Employer Of Record Arrangements: An Overview Of The Overlooked Intellectual Property Implications

Employer of Record ("EOR") services have become increasingly popular among businesses seeking to expand internationally, access global talent and navigate complex employment regulations without the need to establish a local legal entity. EORs act as the legal employer for workers, handling payroll, compliance and HR administration, while the client company retains operational control over the work performed and directs the worker's day-to-day activities and deliverables. However, a critical risk is often overlooked: intellectual property ("IP") ownership. Many clients inadvertently assume that IP created by EOR-hired talent automatically belongs to them because of their arrangements with the EOR. In reality, this is not always the case, and the issue is particularly complex in jurisdictions such as South Africa, where IP laws and exchange control regulations must be carefully considered.

The IP gap

In a traditional employment relationship, the issue is a straightforward one: the company employing the individual owns the IP created in the course and scope of employment, either by operation of law or under contract. For contractors, IP ownership must be explicitly assigned, as the default position is that the contractor retains such rights, irrespective of paying for the work - save for a few specific forms of copyright works in South Africa - a common misconception under South African copyright law. In EOR scenarios, the EOR is the legal employer, not the client. Therefore, unless the EOR contract or a separate agreement includes robust IP assignment clauses and there is a clear link transferring ownership between the 3 parties - being the client, worker and the EOR company, the EOR may be the first owner of any IP developed by the worker and not the client¹. It is also often not practical for the worker to assign the IP directly to the client in EOR arrangements as the client is not a party to the engagements between the EOR and the worker.

Risks and consequences

Ambiguity over IP ownership can have severe consequences, particularly during investment rounds or mergers and acquisitions. Investors and acquirers routinely scrutinise IP ownership as part of IP due diligences, with the aim to ensuring that the chain of ownership IP for the target company is intact. Any uncertainty can delay deals, reduce valuations, or even

Cross-border EOR arrangements add further complexity. In South Africa, the South African Reserve Bank ("SARB") regulates the transfer of IP out of the country, and approval may be required for such transactions. For example, an American tech company using an EOR based company in South Africa, may face hurdles if the IP assignment is not recognised under local law, or if regulatory approvals are needed to transfer IP from the EOR to the American tech company, out of South Africa.

Real-world examples demonstrate the significant risks that unclear IP assignments pose to start-ups, particularly when engaging contractors, freelancers, or using EOR arrangements. For instance, start-ups have experienced substantial delays in securing venture capital funding because they could not provide clear evidence that all contributors, whether created by employees, contractors, or EORs, had properly assigned their IP rights to the company. In some cases, investors have paused or withdrawn from deals entirely when due diligences revealed gaps in IP ownership, forcing companies to renegotiate contracts or pay additional sums to secure retrospective assignments.

What can be done to mitigate the risks?

• Identify red flags: Review current EOR contracts for missing or ambiguous IP assignment clauses, and check for inconsistencies between South African law and contract terms.
• Restructure contracts: Ensure that both the EOR agreement and the employment contract with the worker include clear, enforceable IP assignment provisions and close the gaps in the chain of ownership. Check for appropriate undertakings and warranties to ensure that where a direct assignment from the worker to the client is not possible, there are suitable obligations to do the necessary to transfer ownership.
• Consider Exchange Control issues: Where IP is created locally but intended to be owned offshore, assess whether South African laws require approvals for IP transfers and plan accordingly. The SARB's approval is be necessary for the transfer of IP out of South Africa.

For EOR businesses, clients will often seek comfort that they have taken the appropriate steps to secure the ownership of IP from workers. Therefore, similar assessments of the above risks should be done by EOR businesses to ensure that they can meet their client's expectations and to ensure that they are SARB compliant, as the assignors of such IP.

In today's knowledge- driven economy, IP is one of the most strategic assets a business can hold. Failing to secure such rights in EOR arrangements can expose businesses to legal and financial risk, undermining the value that such structures are meant to protect. Getting EOR IP structures right is not a mere matter of compliance – it is a matter of safeguarding innovation, competitive advantage and long term business value.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.