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How to Avoid the Risks of Misclassified Contractors

By August 22, 2018 No Comments
How to Avoid the Risks of Misclassified Contractors

When a business is considering expanding into new international markets, establishing who will lead the charge in the new market is a primary concern. Will a team of full-time employees be hired first, or should contractors be hired to begin building out the team? For many businesses, the latter makes the most sense, as it can allow the company to gain a better understanding of the local market and begin operating quickly. But contractors are not without risks. Companies should be mindful of how they classify their contractors, as misclassified contractors can lead to fines, social contribution and employee entitlement back pay, and legal headaches that could be avoided with proper classification.

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How to Avoid Misclassified Contractor Headaches

For many businesses that have established themselves in their market of origin, expanding into the European market is the next step due to shared Western culture and similar pro-business environments. Yet despite similarities, the European Union has its own set of laws regarding contractor classification, employee benefits, and a host of other factors that make proper worker classification a must.

Even within the EU, each country operates differently. Employers should be aware of country- and EU-specific laws and regulations when determining classification. When drafting a contractor agreement, employers should entertain the following considerations:

  • Is the contractor an independent service provider? If so, explicitly state this and a business registration number in the contract.
  • Are all local laws and tax requirements observed?
  • According to local laws, in which language(s) should the contract be written?
  • Is the terminology that outlines the worker’s responsibilities correct?
  • Does the contract address the worker as a contractor—but the individual is working as an employee?

Ensuring Proper Classification in Both the U.S. and New Market

While a U.S.-based company may wish to engage with an individual in its new market as a contractor for short-term work and classification as such for U.S. tax purposes, it’s important to consider both U.S. and in-country tax laws to avoid misclassification—and improper tax reporting. For the U.S. company, listing a worker as a contractor involves identifying the employee as a non-U.S. citizen or resident, that all work will take place in the worker’s country of origin, and that the worker will not come to the U.S. This involves the company filing a Form W-8BEN.

A Form W-8BEN should be completed by the contractor to document their status as a foreign worker or entity. Employers can rely on the information listed in the form to determine proper tax reporting and withholdings. If, however, the worker lists incorrect or misleading information, the company is not liable for any tax obligations that were not met.

Bear in mind, however, that the definition of a contract worker likely varies between the United States and the new country. Before drawing up the contract, employers ought to confirm what distinguishes a contract worker from an employee by working with an in-country partner that can provide insight into drafting locally compliant contracts. But bear in mind that, in many countries, a contract alone is not enough to qualify as evidence of a principal-contractor agreement or relationship.

Hire Compliantly—and Confidently

There’s no way around it: hiring in new international markets requires due diligence to avoid misclassified contractors. But by working with an experienced partner that can provide in-country insight into locally compliant employment contracts, you can begin or continue your global expansion without worry of facing misclassification. Reach out to Velocity Global today to learn how we can help ensure proper classification of your international contractors.