Independent contractors are coming under increasing scrutiny – and not just in the United States. Over the past number of years there have been notable examples of governments around the world clamping down on the misclassification of employees as independent contractors by their employers. One Australian employer was fined over a $250,000 for incorrectly classifying just seven employees as contractors.
The appeal to classify workers as contractors can be tempting for employers. In some countries, employers are exempt from having to pay social security fees and make provisions for benefits such as vacation days and pension contributions. The prospect of what appears to be a substantial saving on business overheads is an attraction for many managers and business owners.
However, organizations continue to remain in the dark when it comes to assessing the potential pitfalls of continuing with contractor arrangements. Dependent on the number of contractors involved and their length of engagement, local governments are unlikely to adopt a favorable view on any organization found guilty of misclassifying contractors. Penalties can range in severity, from financial fines through to more substantial repercussions – including being blacklisted from conducting business in that country and even potential prison time for owners and directors.
Don’t get blindsided by this hidden contractor risk
By continuing with a misclassified contractor arrangement employers are opening themselves up to liability and potential risk from what seems like an unlikely and innocuous source – the contractor themselves. There is an increasing trend of contractors filing grievances with their employers at the ending of their agreement – be it a pre-agreed date or via termination.
The theme is a simple one, with contractors very much aware of misclassification risks; they are issuing ultimatums to employers in the form of demanding backdated benefit entitlements and large severance payoffs or otherwise threatening to inform local authorities of their illicit employment arrangement. Faced with potentially unknown consequences, employers are left with simply no choice but to pay the contractors their demands, often at great expense. The practical advice to risk-adverse employers is to migrate contractors into full-time employment contractors, or at the very least stringent short-term contracts, in order to add a layer of protection.
For organizations that flout the classification laws, the severities of potential repercussions are not always known. But what about organizations that are not even aware that their contractor usage is in violation of any laws? Correctly distinguishing between proper and improper classification of contractors can be challenging, even for the most experienced and knowledgeable of HR experts. With the potential risk organizations continue to expose themselves to across multiple countries; it’s vital that employee classification is managed correctly.
Looking to assess your international contractors?
Our interactive independent contractor quiz helps you identify the simple questions to ask in order to uncover the true classification of your overseas contractors and freelancers.