Written by: Gisella Alvarado, Sagardoy Abogados
Foreign organisations that decide to hire employees in Spain often choose to do so using an umbrella company or professional employer organisation to speed up the process before setting up local companies. However, this involves serious liability risks. The legal situation differs in other countries.
Some foreign legal entities decide to hire employees to provide services in Spain through umbrella companies or professional employer organisations while the setting up process for their new Spanish legal entities or registration as foreign non-permanent establishments is being completed. As a result, for a specific period of time, employees are formally employed by umbrella companies or professional employer organisations, but providing services for the foreign legal entities. This enables them to engage and retain qualified staff without waiting until the completion of the incorporation and registration process to do so.
However, hiring employees through umbrella companies or professional employer organisations under these circumstances is not compliant with Spanish law and may have consequences for foreign legal entities.
In Spain, employees can only be engaged by a Spanish legal entity or by a foreign entity that is duly registered as a foreign non-permanent establishment. Likewise, only temporary work agencies that are set up and registered as such with the labour authorities are able to engage employees to assign them to user or main companies. They can only do so for a specific limited term and only as long as temporary legal grounds justify it.
Assignment of employees will be unlawful when:
- The purpose of the service contracts entered into between the companies (the contracting company and the user or main company) is limited to a simple transfer of employees from one entity to another one (i.e. where one entity ‘loans’ an employee to another entity and the employee works under the instructions and supervision of the second entity, as would be the case for umbrella companies or professional employer organisations); or
- The entity transferring the employees does not have its own stable business or organisation; or does not have all means needed to carry out its corporate activity; or does not exercise functions inherent to its employer status.
No unlawful assignment of employees takes place when both companies belong to the same group of companies or if the employer entity is a temporary work agency. None of these exceptions would apply in the circumstances described above, because umbrella companies and professional employer organisations are usually third-party service providers, not members of the group of companies to which the foreign legal entity belongs and have not even been registered as temporary work agencies.
As a result, hiring umbrella companies or professional employer organisations under the conditions explained above will place foreign legal entities at a high risk of unlawful assignment of employees. The possible legal consequences include the following:
- Both (infringing) companies involved will have joint and several liability towards the assigned employees and towards Spanish social security, without prejudice to other liabilities.
- This joint liability includes employee salary claims and social security contributions that have not been paid by the umbrella company or professional employer organisation, and any kind of severance payments, particularly but not limited to, severance payments due in cases of unfair dismissal.
- Affected employees have the right to acquire permanent employment in either of the infringing companies, at their choice. The employee’s rights and obligations will be those that would be enjoyed by a worker rendering services in the same or in an equivalent work position under ordinary conditions. Seniority will be calculated from the start of the illegal assignment.
- Employees transferred illegally could be entitled to become permanent employees of the foreign legal entity and could seek to be paid any difference in salary that may exist between the collective bargaining agreement that applies to the umbrella company or professional employer organisation and the collective bargaining agreement that should apply to the foreign legal entity, if the latter is higher.
- Illegal assignment of employees may be held to be a severe labour infringement, currently punishable with a fine of between EUR 7,501 and EUR 225,018. That means that in the event of a potential inspection, the Work Inspectorate may impose a fine of up to EUR 225,018 on either or both companies.