Howard Levitt: Foreign companies using intermediaries to hire in Canada can’t dodge employee liability

By Howard Levitt and Puneet Tiwari

Whenever there is an economic shift, there is a cascading effect on the employment bar. We witnessed it when the gig economy emerged, with the fight over the legal status of independent contractors versus employees. We saw it throughout the pandemic and are seeing it again in the post-pandemic era. With the ability to work from anywhere at our fingertips, we are now seeing a new term in the world of employment law: the Local Employer of Record (“LER”).

LERs are outsourcing companies founded in a particular jurisdiction for the sole purpose of acting as the “employer” on paper. The LER processes the payroll, acts as the employer, signs all employment contracts and purports to assume all liability from the actual employer. The head offices of many LERs are in foreign jurisdictions. We recently successfully settled a matter against one not even located in our hemisphere but operating out of Toronto on paper.

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Our firm has seen many companies turn to LERs to expand their business operations into foreign markets. A company from California, for example, can now “rent” employees in Canada, Germany or elsewhere without a physical presence or directly hiring them. Why? Because the LER has done the heavy lifting in incorporating in these jurisdictions, hiring the employee, and then “loaning” the employee back to their client as a contractor.

While there are benefits to using an LER, such as streamlining HR and employment practices, it is important to consider the potential drawbacks and risks, including a false sense of security when it comes to employer liability. We have seen more than one foreign employer hastily leave the Canadian market after having to paying hefty settlements, even though their LERs had promised them they would have little to no liability to employees. The use of an LER can also create issues in maintaining a consistent company culture and enforcing company policies.

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From a legal point of view, what these companies are failing to consider is that they are considered “common employers.” This means any wrongful dismissal or other financial liability that arises while using an LER can lead to significant legal and financial risks for the associated company, which may result in additional costs, legal fees and financial penalties.

For American employers venturing into the Canadian employment landscape, this can mean hard lessons learned about Canadian employment law. For employment lawyers in Canada, it means two entities with money who may be footing the bill for their clients and, on the employee side, two entities to sue.

Furthermore, working with an LER can also create additional costs and administrative burdens. While outsourcing employment responsibilities to an LER can save time and money in some cases, it can also result in additional fees and administrative work. For instance, there may be additional co-ordination required with the LER on HR and employment-related matters, as well as the cost of any services provided by the LER. Again, this is to save a few hundred dollars.

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Lastly, it is important to consider the impact on employee relations when using an LER. When working with an LER, it can be difficult to build strong relationships with employees in foreign markets, as the parent company may have less direct communication with their employees. Using such an intermediary can make it challenging to address employee concerns and issues in a timely, effective manner. It can also lead to a lack of consistency in employment practices, resulting in other problems.

Despite the potential drawbacks of using an LER, there are some circumstances where it may make sense. For example, it may be a suitable solution when a company wants to establish a presence in a foreign market quickly or when there are complex legal and regulatory requirements — while they search for appropriate legal counsel.

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Additionally, it may be a good option for companies that do not have the necessary resources or expertise to manage employment matters in a foreign market.

However, it is important to be diligent and conduct thorough research on potential LER partners, including reviewing the terms of any agreements and conducting due diligence on the LER’s legal and financial standing. By doing so, companies can ensure they are working with a reputable and reliable LER to minimize the potential risks.

Howard Levitt is senior partner of Levitt Sheikh, employment and labour lawyers with offices in Toronto and Hamilton. He practices employment law in eight provinces. He is the author of six books including the Law of Dismissal in Canada. Puneet Tiwari is a partner with Levitt Sheikh.