Are Your Independent Contractors Independent? Complying with Global Employee Classification Rules
Companies use independent contractors for their unique skills or short-term projects. Staffing flexibility and fast access to in-demand skills, increasing overall efficiency, productivity and competitiveness in the market make hiring an independent contractor (IC) an attractive option.
Employers want to ensure they treat their ICs as contractors, not employees, during their engagement. Labor laws around the globe apply to any worker who qualifies as an employee. Failure to comply could result in fines, penalties and a loss in credibility as an employer.
Employees vs. Independent Contractors
Businesses hire employees because they have control over how and when work gets done. The ability to supervise and direct employees in day-to-day operations can be crucial for efficiency, quality assurance and cost control. Good employees also can become valuable long-term assets.
ICs are useful for short-term, one-off projects or something that requires a specialized skill the company doesn’t need for the long term. Companies often develop relationships with ICs and engage them for other projects. ICs cost less than employees because employment and payroll laws don’t apply to them.
A person working under a contract for services is not protected by labor law, so companies don’t have to comply with laws that apply to employees. They don’t have to worry about:
minimum wages or salaries,
social security benefits, or
As such, hiring ICs rather than employees can be appealing, especially for companies seeking to control costs due to a tepid economy or to facilitate company growth.
But it’s not hard to step over the line between the two and treat contractors as employees. A company may not be able to point to contract terms to prove a contractor is independent if it has required the contractor to report to a manager. Employers and HR departments need to understand what makes an employee an employee.
Some people contract with companies through a professional service corporation they own instead of as an individual. Or they may be more flexible with contract arrangements because they do not want to be employees, often for tax reasons. However, contracting with a worker through their professional service corporation does not guarantee the worker is not an employee. Labor laws control when a person is an employee, not contract terms. Companies that hire ICs want to make sure those contractors are treated as contractors, not as employees.
Employee Classification for Global Employers
When going global, companies must be clear about the nature of work arrangements they make with ICs. In many countries, labor laws require companies to make sure the people they hire or engage are not misclassified employees. This means a company that uses ICs must respect the independent nature of the work defined by the scope of the services contract and treat ICs as contractors. A company that treats its work relationship with an IC as it would an employee runs the risk of having misclassified the IC.
Another way to view the issue is that companies engaging ICs avoid labor law compliance by making sure that labor law doesn’t apply to their ICs. In most countries, the existence of a services contract is not enough to avoid labor law compliance.
Typically, a person working for a company is an employee when the company controls and directs the worker on a day-to-day basis. If an employer wants to ensure a worker is an IC, the answers to these questions should be “no.”
Does the company have control over daily matters such as process, discipline, or work rules?
Do you set the work schedule and work hours? • Do you provide a workplace, supplies and support staff?
Do you pay for vacation, sick leave or benefits?
Do you include a non-compete clause in the contract or prevent the worker from providing services to other clients?
Do you bear the risk of profit or loss for the worker?
A worker may be an IC even if some of the answers are yes, but employers should look at the overall work relationship. Common themes of an employment relationship are:
the amount of daily control a company takes over how and when the work is performed,
the ability to restrict the employee from working for others, and
the structure of compensation.
Fines, Penalties & Costs of Misclassifying an Employee
If an IC challenges its relationship with a company and the IC is found to be an employee, the company most likely will be held liable for employee misclassification. Misclassified employees can cost a company far more than typical employee compliance costs.
Depending on the country, a company may be required to pay:
fines and penalties,
back wages if the employee received less than minimum wage,
back social security contributions for both the employee and the employer, plus interest,
back income withholding taxes plus interest, and
penalties for failure to file tax returns and pay taxes.
Most employers don’t engage ICs to avoid complying with laws that protect employees or social security rules and contributions. However, if misclassification is found to be intentional or fraudulent, an employer will face hefty fines and penalties, including criminal fines and possibly prison.
Employment Relationships Around the Globe
Uncertainty about whether a worker is an IC usually results in the worker being classified as an employee. Labor law protects workers.
Almost every country has crafted unique factors under their labor laws for classifying people as employees, but those laws don’t have a simple test that draws a clear line between employee and IC. Correct classification of a worker as an employee requires an analysis of the working relationship. Most countries have factors to consider in that analysis that often come from their judicial law.
Legal classification of a worker in a dispute can be complex. However, companies can avoid disputes by learning the basics behind the factors. If ICs perform their work independently within the scope defined by the contract, they should remain ICs.
Cutting Through the Confusion
Contracting for work as an independent worker predates modern labor laws and influenced what labor laws and their protections for workers look like today. But, despite decades of labor protections, confusion around the difference between an employee and an IC continues.
French law gives freelancers the choice of labor law protection by permitting companies to organize as a société de portage salarial (wage company) to employ freelancers and work as an intermediary for freelancers when they contract their services. But most countries leave managing an independent contract services arrangement to the company and the contractor.
Companies should be confident that engaging ICs rather than hiring employees will meet their business objectives. The work needed should be clearly definable, and the worker providing the services should have the necessary skills and experience to complete the work within the contract deadline. If cost is the issue, companies can look at other alternatives for hiring employees.
Don't let potential misclassification risks undermine your business growth. Ensure your company is on the right side of global labor laws and build a more sustainable, compliant, and efficient workforce.
Download our "Are your Independent Contractors Independent" whitepaper now and unlock the full potential of your global workforce.