Contractor Versus Employee: Important Considerations
Contractor or employee? It’s an important decision for business, especially when looking to expand internationally.
Generally, hiring contractors costs less since your company does not need to pay benefits. Independent contractors are also a good choice for organizations wanting to expand, but unwilling to invest in employees until they test the new overseas market and talent pool.
Hiring independent contractors without registering an in-country corporate presence or payroll can make sense for many businesses. When handled properly, it simplifies the hiring process and reduces expenses.
However, companies need to consider these factors before deciding whether they should hire an independent contractor versus an employee and how they should go about the hiring process.
No At-Will Employment
At-will employment doesn’t exist in many regions outside of the U.S. Consequently, employers usually can’t terminate workers without reason. In some regions, terminations have consequences even with cause. Subsequently, businesses need to mitigate their risk when hiring and firing abroad.
Failing to address local labor laws can lead to unexpected, steep expenses for termination of what is considered a straightforward work agreement in the U.S.
The Alternative Workforce Offers Advantages
The traditional employer-employee relationship has given way to a new paradigm that can offer employers more flexibility, a larger talent pool with advanced skills, and cost savings. According to Deloitte’s Global Human Capital Trends survey, half of all companies now have a significant number of contractors on their workforce.
Nonetheless, many companies don’t realize the employee versus contractor distinction may differ between countries and even regions. International hiring does not adhere to the rules and regulations of the host country.
Contractor classification can be legally risky and the status of independent contractors is also constantly under attack in the courts around the globe.
Without a global hiring partner to assist you it can be difficult to manage contractor-versus-employee classification requirements in a cross-border context.
Risks of Misclassification
Each country has unique laws which ultimately determine employment status. Some also rely on a multi-factor test to distinguish contractor versus employee status. These tests vary by area, even within a single country.
Why go to all this trouble? Each region wants to establish whether the individual works with autonomy, or under a company’s rules and work schedule. If it is the latter, these individuals are usually considered an employee and your business must pay the appropriate benefits. Governmental agencies depend on this income to function and strictly enforce compliance laws.
According to international law firm K&L Gates, misclassification outside of the U.S. can trigger additional liabilities besides the categories levied by the IRS such as tax withholdings, social security, unemployment, overtime, back benefits, interest, and penalties.
These additional costs may include:
- Back holidays and back vacation under legal mandates
- Back mandatory benefits such as profit sharing, thirteenth-month pay, mandatory bonus, payments to state housing funds
- Severance pay, notice pay and liability for unfair employment dismissal
- Misclassification fines
Obviously, this makes misclassification a more expensive problem abroad and a more complex problem to resolve, especially if you do not have in-country assistance.
Misclassification claims can arise more often than one might think. Government audits, termination of a contractor agreements, or even whistleblower denunciation can all lead to misclassification claims.
Contracts Aren’t Ironclad
Overseas independent contractor agreements must agree with local law or they’re not worth the paper they’re written on. However, they only lay the groundwork to prove the contractor has autonomy, and are not ironclad.
Local employment laws always override company employment contracts.
If an independent contractor decides to sue your business and wins, they’re classified as an employee and your company is responsible for all the benefits they’re entitled to under the law of the region. Additionally, your company may suffer reputational damage with local and regional authorities.
Mitigate Contractor Versus Employee Risk
In cases where contractor classification is hard to defend, hiring an employee may be a better choice. An international expansion partner can provide expert advice so you can make an informed decision and mitigate contractor versus employee risk.
Should you decide to hire an independent contractor, K&L Gates international law firm also suggests a global expansion partner is a must in some cases. For instance, if your company doesn’t have a registered entity and payroll in the country an experienced partner allows you to hire independent contractors in a foreign country at arm’s length.
You establish a contract with them, they hire the independent contractor under their own payroll, and they also assume the risk. They also understand local law, craft appropriate contracts, and monitor contract work to ensure it remains within contract parameters. This ensures any work they perform on your behalf reflects well on your business.
Your company must consider many factors when hiring in foreign locations in addition to employment laws. Understanding the local market and culture, locating and screening potential workers, and meeting other complicated regulatory demands are just a few.
As a result, a highly-experienced international partner is critical to your success. Fully-immersed local representatives and a core team of seasoned professionals make it possible to overcome your global hiring challenges.
Blueback Global is your international business expansion expert. We offer business expansion advice and services including business set up, recruitment and hiring, global payroll, accounting and reporting, statutory compliance, immigration support, and more.
We’re well-positioned, highly-experienced, and can help you hire abroad affordably and with fewer problems. Contact us for a free consultation and cut through the complications of finding the workers you need for your new venture.
Your business can expand into the international market quicker and more affordably than you might think.