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Employee vs Contractor for International Businesses

By April 4, 2016September 30th, 2020No Comments
Employee vs Contractor for International Businesses

If it’s time to distinguish between employee vs contractor for your international expansion, there are some things you need to consider before making a final decision. Simply put, international hiring goes beyond the rules and regulations that are used to in the US.

International-payroll

The first piece of information to digest is the “at-will” employee is virtually non-existent overseas. Your international employment contracts need to ironcladlad because, from our experience, foreign courts will side with the employee leaving you responsible for pricey, backdated benefits. This rule, as you can think of it, crosses the line into contractor work, which gets increasingly complicated in foreign markets.

You may think it’s best for your firm to hire consultants, freelancers, agents, or temporary workers to expand globally, but you need to be very careful when entering an agreement with contractors in international markets. We’ll get into the details of these difficult arrangements below.

Distinguishing the Difference Between Employee vs Contractor

The first question to answer is: Do you need an independent contractor? Or does it make more sense to hire an employee? The primary difference between the two types of workers is autonomy. An employee plays by your rules and schedule while an independent contract has freedoms.

Five questions cover the general distinctions classifying your worker as an independent contractor and not an employee. If you can answer yes to the following questions, this team member should be safely classified as a contractor:

  1. Do they have authoritative control to perform the work? Meaning, they are free from instruction on the process, free from discipline, free from work rules, free from your supervision and control.
  2. Do they set their schedule?
  3. Do they purchase their business supplies and pay for other expenses related to the work they’re performing?
  4. Do they only receive payment for work completed? For example, you do not provide them with holiday or vacation pay.
  5. Do they market their services to the public and can work with other clients?

The best way to classify a contractor is by drafting a written arrangement that, under the law in your new country, represents an independent contractor relationship.

Risks Associated with Contractor Misclassification

If you’re working with a contractor and they start performing duties that are not autonomous, you as the employer face some serious risks. The biggest issue with hiring contractors overseas is that it’s tough to manage the restrictions associated with this type of relationship. The reason – international employer courts will typically side with the employee, even if there is an established contract in place.

Local employment laws override whatever is in the contract, which means your “contractor” can bring claims for most anything they choose since your foreign contract is silent on all local employment issues.

If your contractor decides to fight their job status in court and wins, they are then classified as an employee. This reclassification means that you are now responsible for all of the benefits entitled to your employees. In global markets, these are vast and not optional, which means it starts to get very pricey for the employer.
Typical benefits for international employees include:

  • Tax Withholdings
  • Social Security Contributions
  • Insurance Contributions
  • Pension Payments
  • Vacation & Holiday Payments
  • Benefits Specific to Your Country, which include Profit Sharing, 13th Month Pay, Bonus & Housing Funds

Each contribution varies depending on the country you’re operating in. What doesn’t vary is the fact that you’ll need to make back payments for these benefits starting from the moment you hired the contractor.

Another risk associated with international hiring is your establishment inside the country. When the labor authority rules on these employment disputes, the employee and the employer need to be present. With that said, you need a local entity in the country. If you don’t have one, there are many issues in addition to back payments that arise, which are laid out in detail in our previous post.

How Can Employers Protect Themselves from Contractor Misclassification

The most important step you can take before hiring employees or contractors overseas is doing your homework. Discover the factors that your target country has in place for hiring independent contractors. For example, many countries have a list of multi-factor tests that have specific rules in place for distinguishing a contractor from an employee.

For instance in Australia, the multi-factor tests list includes:

  • The employer stated at the beginning of the working relationship that the worker was an independent contractor.
  • There were multiple independent contractor agreements between the employer and contractor. This means that both parties were fully aware of the working relationship.
  • The contractor was able to work with other clients.
  • The contractor’s net personal income was only a third of the gross revenue of the employer. This suggests that the work provided by the contractor was not solely responsible for the success of the firm.

As you can see, many of these test factors relate to the contractor’s autonomy.

You should also ask yourself if you should hire an independent contractor or an employee to perform the work needed. And most importantly, consult with an attorney to obtain legal advice for hiring employees vs contractors overseas to ensure you remain compliant.

Our team of international consultants and our FSaaS are a great options if you’re in the process of global expansion. We help firms operate in 185 countries. Give us a call if you’re ready to expand internationally without the headaches of managing compliance issues.