When faced with a need to employ people quickly, many organizations turn to independent contractors. They can be brought on with relative ease, regardless of whether the organization has previously done business in a particular geography. Because independent contractors are responsible for their own employment, your organization may avoid the challenges and complexities of hiring people in a new locale.
Unfortunately, it’s not that simple. Hiring independent contractors may be a viable option for your organization, but there are risks to be aware of. The first step to avoid them: understanding how independent contractors differ from employees—and how this difference affects how you manage them.
Since independent contractors are responsible for their own employment taxes, social and health benefits, many governments have regulations to ensure they are protected in an employment relationship. Based on the scenarios we usually encounter, about 60% of employers are misclassifying their independent contractors, and the penalties for misclassification can be significant.
If your organization is considering independent contractors, it is important to be sure they really are independent — not employees. The criteria defining an employee versus an independent contractor are remarkably consistent around the globe, but many countries have particular regulations that need to be considered. In China, for instance, individuals must register as a corporate entity and create a formal, written employment contract before they qualify as an independent contractor.
Generally, the criteria for independent contractors focus on:
- The type of work the person is doing
- How closely the worker will be managed
- Whether the worker is free to perform other duties or work outside of what you are assigning them
When bringing independent contractors on board, a U.S. company typically uses a U.S. employment contract, provided that local language and statutory requirements are considered and incorporated.
When deciding to take on independent contractors, offering supplemental benefits may seem like a nice perk. However, those benefits are usually considered part of an employer-employee relationship and could affect a person’s status as an independent contractor.
This isn’t the same everywhere, though: in some countries, independent contractors must be provided benefits. In Spain, if independent contractors spend more than 75% of their time working for one company, benefits must be offered.
Another challenge for organizations engaging independent contractors is how to pay them. Because they aren’t employees, contractors are usually paid outside of the corporate payroll process. Many companies choose to pay their independent contractors via accounts payable, allowing their payments to be recorded and managed through finance. Though this is acceptable, it does raise the likelihood that the independent contractors will not be considered in the total headcount and workforce cost reporting and analysis.
One way to ensure that these workers are included in employment analyses is to implement processes across the organization. This should include obtaining pertinent information about the contractors, along with a creating a standard method, preferably automated, of incorporating them into corporate reporting tools.
Deploying resources quickly and with agility is not easy, particularly in a new geography. Meeting these needs through independent contractors is one approach, but it does require extra care to avoid compliance missteps and the resulting penalties.
Be sure to check out our next blog installment, where we’ll be delving further into the potential penalties of misclassification and discussing specific strategies for avoiding them.