Employee or Contractor? The Importance of Correctly Categorizing Your Workforce

Atlas Team Profile Photo

Atlas Team

Atlas helps innovative companies like yours to expand, onboard, manage and pay international teams in 160+ countries.

Published: 09 Oct 2023

In the age of globalization, tapping into an international supply of full-time employees and contractors has become routine. But accurately classifying these workers is critical. There are important regulations around company-worker relationships, and these differ between employees and contractors. Not adhering to these rules can land businesses in hot water, and recent high-profile cases—such Uber’s UK Supreme Court case for misclassifying drivers as independent contractors—highlight the risk of getting it wrong. Hefty fines, lawsuits, and reputational damage are all on the line.

Atlas recently hosted a webinar to answer some of the biggest questions companies have regarding compliance and employee categorization. Sharing their expertise were Atlas’ own Anthony Smith and JoHannah Harrington, as well as Aravind Ganesan from inDrive. Read on for insights and clips from the discussion. 

Before we start: Please note that the information in this webinar does not constitute legal advice—if you have specific questions about your business, please seek outside counsel. Or, if you’d like to learn more about how an Employer of Record (EOR) can help your business remain fully compliant when operating internationally, get in touch with Atlas 

Using contractors to your advantage 

Why might a company engage a contractor over an employee in the first place? In Aravind’s role as Senior HR Business Partner (APAC) at inDrive, he’s used to making these calls: “The most crucial thing is for us to know the duration and the type of the project. And the second point will be flexibility and scalability.” He adds that budget is not an issue at this stage. 

Aravind explains how opting for contractors can give companies a head start in new markets, a common practice in the ride-hailing industry. “In such cases,” he explains, “we will always prefer contractors on a temporary basis. Why? Because when we kickstart our activity in [a] country, we will probably know within three to six months as to whether [it’s] going to be a success [...] We can’t be wasting time.”  

Choosing contractors with the right experience level is also vital. “If we’re going to hire a contractor, we need to understand that the contractor is only a short-term commitment [...], and it should be somebody who has adequate experience and can work with minimal supervision.” 

After around six months, it will become clear whether a project has succeeded. If it has, only then will inDrive start looking at establishing a legal entity, registering with the local authorities, and so on.  

What differentiates an employee from an independent contractor? 

So how do you define an independent contractor? JoHannah explains that definitions vary significantly between jurisdictions, making matters more complicated for international businesses. Even within the US, rules can differ between states.  

Checklists can be a helpful tool here. Examples of useful indicators include:  

  • Autonomy: Does the individual control their daily activities and hours, or does the company dictate these? 

  • Exclusivity: Can the individual serve multiple clients at any time or only one organization? 

  • Payment structure: Is the individual paid a salary, an hourly or daily rate, or is compensation linked to deliverables? 

  • Contract duration: Does the worker’s contract span an indefinite or specific time?  

Independence is the critical factor here. Contractors are less likely to have job titles, company email addresses, supervisory responsibilities, equipment, etc. They can usually work for multiple clients, have flexibility around where and when they do their work and are generally paid by deliverable or on a specific rate. The absence of benefits and vacation time are also typical of independent contractors, but they will often receive higher pay in return.  

The legal risks of misclassifying workers 

The repercussions of misclassifying workers can be severe. “What you’re looking at is all of your back pay for those individuals,” JoHannah explains. “So, all the benefits those folks didn’t receive because they weren’t treated as an employee on the books. You’d also have to pay all the back taxes for those individuals and most likely gross up their salary in order to reach where it needs to be for the individual dependent on that jurisdiction. There might be some equity considerations and other issues that arise in that regard.” 

“There are also penalties sitting at the government level. If you’ve misclassified an individual as an employee, you’ve also then failed to pay taxes as an employer for both the employee and the company. You have failed to register your entity compliantly with the local jurisdictions (if you even have an entity in the jurisdiction). So you’ve probably got some permanent establishment risk, and you’ve also got fines and penalties associated with that company in the jurisdiction itself.” 

Matters become worse if patterns of misclassification can be found, as these often lead to class action lawsuits and the most substantial fines: “This happens when a number of independent contractors at an organization band together and file a suit against a company for the misclassification” explains JoHannah.  

What to do if you find yourself at risk of misclassification 

To help illustrate the importance of avoiding employee misclassification, JoHannah shares two recent cases. 

First, she details one Atlas client’s proactive approach. The client realized a number of individuals they’d hired as independent contractors were now being treated as employees. Atlas swiftly took action. “Atlas, of course, was more than willing to help.” JoHannah says. “We understand the misclassification risk and concern, we have our own checklist to make sure we don’t have that.” When you use an EOR like Atlas, we assume all liability as your team members’ legal employer in a jurisdiction to ensure you always comply with local regulations. 

By taking this corrective step, the company avoided potential fines, penalties, and legal challenges.  

What happens when a company doesn’t get it right 

JoHannah’s other example underlines the potential repercussions of not exercising prudence in worker categorization. “The less positive example I have is Nike. A recent article came out suggesting that Nike might be fined upwards of $530 million for misclassifying thousands of workers.” 

Nike’s workers had equipment and titles and were only allowed to work for Nike. This misalignment with proper independent contractor status could lead to significant penalties: “What they’re facing are tax authority fines. Regulatory fines because of the failure to pay taxes on behalf of these individuals, and the failure to pay taxes to the government as a company.” 

How an Employer of Record (EOR) can eliminate the risks of misclassification 

Whether you operate internationally or not, ensuring you accurately categorize your workforce is critical. Our webinar highlighted the legal risks and real-world consequences of misclassification—and the more geographies you operate in, the more complex matters become.  

But this shouldn’t discourage businesses from exploring new markets and making the most of a global talent pool. With the guidance of an Employer of Record such as Atlas, companies can confidently navigate global workforce challenges while remaining compliant.  

Get started today