As startups go increasingly remote and expand globally, it’s crucial they keep up to date with the differing regulations of hiring employees versus contractors in each market they enter.
Misclassification occurs when someone is mistakenly categorised by an employer as a contractor rather than an employee. This means the individual works as a contractor — without the benefits and protections of an employee — but is actually in an employment relationship.
“It’s critical that startups understand this issue as they begin to work with contractors, particularly international contractors,” says Pedro Barros, senior vice president (SVP) and general manager of contractors at Remote, a global HR platform.
“Many countries have strict rules about misclassification and heavy penalties for violations. When a business hires a contract worker, it has the responsibility to maintain compliance with local labour laws in their country, which differ from place to place.”
Understanding the differentiation
So, what is the difference between a contractor and an employee? Generally, one very strong factor which distinguishes between an employee and a contractor is the level of control the business has over the person.
“The more control a business exerts over how, when and where the work is performed and how the individual is paid, the more likely it becomes that the worker should be classified as an employee,” says Barros.
Compared to the rest of the world, Western European countries are among the more likely to pursue misclassification claims and impose highly punitive penalties
“Employees have more legal protections and benefits, but less control over their working hours, place of business, equipment, payment structure and freedom to pursue other jobs. Contractors, on the other hand, are self-employed, can decide what projects to take on and can take on multiple clients if they choose.”
By misclassifying the individual as a contractor, the worker can miss out on key employment rights and benefits. As for the business, it could face heavy fines and other penalties, which all vary by country. In France, for example, penalties can include being banned from using independent contractors for up to ten years. Other countries can impose prison time.
A company found to be misclassifying individuals may also often have to pay lost wages, benefits such as holiday pay and retroactive taxes. It may lose ownership of any intellectual property the contractor created for them and can become a target for lawsuits. It can also face negative perception issues that impact sales, or the ability to hire in the future.
“Compared to the rest of the world, Western European countries are among the more likely to pursue misclassification claims and impose highly punitive penalties,” says Sam Ross, Remote’s VP general counsel.
Getting it right
Each country has its own rules, and it’s important to fully understand the specific regulations of any country that you are hiring in.
Remote helps companies hire contractors all over the world, and has found that most countries’ laws focus on some key questions about the working relationship:
- Can the contractor set their own hours and decide what work to take on?
- Is the contractor engaged with the company for a temporary length of time?
- How and when does the contractor get paid? How do they submit expenses?
- Does the contractor publicly acknowledge they are self-employed rather than an employee of our company?
- How are taxes and benefits managed?
- Does the contractor manage others?
Differing rules across Europe
Rules and regulations around worker classification differ from country to country — and even in Europe, there is no one set of laws to abide by in this field.
Ross says that in France, classification is a hot topic and the requirements for classification as a contractor in the country are stricter than in many others.
“In France, in order for someone to be classified as a contractor, there has to be a separation between the contractor and the business, and the contractor can't be subordinate to any company employee,” he says. “Hiring an employee in France can be a laborious process for foreign companies, as French labour law is comprehensive and complicated.
“It’s critical that workers are classified correctly, because penalties are stiff and employers may be faced with criminal liability and could be banned from using contractors for two to ten years.”
A common misconception is that it’s difficult or impossible to hire an internationally based employee or contractor
In the UK, there are three categories of employment status: self-employed, worker and employee, with the first category having the least amount of rights. The rules governing the hiring of contractors in the UK compared to other countries are distinct, and require the company to pay special attention to various employment laws, tax and compliance practices — including a specific element of the law related to contractors known as IR35 legislation.
IR35 generally applies to medium and large businesses and means that the responsibility for assessing the contractor's status falls on the company, rather than the individual contractor.
Poland, on the other hand, has no specific law or article dedicated to independent contractors. However, that doesn’t mean there is no risk — regulators can rely on definitions in the Polish Labor Code, the Polish Civil Code and rulings of the Polish Supreme Court to determine that an employer is misclassifying local workers, and impose penalties.
“A common misconception is that it’s difficult or impossible to hire an internationally based employee or contractor,” says Ross. “With Remote, we make it simple to do both, so companies can easily work with contractors and employees for various purposes and have peace of mind that the individuals are classified appropriately.”
Getting ready to hire
For a startup without a dedicated HR or legal team, the burden of compliance can make the idea of hiring international contractors seem overwhelming — but with the right partner and knowledge, it can be a straightforward process.
It’s now easier than ever to work with international contractors who can bring completely new skill sets and diversity to your team
“When you’re ready to hire someone, don’t limit yourself to individuals in your country and consider the global talent pool,” says Barros. “It’s now easier than ever to work with international contractors who can bring completely new skill sets and diversity to your team.
“Consider whether you need a contractor or an employee. Contractors are particularly advantageous for startups that are experiencing rapid growth, require specialised services, and need a high level of flexibility. On the other hand, remote employees should be viewed as long-term partners who contribute to the foundational growth of your company.”
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