Multinational companies may find it enticing to test a new market by using contractors overseas. These firms believe that they can avoid the hurdles of setting up a legal entity, which is needed to hire an in-country employee, by simply working with a local representative to perform consulting work. As wonderful and easy as this sounds, it’s actually inaccurate and presents many risks. Especially if you’re using an American or domestic originated agreement to hire contractors overseas.
Independent contractor status is touchy in international markets. In regions spanning from Europe to Latin America to Asia, contractor agreements constantly end up in court and multinationals end up with big-ticket bills due to their “safe” consultants. Protect yourself from a legal battle and make sure you understand the risks of using contractors overseas before hiring one.
Risks with Contractor Agreements
You may have a solid agreement with your contractor, but in other countries, the courts typically rule on the side of the employee. Basically, if your independent contractor decides to fight their employment status in court, your agreement will likely be thrown out. There are many risks involved in these cases, which we describe below:
Using a US Independent Contractor Agreement
If you’re using a US-based agreement, it’s most likely due to the fact that you do not have an entity set up in the country where your contractor performs their work. This presents many problems if your contractor decides to battle their job status in court. Risks include:
- Your agreement is void, so your employee can claim anything in order to win because the US agreement is not valid in foreign markets.
- The labor authority rules on employee vs. employer cases and you will need to be present in court with a local entity.
Using Contractors Overseas without a Local Entity
If you do not have a local entity, you face costly risks based on the likelihood that your contractor will be classified as an employee once they bring their case to labor authorities. Permanent employees are subject to entitlements including social security, local health programs, pension, and paid vacation. Since you hired this employee as a contractor, they did not receive any of these benefits. Assuming they win in court, you are now responsible for distributing these past-due liabilities dating back to their first day of employment. You’ll also face the following:
- Fines and penalties
- Employment audit
- Conversation about your lack of legal entity
- Tax audit
- Requirement to establish an entity
- Plus fines for non-compliance and back taxes
As you can imagine, this gets very expensive, very quick.
How To Protect Yourself when Using Contractors Overseas
Using an international contractor may cause some risks, but you can still use them to perform work. They are still helpful options for performing responsibilities on short-term projects and there are ways to protect yourself from the headaches.
Use FSaaS to Establish a Presence in New Market
You should have a presence in your target country before working with local contractors. But, it’s probably not smart for you to establish a subsidiary if you’re testing the market. Instead, use Foreign Subsidiary as a Service to quickly create a taxable presence in country and hire locally and compliantly.
Keep Independent Contractor Agreements – Independent
When drafting your independent contractor agreement, establish the independence of the worker under the laws of the foreign country. Make sure that the contractor is free to perform their responsibilities without a schedule, specific office space, paid vacation or any other provisions that would suggest an employment relationship.
Avoid Non-Compete Provisions in Contractor Agreements
This takes a little digging, but in some countries, a non-compete clause creates a presumption of an employment agreement. Avoid including this in the contractor agreement to avoid paying the entitlements and back taxes listed above.
If you’re ready to work with contractors in a new market, but not ready to take the plunge associated with setting up a full, legal entity, give us a call. Our FSaaS option helps you save time and money by getting you up and running in your target country.