Frequently asked questions on Employer of Record system in Nigeria

At a glance

• The Employer of Record (EOR) system has emerged as a vital strategy for organisations who seek to navigate the complexities of international hiring, compliance with local laws, tax and payroll management, etc.
• The EOR model is not specifically regulated in Nigeria and there is no specific licensing requirement for the establishment of an EOR entity.
• While EOR presents appealing risk management opportunities to end-user clients, it is important to note that the EOR concept is not without risks in Nigeria.
• A list of strategies to combat the risks of using EORs in Nigeria is outlined. 

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As employment needs evolve in response to advancements in technology and changes in global economies, organisations are increasingly seeking flexible and efficient solutions to expand their global workforce. One solution which is being increasingly used by organisations is the EOR system also referred to as 'employee outsourcing' in some jurisdictions. This has emerged as a vital strategy for organisations who seek to navigate the complexities of international hiring, compliance with local laws, tax and payroll management, etc. One of the major benefits of hiring through an EOR is that it removes the regulatory obstacles in the process of international employment. As a result, the EOR model is becoming an essential tool for businesses aiming to maintain agility and competitiveness in a global market.

What is an EOR?

An EOR is a third-party organisation that handles the legal responsibilities and obligations of employing workers on behalf of another company. It can be located within the same jurisdiction as the organisation it acts on behalf of or more commonly, in another jurisdiction.

Under this model, the EOR becomes the legal employer to a part or total organisation’s (end-user client) workforce. The EOR assumes all responsibility for payroll, taxes, and other legal compliance. In other words, an EOR serves as a vendor employer and provides employment services to end-user client organisations. This arrangement provides the end-user client with the option to expand its operations into new jurisdictions without being weighed down by the often complex and time-consuming administrative and risk management tasks that typically accompany such expansions.

When is an EOR used?

The EOR system can be utilised in a situation arising out of an asset sales transaction, where the purchasing company needs to employ staff in countries where there is no local entity. Instead of setting up their own entity, which will entail some considerations including tax and payroll management, they opt for using the EOR model, often spanning multiple jurisdictions. 

Another example is when a company expands into a new country but does not want to establish a physical presence immediately due to cost or administrative concerns. In such cases, an EOR provides a solution, allowing them to hire staff earlier and gauge market feasibility. Geopolitical issues also drive the use of EORs. For example, during conflicts like the war between Russia-Ukraine in 2014 and the current one which started in 2022, employees of companies based in the conflict region may be relocated to safer locations and employed through EORs. 

Also, in situations where key talent prefers to work remotely or where operational presence is not necessary, EORs offer flexibility.

What is the legal framework for EOR in Nigeria?

The EOR model is not specifically regulated in Nigeria and there is no specific licensing requirement for the establishment of an EOR entity.  The Federal Ministry of Labour and Employment has provided two sector specific guidelines on contract staffing and outsourcing which include:

1. The Federal Ministry of Labour and Employment Guidelines on Contract Staffing and Outsourcing in the Oil and Gas Sector.
2. The Federal Ministry of Labour and Employment Guidelines on Contract Staffing and Outsourcing in Banks, Insurance Companies and Financial Institutions.

These guidelines merely protect an employee’s right / freedom of association and their legal status and does not envisage an EOR as a standalone concept.

Nevertheless, Our National Industrial Court (Court) has had cause to take judicial notice of the EOR concept. In interpreting this concept, the Courts have recognised that an employment relationship can involve two employers (co-employment), where one entity engages the employee contractually and the other entity is the end-user client.

Are there any risks associated with using an EOR in Nigeria?

While EOR presents appealing risk management opportunities to end-user clients, it is important to note that the EOR concept is not without risks.

The Court has in a number of cases affirmed joint liability to end-user client organisation who were deemed to be co-employers in a triangular employment relationship. The EOR concept may result in shared liability between the vendor employer and an end-user client where the functions of administration, monitoring and disciplinary actions are jointly or solely undertaken by the end-user client, and notwithstanding that the payroll, HR, and other compliance activities were solely handled by the vendor employer. The Court may, in unique circumstances, discountenance an existing EOR agreement and interpret the actions of parties to determine liability of the EOR.

What are the mitigation strategies for preventing the risks associated with EOR?

The following are strategies that can be adopted to prevent risks associated with the EOR model.

• Roles and responsibilities must be clearly outlined: The outlining of roles and responsibilities between parties to an EOR arrangement is heavily dependent on the express terms of contract. It is ideal for the EOR to handle employment-related tasks such as payroll, benefits, day-to-day management, supervision, and operational decisions. This will ensure that the EOR takes full responsibility as an employer and the end-user client is not engaged in employment matters with the employees.  
• Minimisation of control: It is important for the end-user client to avoid direct involvement in employment decisions such as hiring, firing, or discipline. These responsibilities should be left to the EOR to minimise the risk of co-employment claims.
• Separate management structures: It is vital for both entities in an EOR model to maintain distinct managerial team. The end-user client should not be seen as managing or controlling employment policies, contracts, or benefits, of the EOR as this could create the appearance of co-employment.
• Solid contractual framework: As earlier mentioned, it is key for parties to adopt a comprehensive contract between the EOR and the end-user client that specify that the EOR is the sole employer of record for all legal, tax, and compliance purposes. The contract should expressly state that the end-user client does not share employment responsibilities, and this should also be followed by conduct.
• Legal compliance: The EOR must stay compliant with relevant employment regulations, including tax filings, insurance, and workers' compensation, to reinforce its role as the employer. This reduces the chances of the end-user client being classified as a co-employer.
• Routine audits and monitoring: It is important for the end-user clients to periodically review the EOR arrangements and ensure compliance with the structure and identify any actions that might blur the lines in the arrangement.

What should companies look for when choosing an EOR in Nigeria?

End-user client organisations have a responsibility to conduct thorough due diligence on EOR entities. This process involves reviewing the EOR's experience, transparency, and industry-specific and local expertise. It is essential to investigate any records of regulatory non-compliance. Additionally, end-user client organisations must carefully review EOR contract agreements.

What are the common issues with the EOR model?

At the start of the EOR engagement, common issues arise regarding (i) employment terms, (ii) background checks, (iii) employment contract templates, (iv) immigration requirements, (v) business protection, (vi) incentives and benefits, and (vii) data protection. 

During and at the end of an engagement, common issues arise that require careful management and co-ordination between the end user client and the EOR. Maintaining a productive relationship between the end user client and the EOR is crucial, given that the EOR is the legal employer in the eyes of authorities. However, practical challenges can arise, such as disciplinary matters and grievances, where the lines of responsibility between the end user client and the EOR may blur. For instance, disciplinary actions may be initiated by the end-user client but executed by the EOR, leading to potential confusion.

What are the benefits of using an EOR in Nigeria?

• The EOR model provides financial advantages for companies expanding into new markets by outsourcing employment responsibilities.
• The EOR model affords early resolution of common issues associated with hiring and talent management including employment terms, background checks, and immigration requirements.
• The EOR model allows organisations to engage persons from a wide pool of global talents across multiple jurisdictions without the legal challenges associated with setting up a local / liaison office or foreign subsidiary.
• Where managed properly EOR model can limit legal risks and compliance challenges associated with claims and civil suits.

If you require further guidance, please contact us at employment@olajideoyewole.com.