PEO and Employer of Record in Spain: Risks and Alternatives

An Employer of Record is a local entity that formally hires a worker on behalf of a foreign company. The EOR signs the contract, processes payroll, and handles the administrative procedures with Social Security. In practice, however, it is the client company that directs the day-to-day work, organizes the tasks, and benefits from the worker's activity — not the EOR.

In short: the CJEU ruling does not make the EOR model legal. It only clarifies when a European worker-protection directive applies, but it does not say that these structures are valid under Spanish or French law, which remain very restrictive when it comes to the assignment of workers.

What does PEO mean in Spain?

PEO usually means Professional Employer Organization. In the United States it often describes a co-employment arrangement; in international hiring, providers may use PEO and Employer of Record interchangeably. Spanish law does not validate a structure because of its marketing label. It looks at who employs, organizes, directs and receives the worker’s services.

A provider that supplies genuine payroll or HR administration while the Spanish employer keeps the employment contract is different from an entity that formally hires a person who works permanently under the foreign client’s instructions. The second structure requires a case-by-case review under article 43 of the Workers’ Statute and the Temporary Work Agencies Act.

StructureWho is the employer?Main Spanish-law questionPayroll/HR serviceThe client’s Spanish entityIs the provider delivering an administrative service rather than supplying labour?EOR marketed arrangementThe provider on paperWho actually directs the work and bears the employer functions?Authorised ETT assignmentThe temporary work agencyDoes the assignment fit the statutory framework and permitted circumstances?Direct hire through subsidiary or branchThe local employing entityAre payroll, tax, Social Security and corporate obligations in place?

When does a PEO or EOR arrangement become risky?

Risk increases when the provider contributes little beyond the contract and payroll, while the foreign client selects the person, sets working time, gives daily instructions, integrates the role into its organization and controls performance. No single label or contract clause decides the issue; the operating reality matters.

Before hiring, document the intended reporting line, duration, workplace, equipment, disciplinary powers, occupational-risk responsibilities, intellectual-property terms and the reason for using the structure. Compare the arrangement with direct registration, a Spanish entity, an authorised temporary-work route or a genuinely outsourced service with its own organization.

What is an EOR model?

An Employer of Record is a local entity that formally hires a worker on behalf of a foreign company. The EOR signs the contract, processes payroll, and handles the administrative procedures with Social Security.

In practice, however, it is the client company that directs the day-to-day work, organizes the tasks, and benefits from the worker's activity — not the EOR.

That separation between who "formally" hires and who "actually" directs the work is what creates legal problems in both Spain and France.

What did the CJEU ruling C-441/23 say?

On October 24, 2024, the Court of Justice of the European Union ruled on a case involving a worker who provided services to a company different from the one that formally appeared as her employer.

The Court examined whether this situation fell within the scope of Directive 2008/104/EC, which protects workers assigned through temporary work agencies. To decide, it looked at the reality of the employment relationship:

• Who actually controls and directs the worker.
• Whether there is a genuine assignment to a user company.
• Whether there is a real "placement" of services with another company.

One point drew particular attention: the Court clarified that the Directive can apply even if the entity assigning the worker is not formally authorized as a temporary work agency. This led some to believe the ruling "opened the door" to EOR models in Spain.

Does this mean the EOR model is now legal?

No. And this is exactly where the confusion created by the ruling lies.

The fact that a situation falls within the scope of the European Directive only means that the worker is entitled to certain minimum protections. It does not mean that the model used to hire them is valid under Spanish or French law.

The Directive aims to protect workers, not to determine which assignment structures are legal in each country. Each Member State retains its own rules on when a worker can be assigned to another company, and those rules are what truly determine whether an EOR is viable.

How does Spain treat the assignment of workers?

Spain takes a particularly strict approach in this area. The assignment of workers is only permitted through authorized temporary work agencies (ETTs), and only for temporary hiring with a specific justified cause.

Article 43 of the Workers' Statute is the key provision. It does not expressly define "illegal assignment," but it does set out the criteria used to identify it:

• Who actually organizes the work.
• Who directs the worker on a day-to-day basis.
• Who directly benefits from their activity.

If the client company fulfills these three functions while the EOR merely signs the contract and processes payroll, the structure closely resembles an illegal assignment of workers.

In addition, EOR models are often used to cover stable or permanent positions, while in Spain even lawful assignment is limited to temporary needs. This makes the model even harder to fit within the legal framework.

What about France?

France is also restrictive, though in a somewhat different way. Unlike Spain, it does recognize certain specific cases where assigning workers is lawful: non-profit temporary assignments between companies, temporary work-sharing companies, and the so-called "portage salarial."

Outside these cases, Article L.8241-1 of the French Labor Code prohibits any for-profit operation whose sole purpose is to place personnel at another company's disposal.

The key difference from Spain is that French law relies on more objective criteria: whether there is a profit motive and whether the sole purpose is placing personnel, with no additional room for interpretation. This leaves even less room to legally justify an EOR model in France than in Spain.

What are the risks if it is deemed an illegal assignment?

In Spain

• Administrative penalties for a very serious infringement.
• The worker may be automatically registered with the client company as their real employer.
• Retroactive claims for Social Security contributions.
• Retroactive enforcement of labor obligations.
• An additional risk that a permanent establishment may be deemed to exist for tax purposes.

In general, these consequences fall within the labor and administrative sphere, although in serious cases of labor exploitation or fraud, criminal liability could also arise.

In France

Here, the criminal risk is much greater. A poorly structured EOR model can trigger several offenses at once:

• Illicit lending of labor ("prêt de main-d'œuvre illicite").
• "Marchandage" (fraudulent for-profit labor intermediation).
• Undeclared or concealed work ("travail dissimulé").

Penalties can include substantial fines, imprisonment, a ban on public procurement contracts, and even the closure of business premises. There is also a particularly sensitive additional risk: the conviction may be published on the French Ministry of Labor's website for two years.

What alternatives exist for expanding into Spain without risk?

• Setting up your own subsidiary or branch, with a genuine corporate presence in Spain.
• Acting as a non-resident entity with a legal representative, without needing to create a new company.
• Hiring through a duly authorized ETT, when the case fits a temporary, justified scenario.

How Navarro Tax & Legal can help

At Navarro Tax & Legal (NRRO), based in Barcelona, we analyze whether your international expansion model fits within Spanish and French regulations, assess the labor, tax, and criminal risks of EOR structures, and support you in designing safe alternatives such as setting up a subsidiary, acting as a non-resident, or using authorized ETTs.

If you're considering expanding into Spain or France and want to do it without legal surprises, get in touch and we'll review it with you.