processes for termination and dispute resolution.
By focusing on compliance, businesses can avoid costly mistakes and protect their operations.
Safeguarding Your Business
Blackmail risks in Employer of Record (EOR) arrangements stem from non-compliance and unclear agreements. Choosing licensed providers, reviewing contracts, and setting transparent termination procedures can safeguard your business.
Need help ensuring compliance? Contact Peoitaly for trusted EOR solutions.