Governments around the world are getting tougher on employment misclassification, imposing penalties and presenting serious risk to your business.
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Misclassification occurs when a worker is mistakenly employed as an independent contractor, rather than a full-time employee. This means that workers and employers might not be paying all of the correct employment taxes due, and not receiving the correct employment rights and benefits according to local labor laws and regulations.
Contractor relationships are great for temporary roles, where you need specialist skills or additional bandwidth. But they shouldn’t be in charge of other employees or responsible for major initiatives for your business. They should also be able to work to their own schedule, with no set work hours — and should be able to subcontract work as necessary.
However, some employers may be using workers as ‘pseudo-employees' — full-time, ongoing staff where their work and working conditions are set by the company, but who are employed as a contractor. This is an example of employee misclassification in action.
There can be serious consequences for misclassifying workers, either accidentally or on purpose.
The risks can include heavy penalties and fines, plus back taxes. You may also be responsible for compensating workers deemed misclassified by paying them for lost wages and any benefits they missed out on.
Misclassification can also create opportunities for legal issues to arise, from workers, unions, or other groups harmed by incorrect designations.
Did you know that companies of all shapes and sizes have been hit with misclassification penalties in recent years?
Lastly, misclassification can create negative perception issues: workers may quit or leave, potential employees may view your company unfavorably, and your customers may rethink their relationships.
While you may not be affected by contractor misclassification rules today, it’s still important to know the risk and act proactively to ensure your business is in good legal standing in every country you have workers around the world.
In the United States, the IRS says that “[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.”
But the rules vary across different countries, and they are always changing.
However, there are a number of indicators that can be used to evaluate your independent contractor misclassification risk.
Read our guide to contractor misclassification to find out more.
These indicators include, but aren’t limited to, the following areas:
Use our free Misclassification Risk calculator to determine how exposed your company may be to potential fines and penalties.
There are a number of simple steps you can take to first understand, and then reduce your risk of contractor misclassification.
If you’re already working with contractors, make sure you’re not crossing any lines. Our free calculator will walk you through the key questions and assess your current risk.
When you begin working with new contractors, double-check each country’s misclassification rules to make sure you stay within the lines.
Use Remote to onboard, manage, and pay contractors — and access our free legal advice guides.Sign up now
You must use legally-compliant contracts that relate to local labor laws wherever your contractor is based. It’s not enough to use a standard contract worldwide.
Our legal team has created compliant contracts that can be edited, reviewed, and signed all within the Remote platform — so you can welcome new contractors effortlessly.Sign up now
If you are working with contractors and have a high risk of misclassification, it might make sense to bring them on as a full-time employee.
When they’re located in the same country as your business entity, that’s simple enough. But if they’re based in a foreign country, it can be confusing.
Employer of Record services can help you employ a worker as a full-time employee, paying all relevant taxes and benefits, without the need to set up international entities.
Remote is trusted by leaders of international organizations, large and small. Find out how Remote can help you convert contractors to employees around the world.Learn more
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