Using Independent Contractors Overseas

Consider this commonly encountered question posed to Employers Council:

“Our company is looking to engage independent contractors rather than hire employees to work for us throughout Latin America. Are the laws in those countries just as strict as in the United States?”

The short answer is, “No – the laws in most other countries are stricter.” Or, at the very least, rectifying independent contractor misclassifications can be more complex and more expensive outside the United States, because in countries where employment-at-will rights do not exist, extra areas of exposure lurk.

The use of independent contractors is understandable and even appealing as more organizations tiptoe into new overseas markets. An organization may take baby steps into a new market by engaging its in-country representative as an independent contractor (e.g., as a freelancer, entrepreneur, or agent). This an attractive option when the organization has no local subsidiary or corporate presence positioned to issue a legally compliant local payroll.

What is at stake when organizations expand into the jurisdictions of other countries in this way? That is, what happens when a nominal contractor is held to be an employee by an agency or court of another country? How likely is a contractor misclassification claim? If a U.S. court or the U.S.-based Internal Revenue Service (IRS) determine that a misclassification has occurred within the U.S., the liability is generally spread across six categories: back tax withholding, back social security contributions, back state unemployment and workers compensation insurance premiums, back-pay and overtime (for nonexempt positions), back benefits, and potential interest and penalties. An additional liability is that a single misclassification may set the organization up for a larger, company-wide audit a few years down the road (or sooner).

Outside the United States, a misclassification of a contractor triggers additional liabilities. The same six categories apply as in the U.S. plus four other, potentially more expensive, grounds: back vacation and holidays, back mandatory benefits (e.g., profit sharing, “13th month” pay, mandatory bonuses, payments to state housing funds), severance pay, notice pay and liability for unfair dismissal, and finally, fines.  Ouch! These extra liabilities certainly add up. Even so, an organization signing up an independent contractor abroad may cross its fingers and hope the relationship “flies under the radar.”  The organization may wishfully assume that it will never encounter of any of these additional liabilities. And any given dubious contractor arrangement might escape notice… for a while. However, when the relationship finally ends, as it inevitably must, the termination clause in the independent contractor agreement may appear stingy to the foreign contractor compared to the severance pay that an otherwise similarly situated local employee might obtain under local employment laws. When this occurs, and the foreign contractor is no longer angling for continued work with the company, a lawsuit becomes far more likely.

If this sounds familiar to you, be aware of the risks associated with ill-advised or ill-considered classifications of contractors in other countries. While some countries may not regulate these relationships, others maintain a regulatory framework that heavily disfavors contractor status and penalizes organizations who navigate said framework incorrectly.

The solutions to the use of independent contractors, international labor laws, tax issues, immigration concerns and more will be on the agenda of Employers Council inaugural International Conference on October 10th, 2018. The conference will be held at the Employers Council offices in Denver. Conference speakers include experts who will provide critical information and practical advice regarding the issues you may face as you expand beyond U.S. borders.