Hiring anyone, anywhere and anyhow may lead to employment misclassification. It’s a common issue in startups and in some remote companies that have team members all around the world. When the right candidate is on the horizon, compliant hiring becomes secondary…

I’ve experienced different employment misclassification scenarios while working with companies all around the world. Interestingly, the topic usually comes to the surface during an audit or when things simply go wrong… But then it’s too late. And that’s why I’d like to talk about this issue openly so you can proactively tackle any business risks before they become severe.

Hiring people globally

It’s important to know that employment and freelancing are two different things. Team members can’t choose whether they want to be hired as employees, contractors (freelancers) or even on grounds of B2B agreements. The truth is that all of these options are significantly different and using either of them depends on the country, the individual situation of the hire as well as the business context.

And so, an employee is someone who is subject to labor laws in a particular country. A contractor (a freelancer) isn’t legally treated as an employee but an independent individual, delivering  services to the client. B2B on the other hand means that a company is invoicing another company. In some countries freelancers must have their own registered business to be able to sign service agreements. In others (like for example the US), they don’t. It all depends on laws that are binding in a specific country so before you hire anyone – check how you can start working with them in a compliant manner.

Additionally, there’s one more solution. It’s called an “Employer of Record” (EOR). There are currently many of them on the market. What they do is hire employees on the client’s behalf in a certain country. These businesses usually have entities in different locations worldwide so they can act as local employers. Afterwards, they basically just issue invoices and the client covers all payroll costs for the employee, while being able to work with that individual. However, there are other, operational aspects that often speak against using Employers of Record (which I will cover in another article).

The issue of employment misclassification

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.

Attention! It’s worth knowing that there are certain contract provisions that can directly lead to such issues so you better watch out. Here are some of them:

  • Fixed, monthly payments
  • Perks and benefits
  • Paid holidays
  • Medical insurance
  • Business equipment
  • Pension plans
  • Service location (at the client’s premises)
  • Performance tracking
  • Non-competition clauses
  • Exclusivity clauses
  • Daily working hours
  • Supervisor and delegation details

But it’s not just the contract itself that matters. In most cases substance prevails over the form for employment which means that the actual relationship between the company and the contractor will determine its real nature. This means that contractors can’t be subject to the same internal processes and procedures as employees. Let me share some examples:

  • Conducting performance reviews
  • Making social contributions payments
  • Offering and documenting paid time off

 Compliance above everything

Now, when you more or less understand the issue of employment misclassification, let me share a bit about the consequences. Unfortunately, these aren’t pleasant for both the company and the individual… And here I mean penalties such as tax and employment violation fines and/or the need to repay social contribution costs since the beginning of the work relationship. The amount of these is assessed on a case by case basis – it can be low but it can also be super high. You never know until it actually happens… So don’t take unnecessary risks.

I know I’ve shared tons of information and you may now feel a bit overwhelmed. Don’t worry. It’s really not that complicated as every case it’s different. Also, having one of the above mentioned provisions in your contract, doesn’t mean that you’ll get misclassified immediately.

It’s all subject to a detailed evaluation of all the circumstances.

Nevertheless, this topic can’t possibly be ignored as the scale of it will just grow in the current reality of flexible and location-independent work. So, before you enter into any work relationship, make sure that you’re fully aware of its nature, your duties and potential consequences. Even if it requires some research – it’s better to be proactive rather than cry later!


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