Employer of Record (EOR) services are essential for companies seeking to hire quickly and efficiently, particularly in countries with strict labour regulations. However, engaging with non-compliant providers - such as those lacking a proper labour leasing licence - can expose businesses to severe legal, financial, and operational risks.
This article explores the critical need for compliance in EOR services, highlights the risks of working with unlicensed providers, and offers guidance on how to verify compliance to protect your business.
What is Employer of Record (EOR) and Labour Leasing?
An Employer of Record (EOR) is a third-party entity that officially employs workers on behalf of another business, handling responsibilities such as:
- Social security contributions
- Payroll processing
- Tax withholdings
While the employee works for the client company, the legal employer on paper is the EOR provider.
This arrangement, often referred to as labour leasing (or "staff leasing"), is subject to strict regulation in many European countries, including Italy. To operate legally, EOR providers must hold a labour leasing licence issued by the local Ministry of Labour.
A labour leasing licence (Somministrazione di lavoro) is a certification that authorizes a company to legally provide labour leasing services in compliance with Italian employment laws. It ensures the provider meets all regulatory requirements, including proper tax remittance, social security contributions, and adherence to employment contracts. Without this licence, providers are not permitted to offer EOR services in Italy.
Non-Compliance Has Legal and Financial Risks
In countries like Italy, where labour laws are rigorously enforced, non-compliance among EOR providers is alarmingly widespread. It is estimated that 90% of EOR providers operating in Italy do not comply with Labour Leasing Regulations. Businesses that unknowingly engage with these providers face significant risks.
1. Violation of Transparency Laws (Decreto Trasparenza)
The Decreto Trasparenza (Transparency Decree), implemented in Italy in mid-2021, mandates that employees must be informed in writing about the details of their employment relationship, including:
- The legal employer
- Salary, start date, and position details
Non-compliant providers often list their own company as the legal employer, rather than the client company for whom the employee works. This lack of transparency:
- Violates Italian labour laws.
- Leads to mistrust between employees and employers.
- Exposes businesses to legal penalties and employee disputes.
2. Criminal Liability and Retrospective Contributions
Engaging with unlicensed EOR providers can result in criminal liability for the end client (the business utilising the EOR provider). Legal authorities impose the following penalties:
- Forced entity creation: Businesses may be required to establish a local legal entity, which defeats the purpose of using an EOR provider.
- Retroactive Social Security payments: Companies must pay all unpaid Social Security contributions from the employee's start date, even if the non-compliant EOR provider has already remitted some payments.
These penalties can lead to substantial financial losses, as authorities do not recognise payments made by unlicensed providers.
Risks of Employee Termination with Non-Compliant Providers
Another significant risk arises during employee termination, particularly when working with unlicensed EOR providers. Italy's labour laws impose strict rules on terminations, which non-compliant providers cannot legally manage.
Termination Limitations for Non-Compliant Providers
Under Italian law, unlicensed providers are treated as standard companies, subject to stringent termination restrictions. For example:
- Standard companies cannot terminate more than four employees within 120 days without adhering to a regulated process.
- Terminations beyond this limit require:
- Intervention from the Labour Inspectorate
- Union negotiations
Unlicensed EOR providers lack the authority to navigate these processes, forcing businesses to explore costly alternatives. This not only increases the financial burden but also creates delays, potential legal disputes, and operational inefficiencies that can disrupt business continuity.
Costly Mutual Termination Agreements
When a non-compliant provider cannot legally terminate an employee, businesses must offer mutual termination agreements. These agreements often involve significant payouts to employees, who may demand:
- Compensation equivalent to 3–4 years of salary.
- Additional payments to waive their rights to unemployment benefits.
In some cases, employees may exploit the situation, threatening to report the company to labour authorities unless their demands are met.
The Long-Term Impact of Non-Compliance
Even if a business avoids immediate legal issues, working with non-compliant EOR providers can have far-reaching consequences:
- Industry-wide scrutiny: Repeated violations by unlicensed providers could prompt stricter regulations, disrupting EOR operations across the market.
- Operational disruptions: Labour inspections may delay hiring and onboarding processes, affecting productivity.
- Reputational damage: Businesses associated with non-compliant practices risk losing credibility with employees, clients, and stakeholders.
These risks underscore the importance of partnering with licensed and compliant providers.
Verifying and Choosing a Licensed Labour Leasing Provider
Ensuring compliance with labour leasing laws is simpler than it may seem, and it is crucial for protecting your business from legal and financial risks. In Italy, businesses can verify an EOR provider's licence by following these steps:
- Visit the official AMPAL website (Italian Ministry of Labour).
- Navigate to the "Consultation of the Register" section.
- Enter the provider's name and check for a labour leasing licence (Somministrazione di lavoro).
If the provider is not listed, they are not authorised to offer labour leasing services.
Choosing a licensed provider not only ensures compliance with local regulations but also protects businesses from potential financial liabilities and builds trust with employees. Licensed providers:
- Operate under strict labour laws and transparency standards.
- Include clear termination terms in their contracts, reducing the risk of costly disputes.
- Guarantee compliance with social security, tax, and employment obligations.
By taking the time to verify a provider's credentials, businesses can avoid the pitfalls of non-compliance, ensuring smoother operations, legal peace of mind, and long-term success.
Non-compliance with labour leasing laws, particularly in Italy, can lead to severe legal, financial, and reputational consequences for businesses. By engaging with licensed EOR providers, companies can:
- Avoid criminal liability and retrospective payments.
- Ensure transparency with employees.
- Safeguard their operations against regulatory scrutiny.
Before choosing an EOR provider, always verify their labour leasing licence through official government registers. The risks of working with unlicensed providers far outweigh any short-term convenience they may offer.
Investing in a compliant EOR provider not only protects your business but also ensures a sustainable and transparent employment process for all stakeholders.
Need help finding a compliant and licensed EOR provider? Contact Peoitaly for expert guidance and tailored support for your business needs.