Cross-Border Workforce Management in India: The Role of Employer of Record Model

India’s vast labour force, estimated at over 424 million individuals ^[1] with more than 65 percent under the age of 35,^[2] makes it a global hub for affordable and skilled talent. However, India’s labour law landscape, considering its vastness, may be challenging for foreign businesses that desire to hire locally without setting up a subsidiary. Navigating India’s central and state labour laws can be complex for foreign businesses. In such a scenario, the Employer of Record (“EOR”) model, under which the EOR acts as the legal employer responsible for payroll, statutory contributions, and compliance with labour laws While the foreign entity retains operational control over the employees’ work without setting up a local subsidiary. This allows the foreign entity to navigate core business operations while the EOR handles labour compliances.

Key Challenges for Foreign Employers: Legal and Compliance Considerations

Foreign entities envisioning to hire talent in India, either directly or through an EOR, will be required to follow a labyrinth of central as well as state labour laws. These laws cover wages, social security, working hours and employee welfare. The EOR serves as the legal employer and will be responsible for ensuring compliance with labour laws, including payroll management, provident fund contributions, and required filings.

That said, foreign employers do encounter several challenges while setting up EOR arrangements in India:

(i) Companies will have to use EOR services primarily in relation to project-based work. EOR arrangements are suited for short-term or specific projects where the employees are not integrated into the foreign company’s core operations. Indian courts have consistently held that the substance of the relationship matters more than its form when identifying the real employer.^[3] If the foreign company exercises direct supervision, control, or disciplinary authority, the EOR arrangement will be viewed as a sham, making the foreign entity liable under Indian labour laws. To avoid this, the EOR or a designated local entity will have to handle employment related documentation, performance management, and administration of benefits.

(ii) A tax consideration for foreign entities operating through an EOR model in India is the potential creation of a permanent establishment (“PE”) in India. Under India’s Double Taxation Avoidance Agreements (“DTAAs”) with countries such as the United States, the United Kingdom, Singapore, the Netherlands, and Australia, a PE will exist if the foreign entity has a fixed place of business or a dependent agent in India. If employees engaged through an EOR perform core business functions for, or conclude contracts on behalf of, the foreign entity, such activities will lead to the creation of a PE and consequent tax exposure in India. Similarly, under DTAAs with other jurisdictions, the tests for determining a PE are based on factors such as the presence of a fixed place of business, the duration of service activities, and the authority of personnel to habitually conclude contracts.

(iii) Further, foreign employers will have to address several operational challenges. These include navigating India’s state-specific labour laws, managing statutory registrations across jurisdictions, ensuring timely remittance of social security contributions, maintaining data privacy in cross-border employee data transfers, and addressing termination compliances. Each of these areas requires close coordination between the EOR and the foreign company to ensure adherence to Indian legal standards.

Cross-Jurisdictional Analysis: EOR in Global Markets

The EOR model is widely used across jurisdictions, though the legal frameworks differ.

(i) In the Netherlands, legislation governing EORs (referred to as secondment agreements) came into effect on January 1, 2020, under Article 7:692 of the Dutch Civil Code^[4]. It outlines the EOR's responsibilities, such as payroll and compliance. It also differentiates these arrangements from temporary agency work.

(ii) In the United States, the EOR model is implemented through professional employer organizations (“PEOs”) that manage compliance, payroll, and HR functions while the client company controls daily operations. However, the co-employment structure poses risks, particularly concerning workers’ compensation and state tax compliance. In Stephanie Perez v. Dermatology Group, PC v. ADP,^[5] both the company and its PEO were sued for discrimination, demonstrating the shared liability such arrangements can create.

(iii) In the United Kingdom, umbrella companies serve as employers of independent contractors, a practice linked to the IR35 legislation^[6] aimed at preventing disguised employment. These companies handle labour and tax compliances, ensuring that contractors meet the correct employment classification.

(iv) In Australia, the Labour Hire Licensing Act 2017^[7] regulates labour hire and EOR arrangements through strict licensing and compliance requirements to prevent exploitation. In Branded Media Holdings Pty Ltd (in liquidation); In the matter of Brand New Media Pty Ltd.,^[8] the New South Wales court held that Brand New Media Group was the true employer, despite another entity being listed on documents, emphasising that documentation cannot override the practical reality of the relationship. The court found Brand New Media Group responsible as it performed essential employment functions, illustrating the importance of aligning legal form with actual operations.

Conclusion

Foreign entities may effectively hire in India, without establishing a subsidiary by using EOR models. When effectively set up, it minimizes administrative work and legal risk while permitting adherence to regional labour and tax regulations. However, gaps in India’s regulatory framework, need to be addressed to make the country an attractive destination for global employers.

References

[1] India’s workforce to increase to 457.62 million by 2028: Report https://hr.economictimes.indiatimes.com/news/trends/indias-workforce-to-increase-to-457-62-mn-by-2028-report/115290476

[2] Is India’s rapidly growing youth population a dividend or disaster? https://timesofindia.indiatimes.com/india/is-indias-rapidly-growing-youth-population-a-dividend-or-disaster/articleshow/97545222.cms

[3] Workmen of Nilgiri Coop. Mkt. Society Ltd. v. State of Tamil Nadu, (2004) 3 SCC514, Hussainbhai v. Alath Factory Thezhilali Union, (1978) 4 SCC 257, Steel Authority of India Ltd. v. National Union Waterfront Workers, (2001) 7 SCC 1.

[4] Article 7:692 of the Dutch Civil Code -http://www.dutchcivillaw.com/legislation/dcctitle771010.htm

[5] https://images.law.com/contrib/content/uploads/documents/399/32091/Order-entered-re-ADP-MSJ-9.18.19.pdf

[6] Off-Payroll Working Rules -https://www.gov.uk/guidance/understanding-off-payroll-working-ir35

[7] Labour Hire Licensing Act 2017 -https://www.legislation.qld.gov.au/view/html/inforce/current/act-2017-033

[8] [2020] NSWSC 557

‍