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Employer of Record in Denmark

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​​​published on 9 April 2024 | reading time approx. 4 minutes​​


The concept of EoR is also offered in Denmark. At first glance it appears to be a services which can relieve foreign employers from numerous administrative task. On closer inspection, the service also harbours risks that foreign companies should be aware of.



EoR in Denmark​

The "Employer of Record" (EoR) service has also been launched in Denmark in recent years. 

The EoR concept entails that an EoR company hires an employee, pays their salary, pays income tax and social security contributions and assumes all other employer obligations. At the same time, the EoR company con­cludes an open-ended contract with the client company for which the employee is to work. The client company has the authority to issue instructions to the employee and bears the economic risk for the employee's work.

In Denmark, the EOR service is offered by internationally active companies. The providers' reference lists include well-known Danish companies as well as foreign companies that carry out projects in Denmark. The service is particularly relevant in the industry and construction sector, as it enables foreign companies to accept projects in Denmark and then flexibly hire work force locally without the foreign company having to worry about Danish labour, tax and immigration regulations. The EoR enables fluctuating labour requirements to be covered. EoR providers advertise in particular about taking care of the work permits for third-country nationals, the application for which is relatively time-consuming for foreign companies with projects on the Danish market.

As per March 2024, there is no legal regulation for the EoR concept in Denmark and also no case law on this topic.
 

Is the EoR concept covered by the Danish Temporary Employment Act?

In various respects, the EoR concept is similar to a temporary employment agency. The question therefore arises as to whether the rules of the Danish Temporary Employment Act (Vikarloven) also apply to the EoR concept. 

The Danish Temporary Employment Act contains various obligations for the lending company and the hirer. For example, the leased employee is entitled to the same working conditions as regular employees of the user company. However, unlike in other countries such as Germany, temporary employment in Denmark does not require a permit or licence for the hiring company. 

A company is considered a temporary employment agency under Section 2 (1) of the Danish Temporary Employment Act, if three conditions are met simultaneously: 
  1. there is an agreement between a temporary employment agency and a hirer (client company).
  2. the employee's work is carried out under the instruction and supervision of the hirer
  3. the employee's work for the hirer is temporary.

The term "temporary" is not defined in the Danish Temporary Employment Act. The case law of Danish courts and the ECJ have clarified that an assignment of more than 3 years can still be considered temporary and that the term must be interpreted in a sector-specific manner.

The special feature of the EoR, however, is that the assignment is not designed to be temporary. In the case of an EoR, it is not the case that the hiring company hires employees of a certain occupational group or quali­fi­ca­tion in order to assign them to a client company - which is still unknown at the time of employment with the hiring company. Rather, the employee is employed by the EoR precisely with a view to onward placement with the specific hirer. 

The protective purpose of the Danish Temporary Work Act is aimed at ensuring certain working conditions for temporary workers and avoiding social dumping. However, these points are usually not relevant in the case of an EoR, as the hirer often even carries out the recruitment on their own and grants wage and salary conditions that meet the employee's expectations and enable successful employment. 

Against this background, it can be assumed that the rules of the Danish Temporary Employment Act do not apply in the case of permanent employment of an employee in an EoR.

The EoR concept is therefore not subject to any special restrictions under Danish law that go beyond those arising from the general rules of labour law or contract law. Danish law therefore contains no time limit for the employment of an employee via an EoR. 
 

Special focus points under the EoR concept

However, compared to direct employment, the EoR concept contains some special features that the client company should be aware of. Two important special features should be emphasized here.

Right of termination

If the client company wishes to terminate the employee, it should be noted that the formal employer must give notice of termination to the employee. The employer must ensure that the necessary requirements for an effective dismissal are met. If the dismissal is not objectively justified, the employee is entitled to severance pay from the formal employer (EoR), who can, however, pass this on to the client company. Compared to other countries, Danish law is relatively employer-friendly, making it difficult to imagine situations in which dismissal in an EoR constellation is not possible. However, in limited cases, the employee may have a claim against the EoR to be offered a new position in a comparable company.

  

Immigration law regulations​

In our view, the employment of third-country nationals via an EoR harbours significant risks, as the employee must obtain a work permit before starting work. As the EoR does not have the formal right to issue instructions to the employee under the EoR concept, there is a significant risk that the Danish Immigration Office will view the constellation as a circumvention and refuse to issue a work permit. In the event of violations of immigration law, the client company may face severe fines and possibly also police investigations.​​​​​

 

Special tax features of the EoR concept

Foreign companies wishing to hire Danish employees to work in Denmark often refrain from hiring them directly in order to avoid the risk of establishing a permanent establishment for income tax purposes in Denmark.

The practice of the Danish tax administration in recent years – based on the OECD's international rules on the avoidance of profit shifting (BEPS action 7) – has solidified to the effect that a permanent establishment exists in Denmark if the employee performs core activities for the foreign company (in this case the client company) and these are not of a preparatory nature. If the employee is to work from his Danish home office, this may already constitute a fixed establishment within the meaning of the double taxation rules. In particular, according to the practice of the Danish tax authorities, a fixed establishment does not require the employer to have power of disposal of the employee’s home office.

Art. 15 para. 4 of the German-Danish double taxation agreement (DTA) contains the special rule that the 183-day rule under Art. 15 para. 2 does not apply in the case of temporary employment. In these cases, double taxation is avoided by means of an agreement in accordance with Article 43 of the DTA
  

Conclusion

At first glance, the EoR concept appears to be an effective and simple solution for avoiding administrative obligations in connection with the employment of an employee in Denmark. 

On closer inspection, however, there are uncertainties and significant risks, particularly with regard to the rules on foreign nationals. In our opinion, the risk of a permanent establishment through the employment of a Danish employee cannot be excluded by employing an employee via an EoR. 

Against this background, we recommend that foreign companies considering employing a Danish employee via an EoR carefully assess in advance whether the employment via an EoR - which sounds simple and attractive at first glance - is actually without risk in all legal and tax aspects in the specific individual case.​

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