As companies look for new ways to control costs and expand their talent pool, international contractors are on the rise.
Global hiring solutions like Rippling make it easier than ever to hire them, but determining whether an international worker is legally a contractor or an employee is still complicated and risky. Not only are you dealing with nuanced rules, but they’re outside your company’s own geographic area of expertise—the rulebook might even be in another language.
There’s also no single tipping point between a contractor and an employee. A multitude of factors can sway the balance, and before you even realize you’re on the wrong side of the law, you can get buried by fines and penalties.
Check if you’re classifying your international workers correctly (or read on to learn the ins-and-outs)
We’ve built a tool to help you understand whether you’re misclassifying your workers, so you can avoid falling foul of misclassification laws. You can take our quiz in 90 seconds here:
To learn more about classification rules, read on…
What is contractor misclassification—and why is it so risky for companies with international workers?
Misclassification is when a business considers a worker to be a contractor, when they should have considered them an employee. Whether your contractors are in the US or overseas, misclassifying a worker can run up huge penalties.
Different countries have different rules for what distinguishes a contractor from an employee. Without HR admins experienced in the nuances of each country’s classification regulations, it’s more likely you’ll fall on the wrong side of the law.
Here are some of the key factors to consider.
- Impact of work
A true contractor’s work isn’t integral to the business and it should not be critical to the business’s success. If you can’t manage without a worker’s services, then it’s likely they should be classified as a full-time employee.
- Permanency of relationship
An agreement with an independent contractor must have a defined end date, and contractors typically send invoices to you on a per project or per period basis. If a worker is paid hourly, weekly, or monthly without an end date, then that often means they should be classified as an employee.
- Degree of integration
Contractors don’t participate in typical company processes, like performance improvement plans or salary reviews, or enjoy the same benefits as full-time employees. They’re typically responsible for their own work and travel expenses, and shouldn’t receive equipment from their employer to perform work-related tasks.
- Degree of control
Independent contractors are just that: independent. Their output and deadlines are driven by you, but the way they approach work is not defined by you.
- Chance of profit or loss
A true contractor can realize a profit or incur financial losses from their work. For example, they may have to correct unsatisfactory work on their own time.
- Exclusivity of service
Independent contractors are self-employed and can work for multiple clients at once. If your contractor only has time to work for your business, they should likely be classified as an employee.
It’s easier to misclassify people than you think
There’s no single factor that determines whether your worker is legally an employee or a contractor—so you need to tread carefully.
Let’s say you engage a freelance worker based in Australia. After a while, they ask if they can expense some software they need to complete a certain project. It might seem like a reasonable request, but contractors typically pay for their own equipment. So if you agree, their degree of integration with your company may begin to resemble that of a full-time employee.
As you continue using the freelancer’s services, the risks of misclassifying them get even higher. Over time, you might give them more and more work, and feel comfortable delegating increasingly high-profile projects to them—sometimes as much as 40 hours per week. It feels win-win: They produce excellent work for you, and they consider you a valued, regular client, and never turn down a project.
At this point, your risk of misclassifying them is sky-high. Ask yourself:
- Does the increasing volume of work they do for you prevent them from working for other clients?
- Do their high-profile projects make them integral to your business?
If so, you’re sliding into full-time employee territory…and it might be too late to backtrack.
If they’re actually a full-time employee according to Australian law, corporations can be hit with a fine of A$82,500 per contravention—and you could owe back taxes, too. The worker could also be entitled to holiday pay and other benefits.
The heavy cost of misclassifying your contractors
Many employment lawyers drum up business by encouraging contractors to challenge their classification in the hope of a big payout. Even the biggest players can be hit hard if they fall foul of classification laws:
- In 2021, Dutch courts ruled that Uber drivers were employees entitled to backpay and benefits, and hit the company with a €50,000 fine. That same year, the US Supreme Court also found that Uber drivers were not contractors, and that as workers they should be entitled to overtime pay, sick leave, and unemployment insurance—all of which are required for employees but not contractors. Uber paid out $8.4 million to settle a class action lawsuit with California drivers.
- In 2015, FedEx paid out $228 million after misclassifying drivers as independent contractors in California. The company was found to have violated state labor laws by not providing drivers with benefits like overtime pay and workers' compensation insurance.
You could also find yourself under the regulator’s microscope and facing reputational damage from failing to classify your workers correctly.
How to avoid misclassifying your workers
You might not even notice your worker sliding into full-time employee status. But being able to act quickly, with agility, will keep your business running compliantly and give you peace of mind.
The best way to do that? With software like Rippling that supports every stage of a worker's lifecycle. You can transition them seamlessly from contractor to employee without spending hours on the transition, and without losing their historic data.
Rippling can support every stage of your global worker lifecycle
Rippling makes it easier than ever to hire international contractors or convert them into full-time or part-time employees as needed. It’s the first system that lets you hire, pay, and manage all of your global employees and contractors together in one system.
- Onboard contractors in 90 seconds, with a localized experience
- Easily pay international contractors in their local currency
- Automatically monitor and enforce global compliance
- Convert contractors to employees with a few clicks (goodbye misclassification risk!)
- Consolidate your global workforce data with advanced reporting