Techniques are disclosed herein for providing an agent for implementing layer 2 (L2) communication on a layer 3 (L3) underlay network. In one embodiment, an agent in virtualization software determines a newly available network address of a VM, configures a network interface of the L3 network to be associated with the network address such that network traffic for the network address is directed to the network interface, adds a route to a virtual router in the virtualization software indicating the VM is local, and adds a router to an address resolution table to associate the network address with a MAC address. This permits a packet sent from one VM to another VM to be processed by the virtual router based on routes therein and forwarded to the other VM either internally or using the L3 underlay network.