To manage costs, many companies—in the U.S. and abroad—engage independent contractors. While independent contractor relationships are recognized in most jurisdictions, the potential for misclassification and liability are global concepts. The exposure for contractor misclassification can be significant and include action by the government for failure to withhold taxes and “social security,” plus penalties and interest, as well as claims by the contractor for employment-law protections and entitlements. The likelihood of exposure for contractor misclassification highlights the importance of threshold questions in international contractor classification analysis:
- When can a multinational legitimately engage an overseas services provider as an independent contractor or so-called consultant, freelancer, or entrepreneur?
- Under applicable foreign law, what distinguishes a genuine independent contractor from a de facto employee?
- When is a contractor not a contractor?
According to Donald C. Dowling of K&L Gates (an international law firm), “The central question turns on local law, the law of the place where the service-provider works. Be sure to look to both local host-country law as well as any legal regime set out in a choice-of-law clause in the independent contractor agreement.”
According to Dowling, choice-of-law clauses in independent-contractor agreements rarely negate local employment law if a so-called “contractor” can convince a local judge he was really an employee. In other words, the test for who is and who is not an independent contractor around the globe is similar to the test used in the U. S. The test consists of two factors: behavioral control (does the company have a right to direct and control how the worker performs the task(s) for which the worker is hired?) and financial control (does the company have the right to control the business aspects of the worker’s job?). The level of control impacts the degree of true “independence” of the independent contractor.
Let’s look at a few examples of specific countries’ perspectives from Carson G. Burnham and Bonnie Puckett at Ogletree & Deakins (a labor and employment law firm).
In Canada, factors leading to the conclusion that an independent contractor is really an employee include the following: the contractor receives training from the company, the contractor works with tools or equipment from the company, the contractor performs work central to the company’s business, the company supervises the contractor’s work, and the company (as opposed to the contractor) reaps the profit or suffers the loss in connection with the work. Contractors who are deemed employees are entitled to the protections of their province’s labor laws, which differ from province to province, but generally include the right to some amount of notice before termination of employment. In many provinces, if an employee’s written contract does not limit the notice period, that employee is entitled to common-law notice, which is usually above and beyond the statutory notice and can be a month per year of service of more.
In China, under China’s Labor Contract Law, an employment relationship exists regardless of the form of the parties’ agreement if the individual is subject to the company’s internal rules and regulations, if his or her services are a critical part of the company’s business, and if the company has a right to control the person’s work. Article 82 of the law also provides that each employee is required to enter into written employment contracts with his or her employer, and employers that violate this provision must pay double the salary to the employee. Companies should thus make sure that any independent contractor: (1) contracts with the company through his or her own corporate entity; and (2) has a written employment contract with that corporate entity.
The attractiveness of using independent contractors can be bedeviled by its complexity. Therefore, caveat emptor as you look for solutions to establishing or growing your organizational presence outside of the U.S. Expediency can often trump thoughtfulness, but the time you invest in conducting “due diligence” in this area will save the organization time and money in the future.