With more and more examples of governments around the world clamping down on the employee misclassification, it's clear that independent contractors—and the organizations that engage them—are coming under increased scrutiny.
For example, one Australian employer was fined over a $250,000 for incorrectly classifying just seven employees as contractors.
The appeal to classify workers as contractors can be tempting for employers. In some countries, employers are exempt from having to pay social security fees and make provisions for benefits such as vacation days and pension contributions. The prospect of what appears to be a substantial savings on business overhead is attractive for many managers and business owners.
The flip side of that savings, however, are serious pitfalls. If an organization is found guilty by local authorities of misclassifying contractors, its penalties will largely be determined by the number of contractors involved and their length of engagement with an organization. Penalties range in severity from financial fines to more substantial repercussions like being blacklisted from conducting business in a country or even potential prison time for owners and directors.
Don’t get blindsided by this hidden contractor risk
By continuing with independent contractors when scope of work falls within local definitions for employees, employers are opening themselves up to liability and potential risk of misclassification from what seems like an unlikely and innocuous source: the contractors themselves. There is an increasing trend of contractors filing grievances with their employers at the ending of their agreement, be it an agreed-upon date or via termination.
The theme is a simple one, with contractors very much aware of misclassification risks. They are issuing ultimatums to employers, demanding backdated benefits entitlements and large severance payoffs, or otherwise threatening to inform local authorities of their illicit employment arrangement.
Faced with potentially unknown consequences, employers are left with simply no choice but to pay the contractors their demands, often at great expense. The practical advice to risk-adverse employers is to migrate contractors into full-time employment contracts, or at the very least stringent short-term contracts, to add a layer of protection.
For organizations that flout the classification laws, the severity of repercussions are not always known. But what about organizations that are not even aware that the way they use independent contractors is violating any laws?
Correctly distinguishing between proper and improper contractor classification can be challenging, even for the most experienced and knowledgeable of HR experts. With the potential risk, organizations continue to expose themselves to across multiple countries. It’s vital that employee classification is managed correctly.
Talk to one of our global solutions experts today to learn whether your independent contractor arrangements are putting you at risk of employee misclassification and how we can help you mitigate that risk.