Using contractors overseas as your overseas “employees” can backfire, per this case study
Expanding your company into foreign markets can be daunting, and the prospect of hiring international resources is often the tip of the “fear” spear. Understanding the ever-changing domestic employment laws can be challenging enough, so when hiring abroad we’ve seen countless situations of people trying to avoid the employment situation altogether – often with disastrous consequences. Just a little bit of research can go a long way to keeping your employees happy, the regulators in check, and the board off your back.
Let us begin by telling the story of a well-meaning client with a “contractor” in Argentina.
Help! We quietly need to convert a contractor to an employee
…We received a call one day from a distraught CFO. Two years prior her company decided to enter the Argentina market by employing a “contractor” to do sales for them in Buenos Aires. The company researched the Latin America region and concluded they had a significant opportunity to sell their software in Argentina. In speaking with her network the CFO correctly recognized that setting up a subsidiary in Argentina was somewhat expensive and time consuming, the company was fairly confident about their prospects for success but wanted to keep flexibility (just in case things didn’t work out), and the employee they identified in Buenos Aires suggested a contractor relationship at the outset. For all of these reasons – not the least of which being the overall feeling that if this person was classified as a “contractor” they could avoid the responsibility a true employment relationship brings – our client decided to classify this person as a contractor.At this point you may be thinking that it all went awry due to an acrimonious separation… not so fast. After two years the relationship had never been stronger with the employee, not once had the local authorities questioned the status of the employment relationship, and by all accounts it was a success. The problem was that their employee decided he wanted to purchase a home.
In Argentina one must have full time employment to qualify for a mortgage and as you may guess a contractor agreement does not suffice. While both sides were keenly interested in maintaining the working relationship, the small change to the contractor’s situation set in motion a landslide of time, money, and resources for our client.In order to reclassify the employment relationship as an employee, the Argentina labor board must be informed of the change. Our client therefore provided the labor board with the details of the previous two years’ contractor relationship, which, of course, looked to the labor board like a true employee rather than a contractor (he worked exclusively for our client, had business cards, received variable compensation in the form of commission, had a company-provided laptop and was reimbursed for office expenditures, and so on). The newly revealed details opened an investigation by the labor board and required counsel for both the “employee” and our client. 11 months and $375,000 later, the case was resolved and our client hired the individual as an employee of their newly-minted Argentina subsidiary.
Could it have been avoided?
The situation for our client could have been avoided one of two ways: setting up a subsidiary or utilizing an outsourced employment model. Unfortunately they weren’t aware of an International PEO option at the time, so the decision to classify this guy as a contractor seemed to be the lesser of two evils. Ironically they spent three times the amount they would have, had they set up an entity; and six times the amount had they known about an International PEO solution.
“Contractors” often backfire for companies, even in good times
The moral of the story is that classifying someone as a contractor most often ends up costing a company more than the alternatives. Yes we know of stories where contractor relationships end well, but those are by far the exception. As you can see from the above case study, even when the relationship is strong the slightest change in situation can result in trouble as opposed to the other employment options available. And know that this is not particular to Argentina but a basis for best practices anywhere you look to employ people.
Please feel free to forward this to someone planning an international expansion; friends don’t let friends hire international contractors. And if you want to talk through your particular situation, please reach out to us here.