Global Hiring: Is Your Contractor Really an Employee?

Global hiring is fast becoming a strategic imperative for companies competing in the post-pandemic marketplace. Smart organizations want to look for talent everywhere and build global teams. This might mean hiring full-time employees as well as contractors.

Hiring contractors allows companies to be flexible and nimble with their talent strategy. However, misclassifying workers as contractors when they’re really doing the work of full-time employees can lead to both monetary liabilities and penalties, as well as an increased permanent establishment risk. Therefore, it is crucial to evaluate each contractor role in each country to ensure you aren’t unknowingly putting your company at risk.

IS YOUR CONTRACTOR REALLY AN EMPLOYEE?

Employers need to know what defines an employer-employee relationship versus an employer-contractor relationship. There are a myriad of laws and regulations that address that issue. While the specifics may vary between roles and regions, here are a few basic guidelines to help you determine how to classify your people:

Business Intent: What is the business intent for hiring this person? If they were hired to accomplish a specific task or project, they might be a contractor. But if their role is to provide ongoing operational support, then they’re likely an employee.

Duration: What is the duration of the task this person is being hired to do? Perhaps they are filling in until you find a full-time employee, or they are supplementing staff during a seasonal rush. Specified durations typically indicate a contractor, whereas workers who are brought on indefinitely are more likely employees.

Control: How much control or supervision do you have over this worker? If you tell them where and when they must work, that is an indication of an employee rather than a contractor. Also, if they are limited to providing services exclusively to your company, it makes them more likely to be considered an employee.

Integration: How deeply integrated is this person in your organization? Do they have a corporate email address and systems access identical to full-time employees? Are they included in company social events or regular meetings? The more integrated into the daily workings of your business a contractor is, the more likely they should be classified as an employee.

WHAT IS AT STAKE?

Whether or not a worker is properly classified as an employer or contractor is one of the most significant elements of global hiring and is rife with a host of legal and financial implications. The classification determines the rights, obligations, and responsibilities of both the worker and the hiring company. These vary among jurisdictions, but generally, the risks and obligations may include:

Employee Wages and Benefits: Employees are generally entitled to various benefits and protections including minimum wage, overtime pay, paid leave, health insurance, retirement or pension plans, vacation/PTO, and workers’ compensation. Contractors, however, are usually not eligible for these benefits, and misclassifying workers as contractors to avoid paying these costs can lead to legal actions for unpaid wages and benefits as well as regulatory fines, and late payment penalties.

Taxation and Social Security: Contractors typically pay their own taxes, while companies are responsible for payroll tax and other obligations (like social security) for their employees. Failure to pay employer taxes and social contributions is where most companies run into trouble as a result of the employee vs. contractor debate. Jurisdictions rely on employment tax revenue and are diligent about receiving those funds. Misclassifying workers can be considered tax evasion in addition to the underlying potential liability for unpaid contributions.

Contractual Considerations: Employment contracts often include provisions related to job responsibilities, confidentiality, intellectual property rights, and non-compete agreements, whereas contractors may have separate service agreements. Misclassifying workers can result in contractual disputes or issues related to liability and intellectual property ownership. Historically, these contracts have been difficult to create and keep current, but modern hiring platforms have streamlined the process with jurisdiction-specific templates.

Employment Protections: Different jurisdictions have specific labor regulations that govern employees’ rights and protections. Employees often have maximum probation periods, rights to collectively bargain, and restrictions on dismissal. Contractors do not have these protections and are only entitled to the remuneration and notice negotiated in their contract.

Like most business decisions, properly classifying workers results in finding a balance between opportunity, risk, and money. What are the drivers for global hiring? How effective or efficient is the opportunity to source talent beyond your own borders? How much risk will you bear by playing loose with classification? And how much will it cost to bring someone on as an employee vs. a contractor?

Understanding the risk landscape around worker classification will ultimately help you advise your company as it looks to hire globally. Sophisticated hiring of properly classified contractors and employees positions your company to leverage global talent while protecting your brand reputation, strategic advantages, and ultimately your bottom line.