Is My Independent Contractor Really An Employee?

Getting your international operations up and running quickly with the right staff can be a tall order. Your company must have the appropriate entity structure in home builder, register payroll properly and be setup to comply with all relevant taxes, benefit requirements, etc.

The reality is that you may need someone in country working on your behalf sooner than you are able to iron out all the details. This is a common situation in which independent contractors are considered, non employees that can begin doing work on your behalf.

However, there are major risks associated with bringing on an independent contractor. Without proper considerations and detailed contractual agreements, you may find that, although you’ve classified your worker as a contractor, the local authorities in country have actually classified him or her as an employee for tax purposes.

How do you avoid this gray area of misclassification? Ensure that you are hiring only true contractors in the first place. Though each country will have specific employment tests, generally speaking, the following guidelines apply to contractors.

  • A contractor is free to work for other companies/institutions. True independent contractors are just that-independent. They are not solely bound to one company. If an organization that a contractor works for somehow influences his or her ability to work for other companies, the contractor’s status may come into question.
  • Contractors do not hold business cards in the name of the company/institution. By very definition, independent contractors are in business for themselves. This means that they should not be given business cards through your company. Otherwise, it implies that they are actually an employee, and have the same rights as an employee. The only business cards a contractor should have are those for his or her own business
  • A contractor can be readily substituted. A contractor should have the right to substitute another individual in his or her place to handle contractual responsibilities. The idea is that the client of a contractor should be focused on the results, not how the results are delivered. If the contractor cannot be substituted, he or she may be classified as an employee.
  • Contractors use their own equipment. Independent also means equipment independent of the contracting company. If the client company is responsible for providing materials that are absolutely essential to the contractor’s work, this may signify employee status. Examples can include: telephones, computers, printers, etc.
  • Contractors are not usually granted stock options and employee incentive plans. Non-employee status typically means no benefits. Along with things like healthcare, stock options and incentive plans are, in most cases, reserved for employees. Though there are circumstances where such options can be offered to independent contractors, doing so without risking an employee classification may require the assistance of an experienced advisor.

Typically, outside of these guidelines, everyone else will be considered an employee, and entitled to all the rights and benefits that come with that status. Where a true contractor relationship does exist, to avoid any complications, it is best to arrange for a detailed contractor agreement to be in place before work actually starts.

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