Independent contractors and the companies that hire them are under more international scrutiny than ever before. In the last several years alone, there have been notable examples of governments levying severe punishments on corporations that misclassify workers. While there certainly are some companies knowingly disregarding these regulations, the majority simply don’t know how to navigate the subtle nuances that determine classification across countries properly.
The temptation for companies to classify employees as contractors poses a dangerous risk. The allure of substantial savings on benefits like vacation days and pension contributions by classifying employees as contractors might seem a massive opportunity, but in reality creates a substantial liability that, in the end, exposes a company to even more risk.
Most countries have regulations that favor the worker. The U.S. is perhaps the most notable exception, which makes it that much more important that U.S.-based employers operating internationally approach employee classification with diligence. Those found guilty of misclassification can be subject to significant penalties, which vary country by country but generally mandate that companies pay back wages, unpaid employment taxes, entitlements, compliance fees, and interest on incurred costs.
The definition of an independent contractor varies by country. Still, there is a universal tenet on which to base any assessment of a worker: Independent contractors are, by nature, separate from the traditional employer-employee relationship. To classify a worker as a contractor, an organization needs to demonstrate that it has afforded a worker the latitude to accomplish a task without specific instruction, unlike an employee, who is obliged to complete a task with more oversight from the employer. There are also relatively consistent criteria on the type of work a person is doing and whether a worker is free to perform other duties or work outside of what an employer has assigned them.
As companies evolve and strategic objectives transcend borders, the constant state of unpredictability associated with the global economy and entering foreign markets can easily ensnare those unable to adapt quickly and stay current. It’s a monumental task and often leads to several common compliance missteps. Let’s assume, then, that a U.S.-based company with no international expertise wants to expand its presence into just one foreign market. Here are a couple of the most common mistakes its executives might make:
Fortunately, there are a few simple steps companies operating in foreign markets can take to get a baseline assessment of how they classify workers. Every company should conduct regular self-assessments that can be simplified into three core areas: behavioral controls, financial controls, and an evaluation of the nature of the relationship between an individual worker and the employer. While this framework should never be the only tool by which companies conduct workforce assessments, it can answer basic questions about whether a company is compliant in its classification of workers.
This self-assessment can be answered with three easy questions:
If the answer to any of these questions is ‘yes,’ that worker is an independent contractor by most countries’ standards. For future process control when considering adding support from independent contractors, every company should take these additional steps to mitigate noncompliance:
With this basic framework and internal steps that formalize the process by which workers are classified, and their status monitored, companies can significantly reduce the risk of severe penalties.
