Group employment models in Iraq often blur the question of who the employer is. In a group with several Iraqi entities, a foreign parent and regional affiliates, an employee may sign a contract with one company, be paid by another, work under the supervision of a third and have residence sponsored by a fourth. Such arrangements arise for practical reasons, such as shared services, project allocation or payroll convenience, but they create uncertainty about which entity bears employer obligations. When a claim arises, a labour inspector visits or a business is sold, that uncertainty becomes a liability.
Identifying the employer clearly, and aligning contract, payroll, supervision and sponsorship, reduces risk and supports compliance.
The Labour Law No. 37 of 2015 defines employer and employee relationships and the obligations of employers. The Workers Retirement and Social Security Law No. 18 of 2023 requires the employer to register workers and pay contributions. The Income Tax Law No. 113 of 1982, as amended, requires the employer to withhold tax. The Residency Law No. 76 of 2017 links foreign workers’ residence to sponsoring entities. The Companies Law No. 21 of 1997, as amended, recognises each company as a separate legal person.
Indicators of the employer in group employment models in Iraq
Several indicators point to the employer:
- The entity that signed the employment contract.
- The entity that pays wages.
- The entity that directs and supervises the work.
- The entity that can discipline and terminate.
- The entity registered with social security and withholding tax.
- The entity sponsoring permits for foreign workers.
When these indicators point to different entities, authorities and courts may treat more than one as the employer, or choose the one most connected to the work.
Risks of misalignment
Misalignment can lead to:
- Claims against several entities for the same entitlements.
- Social security contributions paid by the wrong entity or not at all.
- Payroll tax withheld under the wrong file.
- Work permits that do not match the actual employer, risking violations.
- Difficulties in transactions when the buyer cannot identify which entity’s employees it is acquiring.
- Tax issues if costs are borne by one entity for employees working for another.
Aligning the model
The simplest solution is alignment: the entity that benefits from the work signs the contract, pays wages, registers for social security, withholds tax and sponsors permits. Where shared employees are necessary, arrangements should be documented through secondment or shared services agreements, with clear allocation of costs and responsibilities.
Secondments within the group
Where an employee of one entity works for another, a secondment agreement should define the host’s direction, the employer’s continuing obligations, cost recharges and immigration responsibilities. Permits should reflect the actual work arrangement. Employment law advice in Iraq can assist with secondment structures.
Shared services
Central functions, such as finance or HR, may serve several entities. The employing entity should recharge costs under a documented services agreement. Tax advisory services in Iraq can advise on recharge arrangements.
Transactions and restructurings
Before selling or restructuring an entity, the group should confirm which employees belong to it and resolve misalignments. Buyers will expect clarity.
Common mistakes
- Contracts signed by a holding company while staff work for operating companies.
- Payroll run centrally without allocation to employers.
- Permits sponsored by an entity that does not employ the worker.
- Social security registration under a different entity from payroll.
- No secondment or service agreements for shared staff.
Practical checklist
- Map each employee’s contract, payroll, supervision, social security and sponsorship.
- Identify misalignments.
- Align employer functions in a single entity where possible.
- Document secondments and shared services.
- Correct social security, tax and permit records.
- Review before transactions or restructurings.
Employer of record and payroll service providers
Some foreign companies use employer-of-record providers or local payroll service companies to employ staff in Iraq. These arrangements can be useful but carry risks. The provider is the legal employer, but the client directs the work and may be treated as the true employer by the authorities or courts if the arrangement is not genuine. Clients should check that the provider is properly registered, holds the necessary licences, registers workers for social security and withholds payroll tax. The contract with the provider should allocate responsibility for compliance, include audit rights and provide indemnities. Clients should also consider whether the activities of staff employed through the provider create a taxable presence for the client in Iraq.
Documenting the model
A short written description of the group’s employment model, identifying each entity, the categories of staff it employs and how costs are recharged, is a valuable document for audits, transactions and internal governance. It allows the group to explain its structure consistently to different authorities and helps new managers understand who employs whom.
Kurdistan Region
Groups with operations in Kurdistan Region should ensure that their employment model accounts for the Region’s separate regulatory system, including registration of the employing entity in the Region where required.
Illustrative example. A group’s Iraqi holding company employs engineers who work on projects of two operating subsidiaries, while a third subsidiary sponsors their residence. During a labour inspection, the inspector questions why the sponsoring company does not employ the engineers. The group transfers the engineers to the subsidiary that sponsors their permits, documents secondment agreements for work on the other subsidiary’s projects and corrects social security registrations.
Key takeaways
- Group employment models in Iraq can create uncertainty about which entity is the employer.
- Contract, payroll, supervision, social security and sponsorship should align.
- Secondment and shared services agreements are needed where staff are shared.
- Misalignment should be resolved before inspections or transactions.
How Etihad Law Firm Can Help?
Clarifying group employment models in Iraq protects groups from duplicated claims, compliance violations and transaction complications.
Etihad Law Firm advises groups on employment structures, secondments, shared services and related compliance in Iraq.