Efficient contracting: the key to a successful client–PEO–employee relationship

Minu Dwivedi
JSA Advocates & Solicitors, Gurugram, Haryana
minu@jsalaw.com

Shreya Chowdhury
JSA Advocates & Solicitors, Gurugram, Haryana
shreya.chowdhury@jsalaw.com

Introduction

In a socio-culturally diverse country like India, navigating the labyrinth of labour laws can be a challenge, especially for small-scale businesses and foreign companies that are exploring the market to test the waters before setting up shop in India. For these businesses, professional employer organisations (PEOs) are a boon! They can readily commence business operations anywhere, with the help of instant plug-and-play options in terms of infrastructure and highly skilled talent, and without the burden of establishing an entity, setting up an office, undertaking corporate compliance or employer-related obligations.  

Although PEOs have been in existence since the 1980s, the dynamics between businesses, ie, clients and PEOs, have evolved over the decades to cater for the industry’s changing needs. PEOs are increasingly providing tailor-made services to their clients, ranging from basic payroll to more specialised services, such as training related to the prevention of sexual harassment, anti-corruption, global mobility services and translation services, and so on. Clients have the flexibility to choose the services they wish to avail, based on the budgetary constraints and business-specific requirements. The size of certain PEOs enable them to leverage economies of scale and to negotiate with insurers to provide better insurance benefits. This advantage helps to provide lucrative compensation packages and, ergo, attract and retain talent.

While there are numerous merits to engaging a PEO, there are some inevitable challenges. For instance, a common problem faced by individuals engaged through PEOs is justifying their work experience and the work they undertook for the PEO’s client, in the absence of an experience certificate issued by such client. Although the individuals technically work for the business benefit of the clients and are a part of the clients’ teams (in essence and in terms of day-to-day work matters), their employment contract remains formally with the PEO. This dual facet also brings confusion for these individuals, as they are bound by two sets of employment rules, one for the PEO and the other for the client. To create a win-win situation for all the parties involved, PEOs may consider issuing relieving and/or experience letters using their letterhead, wherein the kind of work the concerned individuals have specifically undertaken for the PEO’s clients is clearly stated. This will help retain better talent as the individuals will be able to demonstrate their work experience and build their work profile effectively.

An effective contractual working arrangement

For a PEO–client–individual arrangement to work seamlessly and to minimise the potential risks of employment, as well as other claims, it is crucial to carefully draft and structure contracts between the parties. The contract between the client and PEO should have provisions clearly demarcating the rights and obligations of all the parties with respect to the individuals hired by the PEO for the client. While the PEO is responsible for undertaking all the legal obligations of the employer, be it statutory or contractual, the client should have the right to inspect and inquire as to whether the PEO is undertaking such duties correctly, regularly and on a timely basis. Such a practice will put in place checks and balances to ensure that the employer’s obligations are being duly undertaken and the individuals are getting their rightful due. This will go a long way to mitigating the potential reputational risks for the client, if not the monetary risks (which can be otherwise protected contractually). Reputational risk becomes an important concern when evaluating the overall risk, in the case of an employment-related dispute. For instance, if a dispute arises, an aggrieved individual who works more closely and identifies their work with the PEO’s client may disparage and file claims against the material beneficiary of the services and not their actual employer on record.

From a contracting perspective, another key element that should be clearly stated is the ownership and assignment of intellectual property rights. It is paramount to accurately capture the flow of intellectual property rights to ensure that the ultimate ownership of rights in the work produced by the individuals hired by the PEO lies with the client. This can be achieved in different ways. For instance, appropriate language can be incorporated into the contracts to the effect that all the intellectual property rights in the work created by the individual in the course of their employment is assigned to the PEO, which is further assigned by the PEO to the client. Alternatively, a tripartite intellectual property assignment agreement can be executed between the parties, wherein the individual directly assigns the intellectual property rights to the client and the PEO confirms that it has no objection to such assignment.

For symbiotic relationships, such as PEO arrangements, to be successful and mutually beneficial for all parties involved, transparency and clarity are vital. The harmony between the inter-party relationships vis-à-vis their individual roles is often lost due to vague and incoherent terms in multiple contracts. As a result, it is not uncommon for the actual relationship between the parties to be misrepresented on paper. This could be of concern and a red flag in a global transaction involving the PEO’s client, when a potential buyer or investor is evaluating its overall business. Thus, the clauses in the contracts should be cogent to comprehensively reflect the intent and actual practices of the parties.

While PEOs are the employers on record for the individuals hired on behalf of their clients, they also have their own set of employees who work for them. Technically, the PEO is the common factor and the ‘employer’ of both types of employees. However, the relationship with the two sets of individuals is completely different. Therefore, the same employment agreement template for the PEO’s own employees should not be used for the individuals hired for the PEO’s client. It may also be worthwhile to get the client’s input (not limited to the pay scale and job role) on the overall contract to ensure that it not only includes adequate terms and conditions of employment, but also captures the ethos of the client’s expectations.

Clauses that are otherwise practically redundant and do not apply to the engagement should be avoided. For example, the individuals hired via PEOs are selected by the PEO’s clients. If a client decides to terminate the engagement with a particular individual, the PEO will have no say in the matter and proceed with the exit process. It is highly unlikely that the PEO will transfer the individual to another client. Therefore, incorporating a clause stating that the PEO will have the right to transfer an individual to the PEO’s affiliates or clients may not be relevant and can be avoided.

Conclusion

With the exponential increase in remote working opportunities, contemporary work arrangements such as the engagement of PEOs have become more relevant than ever. To optimise the benefits of such arrangements, contracts should be carefully drafted to ensure that the rights and obligations of all the parties are clearly established, without any contradictions in the inter-linked and multi-layered documentation, while ensuring that the provisions are within the confines of the law.