In the United States, it is common practice to hire independent contractors to perform a wide array of services. Independent contractors are specifically defined and regulations are in place, however, it is rare that the validity of the relationship is ever called into question.
This is not the case abroad.
For example, in Australia, if an employer is found to have misclassified an employee as an independent contractor, a penalty of 250,000 AUD ($202,063) is charged to the employer.
Employee vs Contractor
What is the difference between an employee and an independent contractor?
- Has a direct employment relationship with the employer
- Receives benefits from the employer
- Pays taxes through payroll withholdings
- Has protections under local employment laws.
- Directed on a day-to-day basis by the employer
- Provided with the tools necessary to complete their duties
An independent contractor:
- Responsible for their own taxes
- Does not have a direct employment relationship
- Does not have protections through local employment laws.
- Is not controlled by the organization
- Provides their own means necessary complete the job
- Works on behalf of other organizations
- Invoices the organization for work performed.
Typically when speaking with organizations who have independent contractors abroad, we ask the following questions:
- Does the contractor report anyone within the organization?
- Did the contractor receive equipment from the organization to perform the duties?
- Does anyone within the organization dictate what projects the contractor works on?
- Does the contractor only work on projects for your organization?
- Did the organization provide the contractor with a project contract?
If the organization has answered yes to any of the above, they do not have a contractor, they have an employee.
The number one rule in independent contractors is autonomy.
If you cannot prove autonomy, you prove an employment relationship and open the organization up to unnecessary risk and exposure.
Outside the US
In some countries, hiring independent contractors are virtually impossible or against the law.
For Example: In China, hiring an independent contractor normally means hiring the worker under the table and illegally.
This creates considerable legal and financial risks for companies choosing to use independent contractors instead of full time employees with proper registration to work in the country.
Let’s say a construction company hires an independent contractor and that independent contractor is hurt on the job site. The construction company will most likely be held liable by the Chinese government and will face not only a lawsuit from the independent contractor but a government investigation, large fines, and possible criminal penalties.
The company can even be banned from conducting future business within China.
5 Immedis Top Tips
- Don’t blur the lines
If you have hired an independent contractor, do not provide them with equipment to execute the services. The contractor needs to provide all the means to complete the tasks. This includes providing a laptop.
Remember: Do not treat the contractor as an employee. Autonomy is key in establishing a contractor relationship.
- Don’t assume they are authorized to be an independent contractor
Independent contractors may have separate regulations they must adhere to in the country. Exemptions may be needed by local tax authorities for the contractors to be able to provide services to your organizations. Independent registrations may be required from the local government for the individual to be eligible for consulting work. Be sure to ask if the contractor holds the local required documents and tax certificates.
Remember: If you are hiring a foreign national independent contractor, be sure to confirm if they have independent work authorization.
- Use the right contract language
Independent contractor agreements must be written in a way that leaves zero room for interpretation. It must be very clear there is no “relationship” between the company and independent contractor outside of the project they have been contracted for. The contracting organization cannot impose an exclusive work clause meaning the contractor must be allowed to work for other companies. Do not refer to payment for services as salary or establish monthly agreed payments.
Remember: Always refer to payments as “fees for service” and the contractor must invoice the organization on a monthly basis with VAT included (if applicable).
- Other laws exist outside of the US
US law does not apply outside of the US. You are required to adhere to the local laws and local legislation.
Remember: Do your research on the local requirements and ensuring independent contractors are legally allowed to perform business activities in the country that you are operating in.
- Understand the job requirements
In some cases, companies are not permitted to subcontract certain jobs. For example, you may not be able to hire a contractor to execute sales activities or healthcare services.
Remember: There are certain jobs that trigger a direct employment relationship.
Compliance – Forewarned is Forearmed
The best protection is knowledge.
Understanding the local requirements is the only way to mitigate the compliance risk associated with global employment. Having internal HR resources is key for multinational organizations. If the internal resources are lacking, organizations need to rely on their external partners to alleviate the risk on their behalf.
The good news is, it is never too late to come into compliance.
Why Immedis – We offer assistance to clients who are operating non-compliantly and puts together a clear and attainable path to compliance.
We offer assistance with:
- Providing local compliant employment agreements
- Employer registrations,
- Ensuring compliance through payroll
- Ongoing support.