If your business hires a combination of employees and independent contractors, you may have wondered how to create a stronger culture across your workforce and how to put every team member — employees and contractors alike — in positions to succeed. 

In 2021, it is increasingly common for companies to offer benefits to their long-term contract workers. Benefits like healthcare, stock options, and PTO are a great way to attract and retain top freelance talent and build trust within your organization. 

Types of benefits for independent contractors

In this article, we’ll explore why you should consider offering contractor benefits and how to create competitive benefits packages for everyone on your team while avoiding potential risks. 

See also: Expert guide to employee and contractor misclassification

Why more companies are hiring 1099 and global independent contractors

The rapid growth of the gig economy is undeniable. Spurred by changes in technology, the economy, and the workforce, more workers than ever are turning to short-term gigs and freelancing to earn extra income or grow their careers. 

Although this movement includes all sorts of workers, much of the growth of freelancing since 2020 has been spurred by technology and design freelancers (and the tech companies hiring them). The benefits of freelancing for workers include flexibility and variety of work as well as higher hourly wages on average than non freelancers. Some contractors prefer freelance work because their untaxed checks are greater than what they would receive as employees. Further, contractors have more control over what they can write off on their taxes. 

For businesses, hiring independent contractors is an easy way to add extra bandwidth and scale faster. Tapping into contractor talent can be particularly powerful for small to medium-sized businesses looking to stay lean and access global talent. According to Nadia Vatalidis, director of people at Remote, “Many companies in the startup stage are not yet ready to set up global entities to hire international employees, which can make hiring contractors an attractive alternative.”

However, large companies also rely on freelance talent. In 2019, Google hired more contractors than employees. This is a growing trend in the tech industry, with many companies using contractors for 40-50% of their staff. 

Businesses turn to contract workers when they need to scale as well as when they require niche talent for special projects. Contractors can offer their skills and knowledge part-time or short-term without having to be onboarded as full-time employees. For contractors with valuable skills who don’t want to settle down with one company, freelancing can be the best of both worlds.

Why offer benefits to 1099 and global independent contractors

Bruce Gilbert, director of benefits at Remote, believes that contractors are a key part of our evolving digital workforce. “Rules of employment are changing, and the world is moving ever closer to a contractor-driven economy.”

Contractors play important roles in the companies they join. In today’s competitive talent market, companies need to consider fair equity for all of their workers to create an environment that will attract top talent and keep their contractors engaged and happy. This starts with understanding the challenges contractors face and working to make their experience easier.

See also: Expert guide to hiring independent contractors

For many contractors, the biggest struggle is not having benefits. In 2017, over half of freelancers in the US reported having no access to employer-based benefits. This means no sick leave, unemployment, paid time off, and in many cases, access to health insurance. 

If your business relies on contractor talent, offering benefits to your contractors can go a long way toward building trust with your freelance workforce. This is especially important to consider for any long-term contractors you work with. Working as a contractor can sometimes feel like being a second-class member of the team, and benefits are an equalizer. Deciding whether to offer benefits not only impacts the individual lives of your contractors but brings huge advantages to your company culture. Companies that foster belonging for everyone on their team have a serious competitive advantage. 

Top benefits to offer 1099 and global independent contractors

With freelance talent more in demand than ever, companies not offering benefits to contract workers risk falling behind. Here, we will outline the best benefits you can offer your contractors and how you can create fair equity with your 1099 and global contractor team members.

In the US, the most important benefit you can offer your workers is health insurance. The US is not the only country where employer-sponsored health benefits matter, though. In Europe, most countries have a primary healthcare system that anyone can access, but more specialized care typically requires secondary insurance which can come through employment. 

At Remote, we help businesses offer benefits to workers all over the world. In many of these countries, we partner with SafetyWing to give contractors the option to sign up for their own affordable plans. Our specialists are also available to advise companies on how to cover these costs through stipends.  

Needing time off for personal matters, growing a family, and engaging in self-care doesn’t end because someone is a freelancer. While freelancers have the option for greater flexibility and control over their schedules, often they end up working just as much if not more than their full-time peers. 

If you have long-term contractors on your team, consider offering them paid time off and parental leave. A global leave policy is a simple way to create fair equity and a culture of belonging across all the workers in your organization.

Home office and continued learning budgets 

Offering workers a stipend for their home office and continued learning is an investment in your workforce that will bring direct returns to your business. When workers are comfortable in their office space, they are more efficient and productive. When you invest in your workers to help them learn new skills, they bring that new knowledge to their work and enrich your organization. Stipends also show workers that you care about their wellbeing and ongoing development, which leads to greater happiness and retention. 

Stock options are a great way to keep workers motivated and engaged at work long term. If you’re offering stock options to your employees, consider offering stock options to your contractors as well.  

Remote as deep experience in international equity offerings. Contact us today for an equity incentive planning consultation.

Risks to consider when offering benefits to independent contractors 

When hiring contractors, whether they’re 1099s in the US or contractors in other countries, it’s important to be aware of the potential risks, especially misclassification, which can lead to significant fines and penalties.

When it comes to misclassification, “The biggest risk is the chance that a local authority will determine that the worker is actually an employee,” explains Gilbert. “Since most countries' laws see the employee versus independent contractor issue as binary, companies that offer increased employee-like benefits to contractors run the risk that the contractors will be deemed their employees. This can result in substantial tax and regulatory liability.”

To steer clear of these risks, consult a legal expert in the country where you’re hiring or ask the international hiring specialists at Remote.

Remote makes hiring independent contractors easy

If you’re interested in hiring contractors or exploring benefits for your contract workforce, Remote offers the most simple, secure, and cost-effective solution for contractors all over the world.

With Remote, you can create localized contracts to onboard contractors quickly; make payments to workers in 170+ countries, all in one invoice in your local currency; manage taxes; and allow contractors to buy discounted health insurance for themselves and their families. Contractors on the Remote platform can even set up automated recurring invoices.

Our hiring specialists can help you stay compliant with local labor laws and advise on the best benefits to offer all members of your team.  If you’re ready to build a more trusting global workforce, get started with Remote today!

How to offer benefits for 1099 and international independent contractors 

Are you prepared to protect your valuable intellectual property and sensitive data when you employ workers in multiple countries?

If you have questions about IP and data protection abroad, we are here to help. In this in-depth webinar, three of Remote’s top global employment experts come together to share their tips and strategies on how to keep your company protected.

Why worry about international IP protection and data security?

Protections for IP and data are not automatic. Not only do you need to keep your valuable information safe, but you must continue to do so to avoid potential losses.

Remote understands international intellectual property rights better than anyone else. That’s why we developed Remote IP Guard: the safest, most effective way to ensure you retain maximum ownership of your intellectual property when you have workers in other countries. With Remote, you never have to worry about third parties or unnecessary exposure to risk. Our intellectual property transfer process is the smartest and safest way to stay safe as you grow.

In addition to our IP protections, Remote also offers the strongest data protection for companies hiring abroad. We are industry leaders in data protection and hold a number of rigorous certifications that showcase our commitment to good data practices. See for yourself how Remote sets the standard in data security.

Don’t wait! If you have questions about IP protection and data security, this webinar has the answers you need.

Ready to see for yourself what Remote can do for your business? Contact us today and one of our experts will help you discover the best way to grow your global team quickly, safely, and compliantly.

[Webinar Recording] IP protection and data security for distributed teams

In a country like the Netherlands, with various social schemes that protect and provide for employees and citizens, managing payroll goes beyond making sure people get paid at the end of the month. There are employment costs specific to the Netherlands employers must pay to the tax authorities. These are what we refer to as “non-wage” costs.

Understanding what these costs are is the first step in ensuring you’re well prepared to hire and be compliant in the Netherlands. In this article, we will showcase the advantages of employing Dutch workers as well as the labor costs required to do so. One thing is for sure, though: the benefits of hiring employees in the Netherlands far outweigh the costs.

What are the total costs of employing Dutch workers?

The total cost you will incur when employing a Dutch worker is made up of the employee’s salary plus several non-wage costs. These non-wage costs are premiums that fund Dutch social schemes and are paid by the employer. Contribution rates vary depending on the type of employee contract.

See also: Everything you need to know about employee benefits in the Netherlands

Unemployment Insurance (WW): Employers contribute 5.34% (based on 92% of an employee’s salary) for employees on a fixed-term contract and 0.34% for employees on an indefinite contract.

Health Insurance Act (ZVW): Employers contribute 7% (based on 92% of the employee’s salary) toward state health insurance.

Work Capacity Act (WIA): This insurance covers employees who have been disabled or out of work for more than 104 weeks. Employers are required to contribute 7.53% (based on 92% of the employee’s salary) toward this fund. Included in this contribution rate is a surcharge of 0.5% that goes towards childcare allowance.

Sickness Benefits Act (ZW): Employers are required to continue paying sick employees a portion of the salary for a maximum of 104 weeks.  

Statutory Long-Term Sickness Insurance: Employers must provide employees with statutory long-term sickness insurance. Costs for this insurance can vary.

Return to Work Fund (WHK): The employer contributes 0.91% (based on 92% of the employee’s salary) toward this fund to cover the cost of enabling the government to secure income for employees who are sick or incapacitated.

Employer social contributions are capped at an annual salary of €58,311.

In terms of the total cost of labor in countries across Europe, the Netherlands is on the high end of the spectrum along with Luxembourg, Belgium, and Sweden. Non-wage costs in the Netherlands, make up about 20.68% of a Dutch employee’s salary. Compare that to a French employee’s salary, where it is about 33%, or 6.1% for a Maltese employee’s salary.

What are the unique costs of employing in the Netherlands?

The Netherlands has several leave schemes which require the employer to keep paying a portion of the employee’s salary during their absence from work. This applies to parental leave, maternity leave, sick leave, and short-term care leave. Dutch employees are also entitled to a holiday allowance every year. This is 8% of their gross annual salary, which you can choose to include in their annual salary or pay an allowance on top of their salary.

See also: The Netherlands maternity leave, parental leave, and paid time off entitlements

The cost of living in the Netherlands is higher in the more popular Dutch cities, such as Amsterdam, Hague, Utrecht, and Rotterdam. This is important to consider for any offer to someone who lives or will be relocating to any of these cities. Regardless, the Netherlands offers a conducive environment for remote work in most parts of the country.

To secure top talent, you want to provide supplementary benefits beyond the basics to make your offer more appealing. For example, work-life balance and lifelong learning are very important to Dutch employees. To meet that expectation, you can offer a wellness and learning allowance and increase the appeal of your offer. With Remote, you’re able to set up such allowances to be paid out to the employee every month.

See also: The best employee benefits to attract top global talent

Where does the Netherlands fit in the global talent market?

The Netherlands is a top source of highly skilled talent. The Dutch workforce is highly educated, productive, diverse, and multilingual (90% of the Dutch workforce is capable of speaking English). This makes the Netherlands an attractive option for innovative companies looking to build out their team. 

Together with Finland, Denmark, and the United Kingdom, the Netherlands ranks among the best-performing countries with the highest percentage of inhabitants who have above basic overall digital skills. In addition, the Netherlands is consistently rated one of the best remote work spots in the world, along with countries like Canada, the United Kingdom, Romania, Sweden, and Denmark.

Are Dutch salaries higher than those in other markets?

The gross minimum wage in the Netherlands was set to €1701 per month in July 2021. In countries like Luxembourg, Sweden, and Denmark, the minimum wage is above €2000 per month. On the lower end of the spectrum in Europe, countries like Greece and Portugal have minimum wages under €1000 per month. Average salaries do tend to be higher in the Netherlands, but these salaries also tend to be taxed heavily to find the country’s robust social programs.

Which industries have great Dutch talent?

The Netherlands may be a small country, but it’s one of the most powerful economies in Europe. The thriving economy in the Netherlands has enabled businesses not only to operate with ease, but also to access a pool of highly skilled workers. This is especially true in tech, thanks in part to government programs that encourage the development of tech research and skills.

Another industry with great Dutch talent is the agricultural sector, one of the oldest and most innovative sectors in the country. World-class research institutes and universities have made the Netherlands a world leader in agricultural innovation. Over time, some of the biggest food companies such as Néstle, AB InBev, Unilever, and Heineken have established a presence in the Netherlands and hired talented people to run their operations. Some other industries that have succeeded in attracting top talent are the logistics and the creative sectors.

What’s the best way to scale this and retain top talent in the Netherlands?

The Dutch government has done an impressive job of maintaining a stable economy and creating incentives that encourage innovation. This has made the Netherlands an attractive place to work. To retain top talent in this competitive environment, you should review the benefits you offer Dutch employees to make sure they are at least on par with your competitors. 

With the popularization of remote work, companies are realizing that having a global workforce can be a competitive advantage. The good news is that, to enjoy this advantage, you don’t have to go through the strenuous process of setting up a new legal entity or managing the employees’ payroll. Remote can handle all your Netherlands payroll needs.

With Remote, you never have to worry about how to navigate local labor laws, how to manage payroll across different countries, or what taxes to remit to the government. By taking on your global employment needs, Remote makes international hiring seamless. Contact us today to learn more about our global employment solutions in the Netherlands and countries all across the world.

Compensation for employees in the Netherlands

For years, companies have been waking up to the benefits of remote independent contractors. 

There are more than 1 billion contractors working all over the planet right now, and that number is only likely to grow as more businesses realize the benefits of bringing remote contractors onto their teams.

Working with global contractors means companies are no longer restricted to working with local talent. Any business can hire anyone, from anywhere, and have that person start working immediately, thanks to global contractor management services. However, if you have never hired, managed, or paid someone in another country, onboarding your first remote contractor can seem tricky.

To work with remote contractors, you must understand the legal and financial implications of these business relationships. Rely too much on a contractor, and you could run into issues of misclassification.

How can you pay workers in a country where your company has no legal presence? How do you deal with time differences, paperwork, and a remote company culture? What about the risks of legally misclassifying a worker in a different country? Can you convert international contractors to employees later?

Fortunately, hiring remote contractors doesn’t have to be an ordeal. This guide will take you through the nuances of working with international contractors, from finding the talent to staying compliant. 

An independent contractor is any person who works for a company without being subject to that company’s control. A remote contractor is an independent contractor who does not work at a location owned by the company, often in a different country. They can be as close as the same town, in another state or province, or halfway around the world and fulfill the role of an independent contractor. 

Working with remote contractors can present some challenges. The most obvious one is that you’re not face-to-face with them every day, which can make management and communication tough. International contractors may be on the other side of a big time difference, may have language differences, and might live in countries where labor laws are different from those in your own country. So how can you manage a remote international contractor? 

Here are a few tips for managing remote contractors in other countries:

There’s a common cliche about remote teams: “It’s impossible to overcommunicate with a remote worker.” That’s not exactly true, though. No contractor wants you up in their business every second of every day. Contractors are independent by definition, which means they likely have work lives beyond their connection to your company.

Still, most people tend to under-communicate, which can lead to problems. When you manage a remote team, the casual communication common in an office environment doesn’t happen as easily. It’s important to schedule regular updates with your contractors, preferably through asynchronous channels, so both parties are always on the same page.

“Regular” is the key word here. You want your remote workers to understand what you need from you so they can do their work effectively. Don’t under-communicate or overwhelm — set communication expectations for yourself and your contractors, then live up to your side of the deal.

You pay contractors because they already know how to do something well, which means you can typically step back and work asynchronously without excessive oversight. But what’s asynchronous work, or “async?”

Async means a few things. The obvious part is not working with other people at the same time. More importantly though, async is a way to get more done with fewer interruptions based on a few key ideas:

Multiplexing: Work on more than one project without waiting for others.

Communication: Use the right communication tools for the right circumstances..

Action: Always default to action, even if a supervisor isn’t there to tell you want to do. 

The expectation that everyone on a team should take action creates a feeling of trust. You hired your remote contractors for a reason, and you should trust them to do the job, make appropriate choices, and take action. If you can’t trust your contractors, you either need to set clearer expectations or find new ones.

Asynchronous work relies on one thing to function efficiently: documentation.

Documentation is anything written down in a place where other team members can read it, learn from it, and build upon it. When you’re working with a remote team, everything that doesn’t contain sensitive information should be publicly accessible. This creates a base of knowledge the entire team can draw from. We believe strongly in documentation at Remote, so we have an entire chapter in our handbook about it.

You may not want to provide your contractors with full access to your entire library of documentation, but you don’t have to. Share important pages and documents on an individual basis and lean on that documentation to work more efficiently with your remote contractor team.

Helpful resources for managing remote contractors

Managing a remote team can be a challenge, especially one with a mix of contractors and employees. With that in mind, we have a collection of guides that will help you manage your team no matter where they live: 

Reduce team stress. You can’t very well build an on-site yoga studio for remote employees. But there are things you can do to make real changes to your team’s stress levels. We put together a complete guide to managing remote worker stress to help you out.

Think remote-first, not remote-friendly. Did your business go remote in response to the pandemic? You may be a remote-friendly workplace, but if you want to maximize your efficiency, you need to think in terms of remote-first operations. Our guide to remote work for transitioning businesses can help you make the switch, even if you still have office employees.

Develop your remote work culture. Company culture is a weird thing. Culture develops organically in shared offices, but accidental culture isn’t always good culture. So how can you develop a sustainable remote work culture? We have a few tips to get you started.

How do labor laws in different countries affect hiring contractors?

Dealing with international labor laws can sound daunting, especially if you want to work with people from multiple countries. However, it’s not as scary as it sounds.

Most organizations don’t have the resources to manage the HR of hiring a global team by themselves, but global employment services make it possible for companies of all sizes to employ global teams. For contractors, the process is actually quite simple — despite certain challenges. 

Not all counties define “contractor” in the same way. Some, like France and the Netherlands, require freelancers to be registered. Others examine each relationship to ensure that the contractor is truly free to work without excessive company oversight. In some countries, like Israel, a tribunal might reclassify a contractor as an employee. Tax forms for U.S. contractors can be tricky.

Penalties can be stiff if a worker you hired as a contractor is legally an employee. In Germany, for example, a company can face criminal liability if it fails to make social security contributions. Individual managers can also be held civilly liable. Criminal liability is also a possibility in the U.S., as are tax audits, labor audits and fines under state and federal law. 

Despite the hangups of international labor laws, the process to work with contractors in other countries is straightforward. Find the person you want; negotiate a rate for the work; don’t create overstep your bounds as a client; then pay your remote contractors. 

Getting money across international borders can seem difficult at first. Depending on the country, you may need to pay the contractor in a certain currency, which can mean dealing with exchange fees. Many international contractor payment services charge their own fees on top of those — Remote, of course, charges no additional fees for international contractor payments.

The process to pay international contractors is simple. First, you must select an international contractor payment service. Next, you must check the rules of contractor payments for the country where your contractor operates. Do you need to send funds to a government-approved bank, for example? Or in a specific currency? Once you know the rules, you can send the payment. The process for doing so varies by provider, but the concept is easy enough. The most important thing is to pay your contractors legally, in full, and on time to establish a good relationship.

How much should I pay international contractors?

First things first: you probably should not provide your contractors with a regular salary. Make sure they are sending invoices for you to pay. This extra step may seem unnecessary, but it can help protect you from accusations of misclassification, which we will cover later in this guide.

With that out of the way, let’s talk compensation. You and your contractor should negotiate payments before beginning any work. There are a few ways to pay a freelancer: 

Time based: Time-based is a common method of paying contractors. They may have an hourly rate, or you might be offering hourly payment. Some contractors might be paid by the day (called a day rate), which is common in certain countries.

Project based: This means you and the contractor negotiate a total payment amount for the completion of a specific project. You might ask a software engineer to write a program for a specific amount or a writer to complete a blog post for a lump sum. You may repeat project-based rates across multiple deliverables or set different amounts for each individual project.

Retainer: You can keep a contractor on retainer by paying a lump sum (often at the beginning of each month or quarter). This amount covers work up to a certain amount, after which the contractor bills you for anything extra. Most contractors working on retainers negotiate a specific number of work hours or deliverables. Contractors working on retainer should still provide you with invoices, even if you don’t owe anything extra, to reinforce the contractor-client relationship in the eyes of the law.

Upfront: You pay before the work is done. Some contractors will require some of their payment before beginning work and request the rest after the project is completed.

On delivery: You pay once you receive the completed project.

Setting a specific rate can be tricky. Consider what you would pay a local worker for the same work; the cost of living in the freelancer’s area; any expected benefits; and the going rates for contractors in the industry. Most contractors set their own rates, but you may have room to negotiate.

Yes, but your company is likely not liable for making any payments on their behalf. In the U.S., contractors must make estimated tax payments on their own. You’re responsible for claiming them as contractors and filling out the applicable forms, but they pay their own taxes. 

The U.K. requires companies hiring contractors to follow off-payroll working rules (IR35). You may also be required to pay a consumption tax on your contractor invoices, which you may or may not be able to recoup. Common consumption taxes include sales tax, goods and services taxes (GST), and value added taxes (VAT).

How do I ensure compliance when hiring remote contractors?

Failing to comply with local laws regarding contractor misclassification can seriously affect your business. You may be subject to fines and penalties, which could even include a stop-work order for your company in that country.

Some countries may forcibly reclassify contractors under different circumstances. In Spain, for example, you may be responsible for providing benefits to contractors who work with you for a long period of time or who derive most of their income from their work with you. Given that labor laws change constantly, it’s important to have a knowledgeable local partner everywhere you hire.

Who qualifies as a remote independent contractor?

Remote workers typically come in two flavors: contractors and employees. The U.K. differentiates between employees, workers, and contractors, but in most cases, people are either employed by a company or not.

There’s a big difference between the two. Contractors are hired to provide specific services, often for a fixed period of time or on a deadline. Contractors sign a contract with a client and work for an agreed rate. Depending on the laws of their country, they may need a business license to operate as a remote independent contractor.

Employees, on the other hand, work directly for the company, usually for regular hours. You can tell them how to do their job and provide them with benefits and equipment.

Not sure whether your contractor is really a contractor? Consider these questions:

Can your remote worker set their own work hours?

Does your worker get to choose how they get their work done?

Is the worker engaged with your company for a fixed period of time?

Have you avoided hiring this worker for multiple fixed-term contracts in a row?

Does the worker tell other people they are a contractor or freelancer?

Are they only working on their own projects, rather than supervising other workers? 

Can they do their job without training? 

Are they getting a salary rather than submitting an invoice? 

Has the contractor registered for statutory social insurances and obtained required professional insurance policies?

If you’ve answered yes to the above questions, you probably have a contractor-client relationship. Otherwise, you may have a misclassified employee on your hands, which can lead to problems.

What are the penalties for misclassifying workers? 

As mentioned earlier, remote workers are either contractors or full-time employees. It's very important to make sure your workers are correctly sorted into the right category.

If you classify someone as a contractor who should be an employee, your company could face fines and penalties from the governments involved. In some cases, poor classification can even lead to questions about who actually owns the work produced. Imagine the headache if your contractor in another country claims to own IP they developed for you. Fighting an intellectual property battle in foreign courts can be a difficult and expensive proposition, even for large companies.

Our guide on the penalties of misclassifying contractors outlines more of the dangers of misclassification. However, if you are diligent with your compliance, you will never need to worry about facing fines or other punishments.

What to do before hiring your first global contractor

Before you make your next contractor hire, think about these questions:

Define the scope of the project. How big is the project? How long will it take? Are you planning for a string of projects or just one? Remember, some countries consider contractors retained on a continuous basis to be employees.

Figure out your budget first. Be clear about what you can afford before communicating with contractors. You may not be able to afford the top rates, but you may not need the absolute best talent for every project either.

Create a system for communication. Will you invite your contractors to a shared Slack channel? Create a Google Doc or Notion page to work asynchronously? Whatever your plan, set expectations from the beginning to avoid miscommunications. 

Start working with remote contractors today

Onboarding a remote contractor from another country doesn’t need to be complicated. A partner like Remote can make it easy for you to hire, pay, and manage your contractors all over the world, with no hidden fees and no surprises.

Check out our international contractor management services today. You can sign up in minutes and begin onboarding and paying your international contractors right away.

If you have questions, reach out and let us know! We would love to help you navigate all of your international employment needs.

To work with remote contractors, you must understand the legal and financial implications of these business relationships. Rely too much on a contractor, and you could run into issues of misclassification. This guide will take you through the nuances of working with international contractors, from finding talent to staying compliant. 

Expert Guide to Working with Remote Contractors

Working with remote contractors: Expert Guide

Avoiding employee misclassification is more about action than intent. Treat a worker like an employee, and eventually regulators will see that worker as an employee — even if you never intended to create that relationship.

Your intent matters, of course. Many countries levy heavy penalties against companies found breaking the law intentionally. If you want to stay compliant, though, you have to follow through on your good intentions.

A guide to employee and independent contractor misclassification

More and more companies are recognizing the value of using independent contractors. You’re no longer bound by the talent in your area, and contractors can be easier to hire and pay. Win-win, right?

Unfortunately, hiring contractors carries an inherent risk of misclassification. In the United States alone, some estimates say nearly 10% of workers are misclassified and that 10-20% of businesses have misclassified an employee. Because your responsibilities to employees are much more substantial, misclassification can have serious consequences for your business.

So how do you minimize risk of employee misclassification while managing international workers? Keep reading. We’ve developed this guide to help you avoid misclassifying employees.

What is employee and worker classification?

Employee and worker classification refers to the status of the worker in the eyes of the local government. In most cases, workers are either employees (meaning the company holds more responsibility) or self-employed contractors.

Different countries have different definitions of employees and contractors for the purposes of employment law and taxation. When a business hires a worker, that business must classify that worker appropriately, using the proper documentation, and follow all applicable laws.

Employees are entitled to more benefits and protections than contractors. Depending on the country, these benefits may include:

Payroll and reporting are also handled differently for employees and contractors. For employees, employers are responsible for withholding payroll contributions (and sometimes matching contributions); paying payroll taxes; and paying into insurance programs.

Details vary from country to country. Remote’s complete Guide to Global Payroll Management has more information.

What makes one worker an employee and another a contractor? The answer depends on a series of questions, including a worker’s time, place of business, equipment, payment structure, and freedom to pursue other jobs.

In general, the distinction between an employee and an independent contractor depends on the level of control the business has over the worker. The more control a business exerts over how the work is performed and how the worker is paid, the more likely it becomes that the worker should be classified as an employee.

Each country will have its own guidelines. For example, according to the IRS in the United States, “[A]nyone who performs services for you is your employee if you can control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed.” Be sure to check the guidance for each country in which you use global contractors.

While rules may vary by country, you can usually guess whether an employee is misclassified based on the answers to the following questions:

Employees typically work on a schedule, with the business designating the hours and days to be worked. During that time, the employee is expected to devote all of their time to the business. Many employees work from 9 a.m. to 5 p.m., Monday through Friday. By contrast, a contractor can work whenever they want and take as many breaks as they want, as long as they deliver the product or service by the deadline.

Employees often work in a company’s office space or other defined property, while contractors can do their work from anywhere. However, remote work for employees was on the rise even before the global pandemic. Now, it’s common practice for employees to work from home or another location of their choosing. In these cases, a person working in a company office is more likely to be an employee, but an employee working outside that office is not necessarily more likely to be a contractor.

Employers typically provide resources for employees to do their work. These resources may include computers, cell phones, specialized software or subscriptions, and other necessary tools. On the other hand, contractors use their own equipment and subscriptions purchased at their own expense.

When an employer hires an employee, the expectation is that the product or service is done by the employee themselves. If the work must be done by the worker, they are an employee. By contrast, a contractor may be able to delegate work as needed.

Most employees are paid on a regular basis through a payroll system. As part of payroll, businesses deduct necessary taxes and make social contributions on behalf of the worker. Contractors, however, are paid without tax withholding, often based on invoices. Employees, on the other hand, do not have to submit invoices for their regular pay. Instead, they either receive regular distributions of their salary or clock in and clock out using an hourly system.

Here’s where things start to get tricky. In many countries, if a worker provides a service that is vital to the business, they are likely to be an employee. By contrast, contractors are often used to provide supplementary services, such as a marketing plan or website build. However, this can be subject to interpretation.

Think about it like this: if the company makes websites for clients and hires someone to make some of those websites, that person is probably an employee. If the company makes lightbulbs and asks a self-employed website builder to create a website for the company, that worker is probably a contractor.

The question of permanency can be the difference between an employee and a contractor. In some countries, a worker may be correctly classified as a contractor, then become an employee if the engagement with the company continues beyond a certain time frame. In countries with fixed-term contracts, workers often cannot sign multiple fixed-term contracts with the same employer. Instead, the employer must either terminate the relationship at the end of the term or offer the employee an indefinite position at the company.

What is employee and independent contractor misclassification?

Misclassification occurs when a business gives a worker the wrong designation, whether by mistake or on purpose. Although fines and penalties tend to be more severe for deliberate misclassification, businesses still face penalties for honest mistakes.

Unfortunately, many employers deliberately misclassify workers to get the best of both worlds. You are not required to pay taxes and insurance for contractors, and your employment contract can be much more flexible in favor of the company. It’s much easier to fire contractors, and payroll is much more straightforward without the need to calculate benefits or social contributions.

Even if you try to classify workers properly, you still might struggle. For example, you may have hired a contractor to do a small job for your company. And they may have done such a great job, you hired them for more jobs. Over time, the nature of your relationship may shift. Unless you’re doing regular classification reviews, you could overlook the fact that your old contractor is now technically an employee. 

Classification isn’t always straightforward. Local laws vary, and those laws change over time. For example, in 2021, the Netherlands changed rules regarding misclassification and increased enforcement of those rules. That means you need up-to-the-minute information to stay compliant.

Misclassification not only deprives workers of benefits and protections, but it also denies revenue to state and federal governments. Consequently, more countries are cracking down on the practice of misclassification, especially as the gig economy grows. Governments are ramping up enforcement, increasing penalties, and tightening legislation. You could be subject to many consequences, even if your misclassification was an honest mistake.

What are the risks of employee misclassification?

The risks of employee misclassification can be severe. Some consequences might include:

Penalties and fines: You may be liable for back taxes and associated penalties for paying late.

Back wages and benefits: You may be required to compensate workers for lost wages or benefits that resulted from the misclassification.

Legal issues: You may be vulnerable to lawsuits from groups or individuals harmed by misclassification.

Misclassifying employees can have hidden costs as well. Workers who discover they should have been employees instead of contractors may view the company unfavorably. Some workers may even stop working with the business and tell others to avoid the company.

You do not want to be known as a company that deprives workers of benefits and security. Even if you’ve made an honest mistake, the negative PR can seriously harm your company’s ability to compete.

How do I avoid employee misclassification as an employer?

If you have employees and contractors, you can avoid misclassification by learning the local laws that govern compliance where your workers live. For example, rules regarding 1099 misclassification in the United States are different from rules governing IR35 in the United Kingdom.

While every situation is unique, you can follow a few best practices to avoid employee misclassification:

Take advantage of government resources and self-check services.

Review your contracts with all self-employed contractors.

Train your managers on misclassification and encourage them to err on the side of caution when assigning work to contractors.

Convert contractors to employees if you discover that you have misclassified them.

How to calculate employee misclassification

Remote's complete guide to employee and contractor misclassification. Learn how to avoid misclassification and keep your business compliant.

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