For business leaders looking to test the financial viability of a foreign market, hiring independent contractors is a quick workaround to foreign entity establishment—a costly and time-consuming process. However, compliantly employing foreign independent contractors brings its own set of challenges. So, how do you know when you should switch your independent contractors to full-time employees?
In this post, we will explore:
- The risks associated with hiring foreign independent contractors
- Three ways to determine when it’s time to hire your foreign contractors as full-time employees
- One streamlined strategy you can implement to do so
The Consequences of Global Independent Contractor Noncompliance
When companies misclassify their foreign independent contractors, they face consequences that disrupt their growth goals and their ability to carry out daily business operations. It’s critical that your company understand these risks, which include:
- Sizable fines from local regulatory authorities.
- Costly and time-consuming litigation in foreign courts requires hiring lawyers and paying court fees, fines, and back pay for wages and benefits.
- Temporary or permanent bans from operating in a specific country.
- Public backlash that alienates customers and diminishes your profitability.
- Lost business from B2B partners that will not engage with a company involved in a labor dispute.
Uber: A Cautionary Tale for Misclassifying Foreign Independent Contractors
Uber is a real-world case study on the dangers of contractor noncompliance. Once poised to take over the world, Uber faces massive fines and outright bans stemming from independent contractor misclassification.
In the UK, Uber is embroiled in an extended legal battle over whether their workers are independent contractors or foreign employees. In 2016, Uber’s drivers brought a class-action lawsuit against their employer, alleging that Uber deprived them of deserved benefits by classifying them as independent contractors. Multiple court levels affirmed an original ruling in favor of the drivers, and the UK Supreme Court is now reviewing the case. If Uber loses again, an employment tribunal will determine how much Uber owes its drivers in backpay compensation. Lawyers believe that this ruling will set a precedent for thousands of other independent contractors who want to receive compensation.
Uber’s challenges regarding independent contractor misclassification are not limited to the UK. The Canadian Supreme Court recently ruled in favor of a driver seeking full employment status. This verdict marks a key victory in a larger class-action suit calling Uber to recognize drivers in Canada as company employees.
The United States gives us a sense of the financial consequences ahead for Uber in the UK and Canada. In New Jersey, authorities recently fined Uber $649 million for unpaid benefits owed to misclassified contractors, plus interest, over a four year period. Uber is also in litigation with Massachusetts and California for independent contractor misclassification. Internationally, Uber is facing fines, suspensions, and operating bans everywhere from Denmark and Italy to Taiwan and Australia.
Foreign Contractors vs. Full-Time Employees: Three Ways to Decide
Uber’s costly legal troubles show the serious ramifications that come with misclassifying foreign independent contractors. For business leaders currently working with independent contractors, the question remains: how do you know if your contractors are endangering your operations?
Ask yourself these three questions to determine your risk profile.
Question 1: Does my independent contractor embody any of the characteristics of a full-time employee?
Though requirements for independent contractor compliance differ by country, many similarities exist. Common traits of a contractor include:
- The ability to set his or her work schedule
- Being employed for a finite period of time
- Having the freedom to take on projects for other employers
- No expectations for supervising full-time employees, volunteers, or other independent contractors
Employment authorities also look at payments and benefits when determining whether independent contractors are in compliance. Major differences between contractors and full-time employees include:
- Independent contractors invoice their employers for expenses, while full-time employees submit expense reports.
- Independent contractors are paid fees specified in their independent contractor agreements, while employees receive salaries.
- Independent contractors must register for statutory social insurances, while full-time employees receive benefits and insurance from their employers.
If an independent contractor meets any of the criteria of a full-time employee, your company should offer full-time employment as soon as possible to avoid the consequences of noncompliance.
Question 2: What kind of resources can my company devote to maintaining foreign independent contractor compliance?
Large companies with robust HR and legal teams are well-positioned to handle the complexities of employing independent contractors. By constantly monitoring foreign contractors’ actions, HR and legal teams can proactively ensure that contractors remain in compliance. Companies with vast legal departments are also well-positioned to stay on top of changing employment laws, interpret the nuances of an individual country’s contractor requirements, and handle any litigation that results from noncompliance.
Maintaining compliance demands the investment of another key resource: money. From fines and legal fees to the cost of lost business, the tangible costs of contractor misclassification are high. If your company does not have the HR, legal, or financial resources to put toward maintaining compliance, it is best to convert your contractor to a full-time employee.
Question 3: What are your company’s future plans in the market where your independent contractor operates?
Once you’ve employed an independent contractor in a market for an extended period of time, you have a clear understanding of that market’s profitability. If a market is lucrative and you’re ready to expand, deciding between a contractor and a full-time employee becomes more important than ever. Increasing the number of independent contractors you employ in one market increases your potential for non-compliance – along with the risk of being detected by local authorities. In this case, contractor misclassification consequences are even higher: more fines, more legal complications, and more business lost.
Considering the higher stakes of noncompliance when you plan to expand, it is essential to do everything you can to mitigate risk.
Move Forward Compliantly With International PEO
Once you assess your risk and determine that making your contractor a full-time employee is the best course of action, you’re back at square one. How can you legally employ your foreign worker while avoiding the cost, time, and commitment required of entity establishment? Enter International PEO.
An International PEO (Professional Employer Organization) solution employs your workers and handles all the country-specific nuances of legal employment: benefits, taxes, payroll, and statutory requirements. Utilizing International PEO enables you to maintain compliance and give your foreign workers all the perks of full-time employment—without having to jump through the hurdles of entity establishment. International PEO also frees up your HR and legal teams to devote their energy to other tasks, while giving you peace of mind you’ve mitigated risk in key foreign markets.
International PEO allows you can transfer your independent contractors to full-time supported employees in a matter of days. It’s also up to 60% less expensive than establishing a foreign entity. If you decide to shift your supported employees into a new market to test its profitability, International PEO offers the flexibility to make the switch easily.
As a result, International PEO allows you to grow your business in foreign markets without worrying about the risks of noncompliance—and without requiring excess investments in time, money, and manpower.
The Right Solution–Backed By The Right Partner
While hiring foreign independent contractors provides an immediate alternative to entity establishment, it brings risks that only grows with time. Fortunately, International PEO ensures your foreign workers remain compliant while helping you avoid the challenges of establishing a foreign entity.
With expertise helping companies employ workers in over 185 countries, and a commitment to providing a streamlined expansion experience, Velocity Global’s International PEO services are unmatched. Want to find out how Velocity Global can help you ensure compliance for your workers, so you can continue to grow safely and securely? Get in touch.