Everything you need to know aboutHiring Global Independent Contractors

Misclassification

It is very important, when weighing the option of hiring an international worker as an employee or an independent contractor, to be aware of the regulations and labor requirements of the country where your company is hiring them. Hiring independent contractors carries an inherent risk of misclassification. Because your responsibilities to employees are much more substantial than they are to independent contractors, misclassifying an independent contractor can have serious consequences for your company.

Employee and worker classification refers to the status of that worker in the eyes of the local government, i.e., the status of “employee” or “contractor.” Why is classification so important? Because employees are entitled to certain protections and benefits that contractors are not, including minimum wage, vacation, family and medical leave, overtime pay, unemployment benefits, health insurance, workplace protections and termination protections.

Employee and worker classification refers to the status of that worker in the eyes of the local government, i.e., the status of “employee” or “contractor.” Why is classification so important? Because employees are entitled to certain protections and benefits that contractors are not, including minimum wage, vacation, family and medical leave, overtime pay, unemployment benefits, health insurance, workplace protections and termination protections.

It's important to note that, usually, international regulators will determine classification based on action. That means that it doesn't matter if you have a contract between your company and an independent contractor if you treat that independent contractor like an employee. There are various factors that regulators weigh to make that determination, and rules vary by country, but may include:

• Company control over work hours: Employees typically work on a schedule dictated by the company. Contractors, however, can work whenever they want and take as many breaks as they want, so long as they deliver the product or service by the deadline.
• Consistent payments in time and amount: Most employees are paid on a regular basis through a payroll system, through which businesses deduct necessary taxes and make required social contributions. Contractors, however, are paid without tax withholding, usually based on invoices. If your company makes consistent payments in time and amount to a contractor, it's likely a regulator will see such act as treating the contractor as you would an employee.
• Location: Requiring a contractor to work in a specific location, like your company's offices, appears to regulators that your company is treating the contractor like an employee.
• Equipment: Employers will often provide resources and equipment for employees to do their work, like computers, cell phones, software, subscriptions, and other tools. Contractors, on the other hand, use their own equipment and subscriptions purchased at their own expense.
• Assigning vital work: In many countries, if a worker provides a services that is considered “vital” to the business, they are most likely to be an employee. On the other hand, contractors are often used for supplementary services. Assigning vital services to contractors may lead to a misclassification issue.
• Length of contractor use: In many countries, a worker may be correctly classified as a contractor at first, but become an employee if the engagement with the company continues beyond a certain period of time. Workers often cannot sign multiple fixed-term independent contractor contracts with the same employer, for example. Instead, the company must either terminate the contractor relationship at the end of the fixed term, or offer them an indefinite employment at the company.

The list above only provides a few examples and is not comprehensive. What happens if a regulator determines that you've misclassified an independent contractor?

• Legal issues: Your company may be subjected to lawsuits both from the local regulatory authority, the contractor, or other groups or individuals harmed by misclassification.
• Back Wages and Benefits: Your company may be required to compensate workers for lost wages and benefits that resulted from misclassification. I.e., if regulators find that the contractor should've been classified as an employee, you will be required to make that person whole by providing employee benefits from the date the regulator finds that they were misclassified as a contractor.
• Penalties and fines: Finally, you will likely be liable for back taxes and social benefits associated with the contractor's misclassification, along with associated penalties for paying those taxes and benefits late.

There are hidden costs to misclassification as well. Workers who learn that they should've been compensated as employees instead of contractors may take an unfavorable view of the company. Some workers may even stop working with the company and tell others to avoid it. You don't want your company to be known as one that deprives workers of legally-required benefits and security, even if you made an honest mistake. The negative connotations can harm your company's ability to compete.

Government Audits

Government audits can be random, in which regulators will seek to determine whether your company is legally operating in-country, whether you've misclassified independent contractors (See Section 1), etc. If your company is considered by the local in-country labor regulators to have misclassified a worker, your company runs the risk of an audit resulting in heavy fines and remunerations due both to the contractor and the local government.

Less Control

With full-time employees, your company can effectively oversee their day-to-day work and activities. However, you cannot exert the same level of control over independent contractors' work, and if you try to, it may mean running the risk of treating them as a company employee (even if there is a clear independent contractor agreement between the individual and the company).

Independent contractors can decide certain factors, such as work hours and equipment. Throughout the world, governments have instituted legislation to protect independent contractor autonomy. So, know that if you're going to utilize independent contractors, you will have far less control over their work schedule and product than what you're used to with standard employees. Further, if you try to circumvent this lack of control by treating them like standard employees, your company will be at severe risk of misclassification (see point 1) and all of the consequences that come along with it.

Remove Risk with a Global Employer of Record

Your company can avoid the risks that come along with the decision to hire international employees or independent contractors. A Global Employer of Record (“EOR”) like Listo Global will hire the desired individual on your behalf, properly classify that person, and take on the risk associated with employing that person in-country. You provide them their day-to-day instructions without the weight of risk hanging over your company.

To learn more about EOR services, email ready@listoglobal.com.