What UK Businesses Get Wrong About Managing Contractors Abroad

If you're searching for an employer of record that supports contractors, something already triggered the question. A solicitor flagged it. A new hire with global mobility experience raised it. Or you're realising that contractor rules don't hold the same way from one country to the next. Ashleigh Graham sees all three, routinely.

What triggers the realisation that a contractor is misclassified?

It's normally down to people outside of the team. It might be a solicitor, a lawyer. It could be news coming in about certain changes and adaptations. Or it could be that someone's just joined and understands a bit more about global mobility, about how employment law is different in different countries. For a UK business, it might work one way in the UK, but for a business in France for example, it's completely different. They don't accept the same terms or the same variations.

With contractor conversion, 9 times out of 10, a business comes to us because they've had someone external raise an alarm that what they're doing isn't compliant in the countries where they've got their workforce.

How common is this risk, really?

In my experience, around 95% to 98% of the businesses I speak with have real misclassification risk.

One of the things I like to give UK businesses is the analogy that most of them understand employment law in the UK, so it's like the weather. You know what you're going to get in the UK. But in different countries there's different weather, and that means you're going to have to change what you're wearing, or bring a brolly.

When it comes down to UK businesses, one thing they do is assume that what they're doing is correct, or they go off a little bit of information, and they think that if they put some kind of legal document in place, that's going to mitigate all the risk in those countries because they've got a document there. They don't take into consideration what's classified as a contractor versus an employee, and all the different microclimates of employment law.

For instance, something that may be acceptable in the US is not acceptable in France, Spain or Brazil. There are some countries where the consequences of contractor misclassification are a lot harsher than others. But there are quite a few threads that are consistent across them. If you're treating a contractor like an employee, if they're working for you and only you, or if they're using your email address, or portrayed as an employee in any way, you're typically misclassifying them without knowing you're misclassifying them. Because of that, the local governments may fine you, and fine them as well, for being misclassified.

Every company in Safeguard Global’s CFO Confidence Paradox report had suffered losses from noncompliance. Does that surprise you?

No, it doesn't surprise me. Most of the time it comes as more of a shock. I think that sometimes it takes the fine, or it takes that misclassification, for organisations to look at their entire global workforce and go, actually, we've been doing this wrong, or maybe we need to look into it. There is so much information on Google or the internet that just gives you two options, contractor or entity, and there's not that much information about what further options there could be in between.

Depending on the situation, if you're looking at hiring because you've got great talent, or you're looking at retaining someone that's relocated back home, or maybe it's the case that you want to go into a new market where you're not 100% sure it's going to work out, entity setup isn't something that would naturally fit into the budget just yet. Then it's that question mark of what we do. Well, contractors are pretty well known, we'll just go with that and see what happens. And then they get a fine or a penalty, and they go, oh no, we didn't realise we weren't doing this right.

Read the full CFO Confidence Paradox report.

So is that one of the most common mistakes, just not realising they've gotten it wrong?

I think the common mistake is education, that they don't know what's out there and what options they have that support them. Then there's the other aspect, that because they don't know, it might be that they don't have enough team members to do the analysis, or it could be that someone internally from the finance department has hired someone as a contractor and that works, so they're just going to go along with it. It's sometimes because they fall into the habit of using contractors, and that causes those issues. It's only when an external person comes in, or they get that penalty, that they then go, maybe we need to look into this and take this seriously.

A real case: 70% of the workforce, misclassified

We had a recent instance where someone in a leadership role had just joined an organisation and walked in to roughly 70% of the workforce being contractors. She wasn't aware of that until that point, because during the interview process it was just, this is how many people we have working for us. She went onto their HR system, and the numbers weren't matching up, things weren't adding up, and it raised the question of what's going on. When she went through and found there wasn't much detail or data, she did her own analysis and found that roughly 70% of the workforce were contractors working on different projects at different times for different lengths of time. That's what brought up the question of whether this was something they wanted to continue with or not.

This individual did about six months of work with us, going through what the risk would be, what the cost would be to the business, penalties and fines per location over the course of time. The number ran into a six-figure sum of how much that would potentially have been a risk to them.

So we created a more personalised project plan of what that would look like, how we'd treat those conversions into proper employees. We looked at potentially restructuring, having hotspots in certain countries as well. But they wanted to retain their talent so we looked at what that would look like from a conversion perspective. We did that over the course of four months, mapping out what it would look like for every single country, what it meant for the employment law in every individual country, because in some countries you have to respect the time they've had before in the organisation as well, so you acknowledge the full tenure and then have a clean slate.

We had to explain all these different variations by country, create a plan and that plan was then executed so we were able to bring them over. When she took this to the board, it was a case of, “this is the issue, this is the resolution, and this is how we're going to do it”. So from the board members' perspective, it wasn't a case of her saying, “here's a problem and you need to sort this out”. It was, “this is a problem and this is how we're going to support and look into it”.

One of the things that was really helpful was that some didn't want to move from being contractors, they were quite happy as they were. But when we had the conversation with them around the benefits of what that means as an employee moving forward, they actually were quite happy about it and wanted to be part of that journey. We had people in the countries who speak the local languages and are able to communicate with the individual contractors, so it wasn't a case of them being told by someone in the UK how things work in their country, it was literally someone in their country who is able to help them with that transition.

Does the risk change by country?

When we get into European countries, they're so different. You can walk 20 miles one way and be in one country, and 20 miles the other way and you're in a completely different country. Every single country has different rules and regulations, some being a lot stricter than others. The majority of them have the same underpinning when it comes to contractors and how they're treated in the workplace, but I'd definitely say places like France, Germany and Spain go super strict when it comes to contractors, whereas if we go towards South Africa for example, there's different variations of how we'd classify.

One of the common themes across all of them, is if they're being treated as an employee, if they're working only for you, working under your business, that's when they're misclassified as a contractor. Some of that can also lead to a permanent establishment risk. Especially if you have a contractor in a new country possibly trying to make sales or develop business in that country under your brand, that increases your permanent establishment risk in that country, which also increases your chances of being fined.

What happens to the worker during reclassification?

Part of that transitional period is making sure that, from a contractor perspective, they're paid a certain amount per month and they sort out the rest themselves. Part of the process is doing the opposite, where we look at what their gross to net or net to gross would be in that situation, and what the employer contribution is in those countries. Every country has different employer costs. In the UK, employer National Insurance is 15% on earnings above £5,000 a year and the minimum employer pension contribution is 3% of qualifying earnings. For most salaried roles that puts you at around 15% to 16% on top of gross pay before any enhanced benefits, and many employers pay more than the pension minimum so it often runs higher. In other countries that figure can be 20%, 30%, 50%. So it differs.

We have to take into consideration the benefits the employee would receive when we go through the reclassification: the tax, the pension, social security, insurances, medical, anything additional they'd get as part of being an employee. We'd also go through their employment contract. That's one of the main things, because they're an employee now, they receive an employment contract in the local language, and we go through that with them along with their right-to-work information as well.

We make sure that through the transition, when we're reclassifying them, they're not losing out on anything, that they're gaining something, that sense of stability. We work one-to-one with them to make sure they're happy, because we want to make sure that each transition is smooth and easy rather than being an alarm bell for them that there's change. A lot of people get like that with change, so it's just working them through it to give them that reassurance.

The first three things a UK company should check today

I would look at where they're working. I would look at how long they're working and what they're doing as a contractor there. If they're working only for that business, that's going to be a massive consideration as well. How they're communicating with the UK business, how they're working, the level they're working at. All that would give them the understanding of whether this is going to be a concern, or whether they need to look at reclassifying and transitioning.

What every UK HR, business owner and finance leader should remember

I think the main point is not to worry. It's normal that this happens all the time when it comes to contractors and them being misclassified, or there being a risk element to it, and there are solutions out there to support and mitigate that and help them through the transition. There are options out there that can help and support them to convert contractors to employees. It's really understanding what the risk is, and then someone like Safeguard Global can come in and start mitigating and helping with that transition and reclassification and providing that education.

Not sure where your contractors stand?

If you've got people working for you outside the UK and you're not certain how they'd be classified where they actually sit, that's worth a conversation. Bring what you know: where they're working, how long they've been there and whether they work for anyone else. I'll tell you where the real risk is, what it's likely to cost if it stays as it is, and what your options are beyond contractor or entity. If there's nothing to worry about, I'll tell you that too.

Talk through contractor conversion