International De Facto Employees?

International De FactoIf you are doing or thinking of doing business outside of the United States, it is likely that you are using or thinking about using independent contractors. Whether you call them freelancers, consultants, remote workers, or self-employed entrepreneurs, they all fall under the independent contractor umbrella. It is tempting to use an array of “consultants,” especially if you are just tiptoeing into a county or if you have one person in a variety of countries.

So what’s the issue? While labor laws vary widely around the global, independent contractors is one area where countries are remarkably similar, and for the most part, the laws elsewhere are stricter than ours. Revenue departments like the convenience of collecting taxes from employers versus employees, and increasing employment levels is critical for any country. Misclassifying employees as independent contractors will cost you money. In 2010, the First Tier Tribunal Tax Chamber decision in the United Kingdom cost one multinational company $37 million.

Another issue is poorly written contracts with independent contractors. Employers (especially small- or medium-sized) are often unaware of the statutory or vested rights an employee may have in a given country. For example, a typical contract or agreement has a 30-day termination clause. That, however, might only be a fraction of the time required by in-country (local) labor laws.

It is nearly impossible to know what the laws are for every country but ignorantia legis neminem excusat (“ignorance of the law does not excuse”). This is harsh but true.  

So what can you do to minimize your risk? I suggest the following strategies, but each has consequences. It will be up to you to decide your tolerance for risk.

  • If your consultant is really a de facto employee, make them an employee.
  • Have an international attorney review your independent consultant responsibilities and agreements.
  • Second your consultants to a third party. Global Employer Organizations are a good option.

Doing business on an international scale is no longer the exclusive territory of large, multi-national organizations. When the opportunity to expand leads to “putting shoes on the ground,” consideration should be given to whose feet are in those shoes.