Foreign companies expanding into Croatia often face a familiar challenge: they need to hire Croatian employees before they are ready to establish a local legal entity. Sometimes, the need is short-term – hiring the first sales or support staff ahead of launching a subsidiary. In other cases, the foreign employer has no intention of opening a branch or company in Croatia at all.
This creates a legal grey area.
Croatian labor law does not allow temporary employment (via agencies or intermediaries) for longer than three years unless specific legal exceptions apply. These exceptions are outlined in Article 48 of the Croatian Labor Act and include:
· Employee changes the position (new Employment Agreement)
- Replacement of a temporarily absent employee
- Project-based work that is co-financed with EU funds
- Other objective reasons permitted by a special law or collective agreement
Importantly, a break of less than three months does not reset the three-year limitation period.
Due to this restriction, some foreign companies resort to “outsourcing” as a workaround. In such arrangements, the outsourcing company formally employs the individual, but the person works full-time under the direction and control of the foreign client. In practice, this often constitutes disguised employment, carrying legal risks related to both labor law compliance and tax liability.
What is an Employer of Record (EOR)?
An Employer of Record is a third-party organization that legally employs an employee on behalf of another company. While the client company manages the day-to-day tasks, the EOR handles employment contracts, payroll, tax contributions, social security, and compliance with local labor laws.
In Croatia, using an EOR ensures that:
- The employment relationship is fully compliant with Croatian regulations
- Social contributions and taxes are properly paid
- Employees are protected under local labor law
- The foreign company can operate without a local entity during the transition period
Outsourcing: What It Is – and What It’s Not
True outsourcing refers to delegating a specific task or service to a third party, such as IT support, logistics, or customer service, with minimal control over individual Employees. The provider delivers a service, not labor.
However, in many cases involving foreign companies in Croatia, so-called outsourcing resembles employee leasing. The foreign company determines the Employee’s tasks, working hours, and performance evaluations. This degree of control can trigger regulatory scrutiny, as it contradicts the definition of a service contract and may be classified as illegal labor leasing.
The Croatian Legal Framework
Croatia strictly regulates temporary employment and agency work. Article 48 of the Labor Act specifies that temporary assignments must be:
- Time-limited (maximum three years)
- Based on legal grounds such as maternity cover or EU-funded projects
The Labor Inspectorate may interpret disguised outsourcing as illegal employment, resulting in fines or tax audits. Moreover, non-compliant arrangements may expose both the foreign client and the local “employer” to reputational and financial risk.
Why EOR is the Safer Long-Term Choice
Partnering with a licensed Employer of Record in Croatia provides a stable, transparent, and legal framework for foreign companies. It enables international expansion without immediate investment in local incorporation, while maintaining full legal compliance and protecting both the company and the employee.
For foreign businesses testing the Croatian market, launching pilot teams, or waiting on regulatory approvals, EOR offers the ideal bridge between opportunity and compliance.
Final Thoughts: Choose Carefully
The need to onboard Croatian talent before opening a local entity is common – but how you structure that relationship matters. Disguised employment through outsourcing arrangements may seem expedient, but it carries significant legal risks.
Employers should work with legal and HR partners who understand Croatian labor law and can provide fully compliant solutions. An Employer of Record can offer exactly that – a secure and scalable way to build your presence in Croatia, without compromising compliance.
