“Employer of Record”: Why are more companies turning to this hiring model?

Have you heard of an “Employer of Record”? This is a type of employment arrangement that is increasingly attracting companies. In practice, it involves a company acting as the “formal employer” of a worker, but on behalf of another company.

Employment lawyer Eduardo Castro Marques, from Dower Law Firm, explained to Notícias ao Minuto, in a series of questions, how the process works. Here’s what you need to know:

What is an “Employer of Record” (EOR)?

“An ‘Employer of Record’ is a company that acts as the ‘formal employer’ of a worker, but on behalf of another company, usually a foreign company that wants to have someone working in Portugal without opening a branch or subsidiary here.

In practice, it is the EOR company that signs the employment contract, pays the salary, and handles taxes and Social Security contributions. However, the company that gives instructions, sets working hours, approves holidays, and effectively benefits from the work is often the other company, the one that actually wanted to hire the individual.

It is a relatively new model in Portugal, associated with the globalisation of remote work, and one that does not yet have its own specific regulatory framework under Portuguese law.”

Why do companies use this model? Why are more and more foreign companies turning to this type of employment arrangement in Portugal?

“Mainly because of speed and simplicity. Setting up a company or a branch in Portugal involves time, costs, and legal and tax formalities.

Hiring through an EOR allows a foreign company to have someone working from Portugal within a few days, without having to establish such a structure.

This has become particularly common in technology and digital sectors, where work is carried out remotely and nationality is often irrelevant to the day-to-day responsibilities of the role.

The problem is that this convenience for companies may come into conflict with fundamental principles of Portuguese labour law, which is designed to protect workers.”

What are the risks of this model? Is this model safe for workers?

“The greatest risk is the dilution of responsibilities. When two companies are involved, one that formally signs the contract and another that actually manages the work, confusion may arise over who is responsible for which obligations: who pays compensation in the event of dismissal, who guarantees the worker’s rights, and who may be held accountable in court.

Portuguese law does not ignore this type of situation. The law, as well as court decisions, requires the reality of day-to-day work to be taken into account: who gives instructions, who controls working hours, and who benefits from the work, rather than simply what is written in the contract.”

Regarding the proceedings before the Porto Labour Court involving the EOR model: why is this ruling innovative?

“This case involves a Portuguese worker who was hired through an EOR platform and two companies: the company that formally employed him and the international technology company for which, in practice, he worked every day.

This is one of the first times that Portuguese courts have been specifically called upon to rule on this model, which could set a precedent for other similar cases.

The court has already declared the dismissal unlawful because the grounds invoked for the dismissal were vague and generic, without concrete facts to support them. What is particularly interesting is that this lack of specificity was directly linked to the EOR structure itself.

Furthermore, the Court did not exclude the company that actually benefited from the work performed. On the contrary, it kept that company as a party to the proceedings.

This is a clear sign that Portuguese courts are taking a rigorous approach to this model and that it cannot be used to dilute the legal requirements imposed on employers when dismissing a worker.”

What does this decision mean for the future? What recommendations does it offer to workers and companies using this employment model?

“For workers, the main advice is to keep evidence of who exercises authority over their work on a day-to-day basis: who approves holidays, who sets objectives, and who communicates important decisions such as a dismissal. This is the reality that courts will ultimately examine.

For companies, whether they provide EOR services or use them, the message is that this model does not remove the protections afforded by Portuguese labour law.

When the company that actually benefits from the work wants to dismiss someone, it must comply with the same requirements as any other employer.

This ruling shows that Portuguese courts are paying close attention to this new model of work and will not allow it to be used to reduce the protection that the law provides to workers.”