Achieving contractor management compliance: best practices

The international sports brand, Nike, recently found itself facing a staggering penalty as a result of a grave misstep: the misclassification of thousands of its workers. This goes to show that even global companies can make mistakes while hiring workers abroad.

Whether you’re a growing startup or a well-established business, you can’t take contractor management compliance lightly. You must comply with local regulations while hiring and managing contractors or risk facing serious consequences that can include fines, penalties, lawsuits, and reputational damage.

This article explains the common compliance challenges companies face and the steps you can take to reduce legal risks while hiring independent contractors.

Why is contractor management compliance so important?

Managing compliance is a crucial aspect while hiring contractors globally, and your company must comply with legal regulations in the country of hiring. These regulations could consist of national laws, local rules, or company-specific standards. Compliance is intrinsic to different aspects and processes involved in global employment including:

• Contract creation and management

• Figuring out tax requirements

• Organizing insurance and liability

• Onboarding and offboarding processes

• Scheduling training

• Ensuring appropriate insurance coverage

The key to contractor management is to minimize legal risks and foster a transparent and productive client-contractor relationship. Contractor management compliance is crucial if you’re planning to hire abroad. Here’s why:

It helps you avoid legal pitfalls

Non-compliance can lead to financial penalties, legal action, and even injunctions, threatening your company’s financial health. Following a decade-long legal battle, Swift Transportation, an American trucking firm, was required to compensate over 20,000 workers with payments exceeding $100 million. This hefty payout was the consequence of these workers being incorrectly classified.

Contractor management compliance is designed to protect both your business and the contractors you hire from unnecessary penalties.

It helps you maintain a positive business reputation

Adherence to contractor management compliance protects your company from the negative publicity that legal issues can generate, shielding your business from financial harm and helping to maintain the trust of clients, contractors, and stakeholders. It’s more than a protective measure; it’s about creating a lasting legacy of integrity and reliability.

It helps you attract top talent

Companies need to be compliant with contractor-based regulations because it positions them as a reliable employer. Individuals are drawn towards reputable companies that are known for their integrity and trustworthiness.

It leads to contractor satisfaction and retention

Compliance ensures contractors receive proper remuneration for their work. And a happy contractor is a loyal contractor. Reducing turnover helps your company save on the time and costs of onboarding new talent, leading to a more stable, skilled, and experienced workforce.

It leads to clear communication and expectations

Contractor management compliance sets a clear blueprint of expectations for all parties involved, which can reduce misunderstandings, foster collaboration, and help maintain strong professional relationships.

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Here are some common challenges that companies typically face while aiming for contractor management compliance:

Employee misclassification

Misclassification of employees as independent contractors is a widespread problem, adding another layer of complexity to contractor management. Astonishingly, 1 in 10 people initially report that they work for an employer but are, in fact, independent contractors.

Misclassification can have serious consequences, such as penalties and tax liabilities for businesses. Companies might fail to withhold income taxes, neglect to pay employer payroll taxes, or fail to pay unemployment tax on wages paid to misclassified employees, which can result in back taxes, interest, and penalties.

Creating contractual agreements

A contractual agreement forms the bedrock of a successful relationship between the client and contractor. However, drafting a comprehensive and compliant agreement can prove challenging, especially if you have limited knowledge of local laws in the country of hiring.

The contract needs to meticulously outline the scope of work, payment terms, intellectual property rights, relevant legal information, termination clauses, and more. Any ambiguity in the contract can lead to confusion and potential legal liabilities. Read our useful guide to independent contractor agreements for more information on what you must include in an agreement.

Compliance with labor laws

Understanding and adhering to labor laws is a moving target, thanks to continuous updates and changes in employment legislation.

Case in point: in 2022, the US Department of Labor proposed a new rule to reshape who qualifies as an employee and who is an independent contractor. Keeping track of changing laws across countries can be overwhelming, especially if you’re hiring in multiple countries.

This is where a global HR platform like Remote can make your life easier. As your trusted partner, we take the guesswork out of compliance by staying on top of these legislative changes so you don’t have to. 

Tax compliance

Businesses must keep track of and comply with tax practices and regulations that vary not just from country to country but often from state to state. This requires a strong understanding of tax laws and careful implementation, since an oversight or mistake can lead to substantial financial penalties. 

For instance, take the infamous case of Uber. The transportation company was embroiled in legal battles over the classification of its drivers as independent contractors rather than employees. This misclassification led to a whopping $100 million in back taxes.

Compliance with immigration laws

Immigration laws around work permits, visas, and tax obligations vary from country to country and can be complex. Non-compliance in this landscape can also lead to serious legal repercussions including fines, deportation, business bans, and reputational damage.

However, this doesn’t mean that you should shy away from leveraging global talent. With a trusted partner, like Remote, you can navigate these immigration laws confidently. Whether you’re hiring or relocating team members abroad, Remote’s team of mobility specialists can ensure your workers have the right documentation to live and work legally in the country of hiring.

Ensuring data protection and confidentiality

In an era marked by frequent cyber threats and data breaches, data protection and confidentiality take center stage. Compliance with laws such as the GDPR and CCPA is essential but often challenging due to their intricate requirements. 

For example, the hotel chain Marriott was fined £18.4 million for a data breach incident.

Protecting intellectual property rights

Ensuring contractors don’t infringe upon your intellectual property rights is paramount. Missteps can lead to legal complications and damaged relationships. For instance, a contractor unknowingly using copyrighted material in their work could trigger a lawsuit against the company.

Ensuring insurance and liability coverage

Determining insurance coverages and liability can be a complex process, but it’s crucial to protect businesses and contractors alike. A mishap, such as an at-work accident, can lead to hefty costs if the business is deemed liable and isn’t properly insured.

Organizing compliant offboarding and termination procedures

Proper offboarding and termination procedures are crucial to ensuring a smooth transition and protecting both parties’ interests and rights.

Offboarding involves more than just a final paycheck. It can include securing company assets, terminating access to company systems, providing feedback, and transition plans if the contractor is handing over responsibilities.

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Contractor management compliance checklist

Navigating contractor management compliance can seem daunting, especially when expanding your business globally.   Here’s a helpful checklist of contractor management considerations that will help you achieve compliance while working with contractors.

Sign the contractual agreement

This is the foundation of your professional relationship with the contractor. It outlines the scope of work, timelines, payment details, and confidentiality clauses to ensure mutual understanding and agreement.

Gather and store the right documents

Documentation is crucial. Gather, verify, and securely store essential paperwork, such as invoices, work permits, tax forms, and identification documents, to ensure smooth operations and audit readiness.

Perform necessary verifications and background checks

Carry out any necessary background checks and verifications to confirm the contractor’s suitability for the job and protect your company from potential risks.

Set up proper payment channels

Ensure efficient and reliable payroll processes are in place to pay your contractors accurately and on time. This enhances the contractor’s experience and trust in your company.

Remote’s payroll software allows you to easily manage payroll and taxes, administer benefits, and ensure compliance for all contractors and employees, regardless of their location.

Determine the preferred currency

Discuss and agree on the preferred currency for payments. This step eliminates confusion, reduces currency exchange risks, and ensures prompt and accurate payments.

Conduct onboarding and training

Make your contractors feel like part of the team. Organize an effective onboarding process and provide the necessary training to ensure they understand their roles and responsibilities, the company culture, and the tools or software they need to use.

Set up the right communication channels

Establish appropriate communication channels to facilitate discussions, provide feedback, address concerns, and maintain seamless work processes.

Fulfill legal requirements

From compliance with local labor laws to intellectual property rights and data protection regulations, fulfilling these requirements protects both your company and the contractor.

Use our Contractor Compliance Checklist to avoid misclassification

Work through this checklist to help determine if a new hire should have a contractor or employee relationship.

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Make contractor compliance management simple with Remote

Contractor management compliance isn’t just a series of boxes to tick off, but a strategic approach to nurturing an ethical, trustworthy, and globally well-established business.

At Remote, we understand how difficult and time-consuming it can be to keep your company compliant with the latest contractor management regulations. Our contractor management platform was designed with you in mind. It gives you one single platform to hire, pay, and manage your contractors quickly and easily.

With Remote’s contractor management, you can:

• Onboard contractors efficiently with customizable contracts 

• Manage contractor status, time-off requests, tax forms, invoices, and payments in one platform

• Create localized employment contracts and manage contract signing easily

• Manage payments and invoices globally in the local currency

• Ensure that you’re operating in compliance with local labor laws and tax practices.

Download our full guide on international contractor management to learn more about how you can onboard, pay, and manage your international contractors at scale. To simplify your contractor management process, get started with Remote today!

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