There are many ways to start a global expansion. You can establish a local subsidiary, franchise your business, utilize an International PEO, or hire independent contractors. Each of these options come with their own set of benefits and drawbacks. One of the most popular methods of expansion is hiring independent global contractors, but it is important to keep in mind the risks associated with this method.
Pros and Cons of a Global Contractor
Hiring an independent contractor is just like contracting with a company. They provide a service and you pay them the agreed-upon amount. Because the global contractor is not an employee, the contractor relationship frees you from many regulatory obligations. Here are some of the pros:
- No tax or social security withholding
- No benefits
- The contract can end with low severance or no severance
- Staffing flexibility
- You can reduce exposure to lawsuits
For global contractors, the primary benefits are twofold: You save money and have more flexibility for staffing. This autonomy also carries several drawbacks, such as:
- You have less control over how work is done
- Contractors come and go with projects, so it can be difficult to produce consistent results
- It can be difficult to terminate a contract early
- Contractors own their intellectual property, not the business
Legal Risks for Global Contractors
While independent contractors might seem like the most efficient and easiest way to begin a global expansion, they can carry legal risk too. Most country’s labor laws push businesses toward hiring employees rather than hiring independent contractors. These countries create standards by which they judge whether a worker is a contractor or an employee, regardless of what the employment contract says. If a company misclassifies a worker, there can be severe penalties.
For example, France is well-known for their strict labor protections. Their labor system distinguishes between contractors or employees with the phrase, “bond of obedience.” A bond of obedience depends on two factors: How much control the hiring company has over the work of the contractor and how much the hiring company can instruct the contractor and penalize disobedience to instructions. French labor laws make the burden of proof rest on the contracting company rather than on the worker, so courts tend to side with contractors when there is a legal challenge.
The United States also has a test to determine whether a contractor is really an employee. The IRS reviews three categories:
- Behavioral control: Does the company control the worker’s hours and methods of working on the project?
- Financial control: Does the company direct the worker’s financial actions to finish the project?
- Relationship: Does the worker have multiple clients and/or a long-term relationship with the company?
Risks of Misclassifying Workers
Misclassifying an employee as a contractor leads to severe fines and penalties. Should the contractor win a lawsuit, your company will have to pay for all the legal benefits an employee would have received through the entire working relationship. This may include:
- Social security taxes
- Taxes that should have been withheld
- Benefits normally offered to employees
- Vacation and sick leave
- Interest on benefits that should have been paid
Additionally, many countries have civil or even criminal penalties. In France, you can face up to two years of prison time in addition to a fine up to €225,000. The company’s legal representative may also face separate prison time and fines.
The Cost of a Lawsuit
Perhaps the most devastating costs of misclassifying a global contractor are the cost that come with a lawsuit. A lawsuit for employee misclassification can be time-consuming in your home country, but it is much worse for global contractors.
It is important to find local representation with expertise in employment law. For companies who are expanding into new marketplaces, this can be a huge challenge. With few contacts in the region, it can be difficult to find a lawyer who is competent and trustworthy. If you don’t speak the local language, the cost of a lawsuit increases because you will have to pay someone to translate documents.
Even worse than losing money, you will lose time and focus. You will spend time meeting with attorneys, finding documents, communicating with your team, and going to court.
Global contractors may seem like an easy way to expand into international markets, but the associated risks are simply not worth it.
We suggest working with an International PEO to help guide you through the legalities of hiring both contractors and employees overseas. To learn more about the benefits of working with a service such as International PEO (Professional Employer Organization), get in touch with our team today!