Hiring from anywhere looks super tempting. Companies that release such policies become highly desired by candidates. People want full freedom and flexibility. Employers also want to increase their EVP by making “work from anywhere” possible. I get it and I’m fully onboard…

But how do these companies make it happen that team members can actually travel the world all the time? Well, carefree hiring and becoming location independent without a proper compliance analysis, can lead to issues for both sides of the contract.

What can happen is “employment misclassification” which means that businesses hire people through contractor agreements but they treat them as employees.

Before we dig into the details of employment misclassification, it’s important to explain what work from anywhere actually is. In a nutshell – it can mean that a company is hiring people as employees in different countries through their own legal entities or through “employers of record”. As mentioned above, it can also happen that companies hire contractors all around the world so that they can embrace a digital nomad lifestyle. Additionally, numerous companies introduce “workation” policies that allow employees to temporarily work abroad. However, this is a different topic and you can read more about it here.

What I’ll cover in today’s article is the issue of employment misclassification that happens in companies due to inappropriate contract provisions and irrelevant management methods. Hiring contractors just to overcome some obligations and limitations resulting from labor laws isn’t the way to go. So if you’re a remote-first founder, HR professional or team member – hold on tight because you should know this.

Contractor vs. employee – the legal difference

First things first. We must properly define the difference between being an employee and a contractor. The first one is subject to an employment relationship that is characterized by various features, according to local labor laws. According to some of the current EU laws, an employee is defined as as someone who for a certain period of time, performs services for and under the direction of another person in return for which he receives remuneration.”

An independent contractor, however, is an individual who routinely, personally, and directly performs a business or a professional activity for profit. Most importantly, such an individual does it on their own and outside the scope of another person’s management. In other words, an independent contractor does not receive instructions about how the job needs to be done and isn’t subjected to the company’s orders. A contractor organizes work alone without a pre-determined timetable or subordination. Such individuals usually work for many companies, not just one.

At this stage the difference between these two relationships seems clear, right? So, in this case there should be a clear distinction between contractors and employees in every company. If this isn’t the case, local authorities may classify a contractor agreement as an actual employment relationship which leads to dramatic consequences – employment misclassification. Here I mean additional (retroactive) taxes, social security contributions and fines for both the employer and the employee.

Let me share some of the riskiest provisions that I’ve seen in contractor agreements. You must know that having some or all of them as part of your contracts, can sooner or later most probably lead to employment misclassification:

  • Position / job title
  • Fixed, monthly payment
  • Perks and benefits
  • Paid holidays
  • Medical insurance
  • Business equipment
  • Pension plans
  • Service location (at Client’s premises)
  • Performance tracking
  • Non-competition clause
  • No right to subcontract
  • Exclusivity clause
  • Daily working hours
  • Supervisor and delegation details
  • Manner of providing services
  • Right to act in the Client’s name
  • A probationary period

 

It’s not just the contract that matters

Now you could think that eliminating all these elements from independent contractor agreements will simply solve the problem of employment misclassification, right? Unfortunately, that’s not the case as in many countries substance prevails over the form of employment. It means that the actual relationship between the Client and the contractor will determine its nature. Therefore, not only the contract itself but the ongoing relationship should also indicate a contractor agreement. In other words, the way a company collaborates with contractors should be separated from the manner of working with employees. This refers to overall business operations, processes, and procedures as well as mutual responsibilities.

To make sure that we fully separate both relationships, both the doctrine and practice have developed principles and a number of factors that matter while we’re determining the existence of either employment or a contractor agreement. These can be:

  • Not to store contractor details with employee files
  • Not to conduct performance reviews with contractors
  • Assess contractors’ services as part of a “vendor management process”
  • Not to advise contractors on payments, taxes or any other contributions
  • Not to provide paid time off
  • Make sure that the contractor also performs projects for other clients
  • Document contractors’ deliverables
  • Require contractors to document deliverables as a support of the invoicing process
  • Reimburse contractors rather than directly cover expenses that the contractor has made towards the Client’s business
  • Not to formally include contractors in company-wide reporting process

It’s important to know that not all these criteria have the same weight in terms of assessing potential employment misclassification. This is normally applied a “matrix” and the identification process varies per country. That’s why it makes sense to check them individually for all the areas that are currently being considered.

Hire as you wish – but do it wisely

Just to make things clear – I’m not trying to discourage anyone to hire contractors and offer employment relationships instead. The goal is to understand that we should proactively address this topic, especially because the talent market is highly competitive these days. People want freedom, benefits and security so companies are doing all they can to ensure they become the employer of choice. This often results in super flexible working arrangements such as contractor agreements entailing employment-related provisions.

It’s important to distinguish two, different collaboration paths and build awareness among team member and candidates. The latter ones should understand the differences between being an employee vs. a contractor as well as the consequences of employment misclassification. I strongly advise to create awareness among team members about their responsibilities during flexible collaboration agreements. Only then we can keep scaling our teams in a compliant, efficient and sensible manner.

 

One Comment

  1. […] Employment misclassification happens when a company hires a person on a freelance contract (as an independent contractor or even on B2B grounds) but the relationship should have been employment. […]

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