There are many situations when companies consider hiring “independent contractors” rather than direct employees. When considering such a step in an overseas market, each country’s labor law should be consulted to determine the specific requirements of independent contractors in that country. Here are some issues to consider that are commonly addressed by most country labor laws.
Independent Contractor or Employee?
The difference between an employee and an independent contractor is determined based on the requirements that one must have to be an employee. While each country is different, generally, an individual will be considered an independent contractor and, therefore, will not be covered by the labor legislation, if he or she has independence to perform the work and it is not subordinate to a company’s directives and regulations, and when there is no exclusivity in the relationship between the parties.
5 Questions to Assess Independent Contractor Status
Here are 5 questions to help you determine if a relationship is a true independent contractor:
- A worker is an employee if the company has the right to control the manner and means of accomplishing the result desired.
- An employee is paid for his/her time and bears no risk of wage loss if the employer’s product is unprofitable. An independent contractor has the opportunity to profit from the project and the risk of loss, depending on the worker’s managerial skill.
- An employee is not required to invest in the employer’s business. An independent contractor makes some investment in tools, equipment, supplies, and facilities appropriate for his/her business.
- An employee may receive training. An independent contractor has the skills necessary to perform the task without additional training.
- An employee enjoys a continuing relationship with the employer. An independent contractor generally works on one project and moves on, accepting additional projects when and if available.
Key Considerations for Independent Contractors
Before engaging an independent contractor, be sure to consider the following:
- Determine the real need to have an independent contractor. Could this work be done by an employee instead?
- Draft an independent contractor agreement that makes the case for real independence. Prepare a very clear and specific agreement. Address all possible issues and avoid having the contractor sign non-compete restrictions. Avoid mention of bonuses or other provisions, such as vacation, work hours and other stipulations that look like employment terms, in the independent contractor agreement.
- Structure the day-to-day working relationship to support the contractor’s independence. For example:
- Do not put the contractor in the employment list or in the payroll and keep the contractor off organization charts.
- Do not provide an office or company business cards and do not schedule hours.
- Avoid constant email with requests that are more closely to control than simply guidelines on how the company wants a final product to be delivered.
- Do not pay the same amount every month.
- Ask the contractor to invoice the company with detailed information on hours worked and project deliverables to justify payment.
Additional Tests to Assess Independent Contractor Status
This checklist is based on the one developed by the US Internal Revenue Service (IRS). It gives valuable information that characterizes most independent contractor relationships across the globe:
- No instructions
- No training
- Services do not have to be rendered personally
- Set own work hours
- Not a continuing relationship
- Control their assistants
- No interim reports
- Paid by job
- Time to pursue other work
- Decide on job location
- Order of work set
- Work for multiple companies
- Pay business expenses
- Have own tools or equipment
- Significant investment in their business
- Offer services to general public
- Can make entrepreneurial profit or loss
- Cannot be fired at will
- No compensation for non-completion
Maintaining the proper classification of employees versus contractors is very important to ensure compliance with labor law regulations. The rules are unique to each country, and HR professionals are urged to review the specific requirements for each country as needed.
Important Note: These guidelines are intended to provide a brief overview of the independent contractor issues in foreign countries. It is not intended as a substitute for professional legal advice and counsel.
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