Employer of Record (EOR) Arrangements and the Italian Framework: Opportunities vs Compliance Challenges

Introduction

The international employment landscape has undergone significant changes in recent years. On the one hand, multinational companies increasingly seek to engage talent wherever it is located, often without establishing a corporate presence in every jurisdiction in which their employees work. On the other hand, remote working, digitalisation and growing competition for highly skilled professionals have encouraged companies to explore more flexible and dynamic workforce solutions.

Against this backdrop, EOR services have gained considerable popularity worldwide. The model enables a business to engage workers in a foreign jurisdiction through a local provider that becomes their formal employer, while the client company remains the substantial employer, manages their day-to-day activities and benefits from the services they perform.

In fact, the EOR provider formally enters into the employment contract, processes payroll, manages tax and social security obligations and generally assumes responsibility for local employment administration. Meanwhile, the client company determines the activities to be performed, assigns objectives and supervises the employee’s work, often integrating the individual into its own organisation.

From a commercial perspective, the model offers clear advantages: businesses can enter new markets more quickly, reduce administrative complexity and recruit employees without immediately committing to the establishment of a local subsidiary or branch. An EOR may also be used to hire a single employee in a new country, thus testing business opportunities before making a larger investment, or to recruit specialised professionals regardless of their geographical location.

These advantages have become particularly attractive in a business environment characterised by increasingly international talent pools and this development was accelerated by the COVID-19 pandemic, which demonstrated that many roles could be performed effectively from different locations and encouraged employers to recruit beyond traditional geographical boundaries. The resulting increase in cross-border employment generated greater demand for structures capable of facilitating international hiring.

As a result, the EOR industry has experienced significant growth, with numerous providers entering the market and offering multinational businesses a streamlined solution for engaging workers across multiple jurisdictions. To this extent, EOR services are frequently marketed as a quick and compliant means of removing many of the administrative burdens traditionally associated with local employment.

However, businesses seeking to use EOR arrangements in Italy should proceed with caution. In fact, unlike jurisdictions in which the model may operate within a relatively flexible regulatory environment, the Italian legal system does not recognise Employer of Record services as a distinct legal category. Instead, arrangements involving a formal employer and a separate entity that benefits from and directs the employee’s work must be assessed under the rules governing labour leasing, known in Italy as “Somministrazione di Lavoro”.

This distinction is not merely theoretical, since it has important practical consequences for international companies seeking to engage workers in Italy through an EOR provider. While businesses may adopt global workforce strategies, employment law remains largely national in character, meaning that the same operating model may receive a significantly different legal treatment from one jurisdiction to another.

The Italian approach: no specific regulation for EOR arrangements

One of the first aspects that may surprise foreign businesses is that Italian law does not contain a specific legal definition of an Employer of Record. Unlike jurisdictions in which the concept has acquired formal recognition or developed within a comparatively flexible legal environment, the Italian legal system does not identify EOR structures as a separate category of employment relationship.

In fact, the Italian legal order is quite stuck with the “traditional” bilateral relationship governing a subordinate employment between the employer and the employee, with limited (and exhaustive) exceptions.

This does not mean that EOR services are expressly prohibited by specific legal provisions. Rather, Italian law adopts a functional approach, focusing on the substance of the arrangement instead of the terminology used by the parties or the service provider. The commercial description given to a service cannot, by itself, determine its classification under Italian employment law.

In practical terms, the relevant question is therefore not whether a company describes itself as an EOR provider. Italian authorities and courts would examine how the relationship actually operates, paying particular attention to the allocation of employer functions and, most importantly, to the entity exercising organisational and managerial authority over the worker.

This approach reflects a long-standing feature of Italian employment law, in which the employment relationship is traditionally based on a direct connection between the individual performing the work and the employer exercising the relevant organisational and managerial powers. Where the formal employment relationship and the effective exercise of those powers are divided between separate entities, specific regulatory provisions may apply.

Consequently, arrangements under which one entity formally employs a worker while another directs, supervises and benefits from the employee’s activities do not fall outside the scope of employment regulation. On the contrary, Italian law contains a specific statutory framework governing this separation between the formal employer and the entity using the worker’s services.

Labour leasing as the Italian framework for third-party employment relationships

Italian labour law allows a separation between the formal employer and the business that benefits from the employee’s work. However, this separation is not left entirely to contractual freedom, since it operates within a statutory framework regulating the supply of labour between different entities.

The current rules governing labour leasing are primarily set out in Legislative Decree No 81 of 2015, which forms part of the broader evolution of Italian legislation regulating the supply of labour. Under this system, a worker may be formally employed by one organisation while performing services under the direction and control of another enterprise.

The arrangement involves a three-party relationship between the worker, the labour provider and the user (client) company. The labour provider is the worker’s formal employer, while the user company incorporates the worker into its organisation and exercises the managerial and organisational powers required for the performance of the assigned duties.

The rationale underlying this regime is relatively straightforward. Italian lawmakers have historically regarded the supply of labour as an activity capable of creating particular risks for workers, and the separation between the formal employer and the entity benefiting from the work may generate uncertainty regarding employment responsibilities, working conditions and the effective exercise of the worker’s statutory and contractual rights.

Also for this reason, labour leasing is treated as a reserved and regulated activity: the supply of workers to third-party organisations may only be carried out by authorised agencies that satisfy specific legal requirements and are registered in the relevant public register. The purpose of the authorisation regime is to ensure that providers possess adequate organisational, financial and professional structures to conduct their activities in compliance with applicable employment legislation.

The Italian framework also seeks to protect workers against potential disadvantages arising from their employment through an intermediary and, as a consequence, imposes specific obligations concerning employment and working conditions, equal treatment and the allocation of responsibilities between the labour provider and the user undertaking.

Although labour leasing is an established feature of the Italian labour market, it remains a closely regulated mechanism. This becomes particularly relevant when international companies seek to implement EOR models developed and standardised in jurisdictions where the separation between the formal employer and the operational management of the worker is subject to fewer restrictions.

Why standard EOR models may create compliance concerns in Italy

The compliance challenge in Italy does not arise merely because a third-party entity is appointed as the worker’s formal employer. Rather, it arises because many EOR arrangements reproduce the separation between formal employment and managerial authority that the Italian labour-leasing rules were specifically designed to regulate.

In a standard EOR arrangement, the provider enters into the employment contract and performs the related administrative functions. The client company, however, determines the activities to be performed, assigns duties and objectives, supervises performance and integrates the worker into its business organisation. From an Italian employment-law perspective, these features may substantially overlap with those of a labour-leasing arrangement.

Accordingly, businesses cannot assume that a service marketed internationally as an Employer of Record will automatically be regarded as compliant under Italian law. The legal analysis depends on the actual structure adopted, the allocation of functions between the provider and the client company, and the way in which the employment relationship is managed in practice.

This issue becomes particularly significant when the provider is not operating as an authorised labour-leasing agency. If the substance of the arrangement consists of supplying employees to a client company that directs and organises their work, the absence of the required authorisation may trigger the Italian provisions governing irregular or unauthorised labour leasing.

The consequences shall not be underestimated and may affect both the provider and the client company: depending on the circumstances, the worker may seek the establishment of a subordinate employment relationship directly with the user company, asking for damage compensation and/or reinstatement when the supply comes to an end.

In the worst cases, the parties may also face criminal sanctions and liabilities provided for by the applicable legislation, together with potential consequences concerning remuneration, social security contributions and other obligations arising from the employment relationship.

The most serious forms of unlawful labour intermediation must be considered separately. Where an arrangement involves not only the unauthorised supply of labour but also the exploitation of workers, coercive conditions or other indicators identified by the relevant criminal provisions, it may fall within the scope of the rules governing unlawful intermediation and labour exploitation. An EOR arrangement should not, however, be regarded as representing such a criminal offence merely because the provider does not hold the authorisation required to engage in labour leasing, as the legal classification depends on the specific facts and the constituent elements of the relevant offence.

The presence of a direct employment claim and potential sanctions mean that an EOR arrangement cannot be assessed solely by reviewing the formal contractual documentation. The actual conduct of the parties is equally important, including the extent to which the client company assigns duties, determines working methods, supervises performance and incorporates the worker into its own organisational structure.

Many international businesses are unfamiliar with this regulatory background, also due to the fact that, as previously mentioned, in some jurisdictions the division between the formal employer and the entity responsible for the employee’s operational management is not subject to an equivalent authorisation regime. Italy, by contrast, has long maintained a legislative framework specifically intended to firmly control the supply of labour between separate entities.

The use of a globally established EOR solution does not therefore eliminate local regulatory risk. Before implementing such a structure in Italy, businesses should carry out a local-law assessment addressing the practical operation of the relationship, the distribution of employer functions and the regulatory status of the provider.

Increasing attention to cross-border hiring structures

As previously mentioned, international recruitment is no longer limited to large multinational corporations. Technology companies, professional services firms, start-ups and investment-backed businesses frequently engage talent on a cross-border basis. In many cases, the number of employees involved is relatively small, making the immediate establishment of a local entity commercially unattractive.

Italy can be an appealing jurisdiction for international recruitment, offering a highly skilled workforce and strong expertise across numerous sectors. As remote and hybrid working models continue to develop, foreign businesses are showing growing interest in engaging employees located in Italy without establishing a permanent local presence.

These developments naturally increase demand for EOR services. At the same time, they make it more likely that international companies will encounter the constraints imposed by the Italian labour-leasing framework. What initially appears to be a straightforward administrative solution may require an assessment of the allocation of employer responsibilities, the exercise of managerial powers and the regulatory status of the provider.

For this reason, appropriate due diligence should be conducted before adopting an EOR structure in Italy. The analysis should address both the terms of the agreements and the intended practical management of the worker. In particular, businesses should understand which entity will assign duties, set objectives, supervise performance and determine how the employee’s activities are organised.

Careful structuring at the outset is especially important because the division of employer functions may evolve over time. An arrangement that initially appears limited in scope may become more integrated into the client company’s organisation as the employee’s role develops. The practical operation of the relationship should therefore remain consistent with the legal structure on which the parties have relied.

The issue has consequently developed from a purely administrative matter into a broader corporate governance and risk-management consideration. Investors, boards of directors and compliance functions are paying increasing attention to workforce structures, particularly where international operations involve employment models that must comply with different national regimes.

Looking ahead

The continued growth of international hiring suggests that Employer of Record services will remain an important feature of the global employment landscape. Their flexibility and speed respond to a genuine demand from businesses seeking to access talent and expand into new markets without immediately establishing a local presence.

In Italy, however, the further expansion of the EOR model will inevitably have to contend with a comparatively rigid legal framework governing the supply of labour. The challenge for EOR providers and international businesses will therefore be to reconcile the commercial advantages of this increasingly popular model with the specific constraints of Italian employment law.