Companies often use foreign independent contractors as a faster, easier way to test new overseas markets without establishing a legal entity.
Hiring foreign independent contractors is a viable option when your business is ready to expand globally. However, if substantial HR, legal, and finance teams are not in place at your company to keep foreign independent contractors compliant, consider other options that involve less risk. Otherwise, you face severe financial consequences or reputational damage.
Businesses operating overseas with independent contractors, or considering them in the future, must take the following steps to ensure they work within the local labor laws and regulations in their country.
Step 1: Identify Misclassified Foreign Independent Contractors
The first step toward compliance is determining if workers are classifiable as foreign independent contractors, or if they are full-time employees. Ask the following questions to reach a conclusion:
- Can the contractor set their own work schedule?
- Is the contractor engaged with my company for a temporary length of time?
- Does the contractor acknowledge that they are self-employed, rather than an employee of my company?
- Does the contractor have the freedom to complete projects for other organizations unrelated to my business?
- Has the contractor paid and met deadlines for applicable taxes?
If the answer is “no” or unclear on any of these points, the independent contractors in question are misclassified employees. Keep in mind that labor laws and regulations are different in every country, so the independent contractor’s employment market could be more or less restrictive.
When working with foreign independent contractors, reserve bandwidth within your company’s internal legal and HR teams to learn and keep up with the changing labor laws.
Step 2: Understand Noncompliance Consequences
Countries have different consequences for foreign independent contractor misclassification, and many enforce serious fines or even imprisonment. Also, consider that labor laws and regulations change, so teams need to stay updated to ensure long-term compliance.
Some penalties for misclassification in top international markets include:
- €225,000 fine and up to two years of imprisonment in France for employers who conceal employee working hours. Independent contractor misclassification brings with it a €150,000 fine.
- €626 to €6,250 fine per misclassified employee in Spain.
- AUD $63,000 fine for misclassifying an employee as an independent contractor in Australia.
Consequences for misclassification run deeper than just monetary fines. Other direct and indirect noncompliance ramifications include:
- Some authorities ban businesses from using contractors for a certain period of years or halt in-country operations.
- Business-to-business (B2B) companies find that in-country partners are unwilling to continue a relationship with a business tied up in labor disputes.
- Business-to-consumer (B2C) companies face public backlash in certain cases.
Step 3: Assess Potential Risks
Compliance with local labor laws is your business’s top priority when hiring internationally. However, some companies incorrectly assume that the cost of risk mitigation is more expensive than noncompliance penalties.
Consider the compounding costs and legal penalties of widespread contractor misuse before using misclassified foreign independent contractors. Ensure that foreign independent contractors do not handle any critical business activities, such as sales, finance or HR. It is illegal to use foreign independent contractors in core roles, and their jobs risk interruption during an investigation for contractor misuse. The associated productivity loss costs businesses more money, on top of the already serious fines.
Analyze your company’s size and available internal resources. Many large companies with more resources, expert legal teams, and geographically diversified operations have a higher risk tolerance—meaning that large fines will not impact their daily activities, compared to firms that do not have these assets.
Step 4: Take Steps to Fix Noncompliance
Companies that want to bring misclassified foreign independent contractors into compliance have three main options:
- Establish a legal entity
- Register as a Non-Resident Employer
- Partner with an International Professional Employer Organization (PEO), also known as an Employer of Record
Utilizing the above three methods brings foreign independent contractors into compliance, but they each have different benefits and additional risks to consider.
- Establishing legal entities in all countries of operation ensures global employees are compliant. However, it is a long-term process that requires significant financial investments.
- Registering as a Non-Resident Employer is an option for businesses looking to establish a compliant foreign presence. But it is not available in every country.
- Partnering with an International PEO provider like Velocity Global is a quick, cost-effective, and compliant way to establish a foreign presence while mitigating in-country risk and liabilities. This solution, though, does not allow companies to hold fixed assets such as land, buildings, or equipment, so it is not a possibility for manufacturing or real estate companies.
Learn More About Foreign Independent Contractor Compliance
Establishing a compliant workforce around the globe is complicated because of different labor laws and regulations in each country—but it does not have to be a guessing game. The questions listed above include just a small sample of considerations to address before hiring foreign independent contractors or bringing current workers into compliance.