Over the past years, the use of Employers of Record (“EOR”) has significantly increased outside of Europe and is now also developing across European countries.

This growing interest is due to the EOR system offering increased flexibility to companies, in particular for those intending to expand their business in countries where they do not have a legal presence.

EOR’s are third-party organizations that formally act as the employer of a workforce on behalf of another company (“the client”). The EOR is responsible for hiring individuals and handling legal and administrative employment tasks and formalities, including payroll, taxes, benefits, and compliance with local labor laws. The client oversees the daily activities of the employees.

In France, and many other European countries, EORs are to be managed cautiously.

The principle in France is that EORs are not permitted, except if they are implemented in the context of the portage salarial and comply with their conditions.

The rationale behind this is the general prohibition by French law of the lending of employees against remuneration which, except for temporary agencies is not allowed and is punishable by sentences of up to 2 years imprisonment and fines of up to EUR30,000 for the legal representatives of the company, and fines of up to EUR150,000 for the legal entities, although rarely imposed in practice.

The portage salarial regulations do provide for some flexibility around the lending of employees and subject to some limitations, enables a system similar to an EOR.

The main applicable rules are as follows:

The portage salarial consists of an individual entering an employment contract with a specialized portage entity which pays the individual to fulfill a specific assignment in another company (the client). The client will then enter into a service agreement with the portage entity, under which the client pays for the provision of the service. The portage entity pays the individual a salary equivalent to the price of the service provided less the running costs and all social security contributions. The individual is treated as an employee and benefits from all employee protections under French law.

Care must be taken when incorporating the portage entity in France given that its corporate purpose must be exclusively limited to the activity of portage salarial, and a financial guarantee from a bank will be required. A preliminary tax analysis may also be necessary to assess any potential risks for the client entity having a permanent establishment in France.

A feature of the portage salarial is that it is up to the employee to search and find their assignment to the client, and to negotiate the services which are to be provided as well as the price directly with the client. Therefore, the employee must demonstrate their expertise, qualifications and autonomy enabling them to find the client.

For the client, the key aspects are (1) the recourse to portage salarial is only possible for (i) the performance of occasional tasks/assignments which are not part of its normal and permanent activity or (ii) for a temporary service requiring an expertise that it does not hold internally and (2) the length of any portage salarial service must not exceed 36 months.

Non-compliance with the rules on portage salarial (including the rules on the maximum duration of an assignment) may trigger potential sanctions for both the client company and the portage entity, including fines and other potential administrative/civil sanctions and damages.

It is therefore important in practice for both the EOR and client to have a good understanding of the legal rules and practicalities applicable to portage, so as not to fall under the illicit lending of employee regime (and be subject to sanctions).