Not Just in the U.S: Contractors or Employees? People are now digitally located, from Malta as well!
There’s been a flurry of news lately about misclassifying workers — hiring people as contractors when they’re really employees. Recent examples are Uber and FedEx. With 40% of the U.S. workforce having contingent jobs, there will surely be more cases to come.
There is the same problem overseas and this is very important. I’ll explain why later. For clarification, I’m addressing local nationals here — not expats.
When a company wants to hire overseas there are two situations:
1) Hiring someone in a country where the company already has an existing operation. There is no problem unless the person is hired as a contractor when actually an employee.
2) Hiring someone in a country where the company has no formal corporate presence.
Let’s talk about #2 because it’s the most complicated. No formal corporate presence means there is no registered branch, subsidiary or representative office — therefore no license to do business. There is no local taxpayer identification number either. Without that a company isn’t able to issue a legal payroll — either internally or through a local payroll provider.
Companies may use a creative work-around like paying the local employee from the U.S. payroll. The downside is there is no local tax/social security reporting/withholdings/contributions on the employee’s behalf and s/he is not eligible for government benefits. And oh — this violates the law. Bottom line, in a new country a company cannot hire anyone as an employee.
The most obvious strategy then is to hire a person as an independent contractor. That sidesteps local payroll and employment laws entirely. Here is where misclassification rears its ugly head. This is where situations #1 and #2 above have the same problem.
Contractor misclassification claims are probably more common and monitored more closely overseas than in the U.S. Tax and social security agencies around the world increasingly target multinational contractor misclassifications. The cost liability ranges from the hundreds of thousands, sometimes millions of dollars.
How is misclassification defined in other countries? Actually the list of definition factors looks similar from country to country including the U.S. The overarching legal issue behind all the various tests is autonomy. The best rule of thumb to use is that if a contractor relationship would fail the “smell test” in the U.S., expect that it would also flunk the smell test overseas.
The best solution is to hire the contractor as a leased employee or secondee. A local company like Kelly Services hires the contractor as its employee on its own payroll and then “seconds” him/her in a business-to-business contract with the U.S. company.
Now — why is this overseas contractor vs. employee issue such an important one? With the “war for talent” continuing to be hot issue, there seems to be a belief that companies should hire workers anywhere they can find them. If companies can’t find the right skills in the U.S., they need to search worldwide. I have seen many articles promoting this.
“Find the very best performers in every individual country around the world and let them work remotely in their home countries.”
Comments like this give me the “willies.” Sounds good. There are 190+ countries in the world — surely skilled people can be found somewhere.
But let’s look at an example of what this might look like: A company might find critical programmers with a very unique programming language in Bolivia, Latvia, Uganda and Nepal. So they hire them. Multiply that by hiring in multiple countries for many other hard-to-find skills. A company could end up with 500 employees working in 150 countries — each country with one or two employees working from home!
I’m exaggerating to make a point. It’s just not going to happen due to tax, legal and other complications. And the odds of getting caught are much greater than 50%. But it’s a very attractive solution to many hiring managers desperate to find talent.
Watch out for that “hire them wherever you can find them” mentality in your company. It might make sense in the U.S., but it’s not a logical strategy overseas.