Breaking the US Mindset: Employee vs. Contractor
Amber Morris
VP of Commercial Development
UKG Inc., a leading provider of HR, payroll, and workforce management solutions announces entering into a definitive agreement to acquire Immedis. Read More
VP of Commercial Development
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.
What is the difference between an employee and an independent contractor?
An employee:
An independent contractor:
Typically when speaking with organizations who have independent contractors abroad, we ask the following questions:
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.
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.
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.
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.
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).
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.
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.
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:
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