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How Your Company Can Avoid the ‘Uber-Effect’ : Independent Contractor vs Employee Misclassification

·      Does your business hire independent contractors instead of employees for skilled positions or work projects?

·      Is your company operating in foreign countries with contractors and/or employees?

If you answered yes to either of these questions, then it is time to assess how you hire and assign workers abroad, and what risks you may be exposed to as the legal and regulatory landscape may be shifting dramatically.

It is no exaggeration that in the next few years, the use of independent contractors may become seriously limited, with far reaching financial and legal effects.  Shield GEO offers your company a full range of solutions for hiring workers in both your home country and in foreign locations.

Let’s examine why you might select our unique and simple employment solution…

The Modern Business Era: Facing Expanding Employment and Labor Protections

If you are a company that relies on independent contractors or freelancers to fill some of your work positions, you should be planning now for important pending changes to worker classification.  This trend has been taking shape for the past two years, and is currently being decided by the courts in several countries.

To put it directly, governments and courts are taking a close look at businesses that misuse independent contractors, as a way to avoid paying for employee benefits and withholding.  Some of the outcry is based on the steady erosion of employment and labor protections, and the role of businesses to help fund benefits such as medical care, pensions and paid leave.

Tax Revenue or Social Policy?

This is not just a policy debate, but a realignment of legal hiring practices with huge lost tax revenues at stake.  For example in the US, an employer will pay 7.5% of compensation for employment taxes, but contractors pay both employee and employer amounts (15% total).  Because contractors, unlike employees, can deduct business expenses, the net self-employment tax revenue may be much less.  In addition, the US Department of Labor discovered over $270 million of unreported wages in 2013, along with $10 million in past due unemployment insurance contributions. 

Given the amount of lost revenue, governments are motivated to investigate any potential misclassification, and can be expected to take the side of dissatisfied contractors seeking full employee status, compensation and benefits.

The Uber-effect and What It Means for Your Company

The classification of employees vs. independent contractors has been at the center of several lawsuits against the ride-sharing company Uber, which could have far reaching implications for the entire ‘on-demand’ gig economy.

  • Legal Alert: Recently, a UK court ruled that several Uber drivers are not really self-employed contractors as Uber claimed, but truly employees and entitled to the full range of benefits and payments given to all UK employees.
  • UK Uber-effect: The court’s decision can be used now by other Uber drivers (and similar contractors for other companies) to bring their own claims for employee benefits.
  • Global Uber-effect: This ruling sets new precedent that could be copied by courts and governments around the world.

So, what does this legal outcome mean for your company?

This landmark case could be the beginning of a wave of court rulings and legislation to re-classify contractors in other countries.  Foreign jurisdictions are not legally bound by this case in the UK, but they may be encouraged to follow suit if similar claims are brought by other contractors based on the same arguments.

The “Uber-effect” has the potential to impact virtually any business that relies on independent contractors, and it should be of strategic importance for you to begin looking for solutions and get ahead of the trend.

Essentially, the risk of using contractors for some positions could outweigh the advantages, and each company will have to assess their own hiring strategy, and quickly find alternative and solutions.

This very real change in how you can hire workers will require engaging international employment experts such as Shield GEO, who can offer your company real solutions to this growing risk.

What is the Gig Economy and How Do Independent Contractors Offer an Advantage?

The ‘gig economy’ is a term used to describe an emerging business model that relies on independent contractors, instead of hiring employees.  There are few core reasons a business might prefer to use contractors over employees, including:

  • Contractors can be up to 40% less expensive than a full-time employee, since no benefits or withholding are required by the hiring company
  • Contractors can be used for a short period of time or a single project, with no right to expect continued work or compensation
  • When a company hires contractors, they can match the worker’s skill set and experience to their current needs, without having to make a commitment to an employee who may need training or support
  • The ability to terminate a worker without regard for notice and cause for the termination

To be fair, there are some downsides to using contractors such as no control over the contractor’s availability, and the lack of employee reliability.  Also, any skill development gained is lost when the contractor stops working.  But the real disadvantage now is the risk of misclassification.

Some of the advantages can be preserved by using a hybrid or third party employment solution such as Shield GEO, since we specialize in making international employment simple for any size company.  But first, it is important to understand the full scope of the risks of misclassification, and the long-term consequences for your business.

Why Should Misclassification Matter to Your Company?

Misclassification (def.): using an independent contractor for a position that should be held by a formal employee, and having labor or tax authorities intervene to re-classify the worker and award employee benefits and payments.

This may seem like an unlikely outcome when hiring an IC, but with increasing attention to what is being called “sham contractors”, your business needs to be aware of the consequences.  The issue is complicated further when the contractor is hired in a foreign country, since the laws of that location will determine their employment status.

The Uber case is just the beginning….

Hiring Contractors in a Foreign Country

Think about what happened with Uber in the UK.

Uber is a US corporation, with subsidiaries in many different countries including the UK.  Two UK Uber drivers brought a lawsuit claiming back pay and employee benefits, and the UK court used local laws to rule in their favor.  Now, up to 40,000 Uber drivers in the UK can use this precedent to make similar claims, potentially leading to millions of pounds in unpaid taxes and benefits.

Doing business in the UK is about to become much more expensive for Uber…are you prepared for the same outcome?  And it wont end there you can be sure…

The main point to take away from this, is that any company operating abroad has to be fully aware of the implication of hiring contractors, in light of host country laws.  You will not be insulated from the legal and financial consequences if you assumed the laws were the same as in your home country.

Hiring Contractors in Your Home Country

Of course, misclassification can also take place in your home country, as Uber is discovering.

The US Uber Case:

There is a similar case pending in the US court system, and if a class action lawsuit is allowed, as many as 200,000 Uber drivers could be re-classified as employees.

The reclassification cost in the US? Up to an additional $USD4 billion per year for Uber in employee salary and benefits and unpaid mileage charges.

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The Three-Headed Monster of Misclassification Risk

There are three primary ways that misclassification can impact your business, and you need to be aware of each:

  1. Legal Compliance 

Host country laws on classification of workers must be researched and tested against your own company’s use of contractors.  If you operate in multiple foreign locations with contractors (just like Uber does) then your risk of non-compliance increases dramatically.

Country Example:  Canada requires foreign companies to pay a full range of benefits for employees, as well as withhold tax.  If a contractor is re-classified as an employee, the employer may need to pay the employee’s back income taxes, as well as pension and health contributions.

Canada takes it one step further and imposes liability on the company retroactively for any actions by the worker.  In other words, the employment relationship (and all obligations) is effectively dated back to when the contractor work relationship began.

  • Do you have the in-house resources to ensure full compliance with worker classification laws?

If no, then you need Shield GEO, and its network of partners around the world to ensure complete and ongoing compliance.

  1. Penalties, Fines and Back Payments for Misclassification 

If your contractor is reclassified as an employee, some countries have statutory penalties and fines for each misclassified worker.  Further, your company could be liable for unpaid overtime, back taxes and other withholding for legal employees.

Country Example:  Australia’s Fair Work Act imposes a penalty of $USD25,000 per incident of misclassification, plus backdated pay and benefits.  In some cases, even senior management can be fined if the re-classified worker is found to be non-compliant with immigration laws.

  • Are you prepared to face these financial consequences for the misuse of contractors?

If no, then Shield GEO can show you how to avoid heavy fines and payments that could undermine your revenue and ability to conduct business abroad.

  1. Contractors Claiming Employee Benefits

The final blow of worker misclassification is that you will have to immediately extend employee benefits to any re-classified contractors in that country, increasing your cost of doing business and effectively erasing the advantages of using contractors in the first place.

As soon as that happens, any contractors you have in other locations may start to make the same type of claims.

Country Example:  In the United States, a contractor can file a complaint with the Labor Department claiming that they were denied employment benefits.  This can result in a re-classification as well invite scrutiny from tax and labor authorities on your company’s hiring practices.

Would you like to find a better way to hire workers that are skilled and flexible, while still remaining compliant with host country laws?

Shield GEO can show you how to hire workers abroad while still maintaining compliance and avoiding a misclassification and claims for employee benefits.

It is time to evaluate the status of your own workers to avoid the financial and legal impacts, damage to your company’s reputation and potential of being blacklisted from doing business at home or abroad.

A Misclassification Primer:  How Does a Company Know if They Are Non-compliant?

How to Evaluate Your Workers’ Status: A Classification Test

A HR department and executive team are not without guidance or tools to evaluate their current contractors.  While some countries have unique approaches, there are two primary principles used to test whether a worker has been misclassified.

  1. Type of Work Assignment (duration and scope of responsibility)
  2. Control Over the Worker (whether the company or worker controls their time and work methods)

This is an oversimplification, so it is necessary to get into the factual aspects of the work relationship, and hold it up against local compliance standards.

Key Independent Contractor Indicators:

  • Operates under own business name
  • Hires own employees and has company bank accounts
  • Owns the tools of business, advertises and invoices the client
  • Sets own hours and keeps business records
  • Sets own hours of work, and uses methods according to expertise
  • Works for multiple clients

Key Employee Indicators:

  • Works for one company or employer
  • Work schedule and duties are directed
  • Is required to adhere to company work methods and standards
  • Receives training for work assignments

Creating a Reliable Compliance Framework

Employee / Contractor Checklist:

General Criteria

Assignment Duration:

Employee = Long term

Contractor = Short term

Degree of Control:

Employee = Directed by Company

Contractor = Self Directed

Type of Work:

Employee = Broad responsibility

Contractor Limited scope of work, project based

Pay Structure:

Employee = Salary based

Contractor = Paid on project completion

History with Client:

Employee = Long term

Contractor = New association, short term

Grey Areas of Non-compliance Risk

  • Hiring a former employee as a contractor
  • Paying the contractor a monthly fixed amount, like an employee
  • No formal agreement or invoices submitted by the IC
  • Exposure to non-compliance in multiple countries if the IC is mobile
  • Non-payment of tax or withholding by the IC, inviting scrutiny

Since every work relationship is unique, you may never be 100% certain if you are at risk of having misclassified contractors working for your company.  The indicators listed can give you some guidance, but due to the serious consequences of re-classification, it is prudent to consider a more secure solution.

Eliminating the Risk of Worker Misclassification: Shield GEO’s Local Employer of Record

Now that you understand the classification problem and consequences, it is time to look for solutions.  As you see, there is not one clear cut way to know if you are non-compliant in any country where you hire contractors to work on your behalf.

The simplest and most cost-effective approach to hiring workers is to side-step the classification risk completely, and employ all independent contractors as employees, through the Shield GEO local employer of record.

Don’t wait until you are found non-compliant, and face the consequences for your business….

Third party outsourcing for work assignments abroad is a well-established international employment strategy for multinationals, and now it has even more value for your company to avoid any potential for reclassification of your workers.

(Notably, Uber is now considering employing drivers in the UK through a third party ‘umbrella company’, that will handle all payroll and employment requirements in that country.)

While that step will mitigate future claims, you can be sure Uber will wish they had taken that step years ago.  The need for creative and complete employment solutions is increasing, and as governments step up their review and enforcement of worker classification rules your company should recognize the need for a new approach in global mobility.

The Shield GEO solution is tailor made to deal with evolving employment laws in multiple countries…

Shield GEO offers a comprehensive employment solution for your business, which includes compliance with all immigration, tax and withholding laws.  We offer the GEO solution in 89 different countries, using local partners and resources to support your workers on assignment.

How does Shield GEO eliminate the risk of misclassification?

Its simple. All workers (both formal employees and independent contractors) are now employed by the third-party ‘employer of record’ in the host country.  Since you no longer have any contractors, and all employment rules are being met, the risk of misclassification no longer exists and your company is assured of being in compliance with local labor and employment laws.

What about the cost of using a GEO solution?

The fee charged to clients of Shield GEO is minimal compared to the cost of incorporating your own subsidiary and running a compliant payroll for employees in the host country. When you add in the potential for contractor misclassification fines and back payments, Shield GEO offers you the most cost effective method for compliant employment of workers around the world.

Do GEO employees (and former contractors) need a contract?

Many countries require an employment contract that complies with their labor laws, and our local partner will assist you in creating a contract for all workers.

What are the other advantages of using a GEO? Is it just to avoid misclassification of contractors?

Aside from eliminating the misclassification risk, assigning all workers as Shield GEO employees means that payroll, immigration and statutory withholding are all taken care of at the local level by our reputable and informed network. Further, you can deploy staff quickly and avoid the delays and expense of a DIY approach.

Still want to go the DIY route…?

You may not be convinced that a GEO is right for your business, and want to attempt to navigate foreign employment and labor laws on your own so here are the steps you would have to take in most countries…

  1. Incorporate, register and meet the capital requirements for a subsidiary or branch office in the host country
  2. Apply for all necessary work permits and visas for your staff
  3. Locate local legal and HR experts to assist with payroll and withholding requirements
  4. Set up and run a compliant payroll inside the host country (remote payroll is rarely permitted)
  5. Withhold employee taxes, and make correct statutory payments and employer contributions
  6. Draft new employment agreements for all workers that are in accord with local labor laws
  7. Adhere to all notice, termination and severance requirements to avoid employee claims

Reviewing these complex steps, it becomes obvious why so many companies are turning the Shield GEO solution for their international assignments.

Misclassification: A GEO Solution vs. A DIY Approach

Whether you decide to use a GEO as your strategy to avoid misclassification risk, or prefer to try a DIY approach, it is clear from recent events and global trends that this is an imminent issue for multinationals.  The bottom line is that a business has to evaluate their use of contractors, even if they are not a major part of operations.

Small to mid-size companies entering foreign markets may not have the resources to implement a DIY method, given the cost and complexity of foreign registration and compliance.  However, more established businesses with a sophisticated global mobility program may decide to use in-house resources to deal with this issue.

What are the employment choices in a DIY approach to worker classification?

Continue with contractors:

  • Maintain all independent contractor relationships, but take steps to avoid any indicators of an employee relationship (low cost / high risk)
  • Hire contractors through a third-party agency or consulting firm to avoid appearance of an employee relationship (high cost /low risk)

Hire as employees:

  • Hire quality contractors with a consistent track record as full time employees (assuming they are interested) (High cost / low risk)
  • Hire the contractor as a fixed term employee with a finite time frame. This can be done on a short term basis to preserve some flexibility (or through a GEO to minimize expense.) (medium cost / low risk)

The Choice Between Misclassification vs. Proactive Employment Solutions

As you can now clearly see you only really have two choices:

  1. Wait and hope that your contractors are not re-classified as employees (high risk!), or
  2. Be proactive and find an employment solution for contractors at home and abroad (low risk)

You already know the downside of waiting and being subject to contractor misclassification costs and consequences.  Now, consider the advantages of being proactive on worker classification…

  • The Benefits of Engaging Contractors as New Employees Now

If you are ready to take the next step and engage your contractors as employees, you will be ahead of the majority of companies in preventing misclassification.

The benefits include:

  • Avoiding potential contractor legal claims and complaints to labor authorities
  • Assuring host country compliance to a maintain your business presence and reputation
  • Securing the commitment of high performing contractors as new employees
  • Arriving at an employment cost estimate that will allow you to evaluate ROI for your assignments
  • Placing all workers on equal footing in your company, with equivalent pay and benefits

Now, allow Shield GEO to handle all of this for you….

A Summary of Implementing the Shield GEO Employment Solution

Proactive companies and HR departments still have time to remedy any non-compliant situations with independent contractors.  If the Shield GEO solution is chosen, here is a summary of the outcomes you will have:

  1. All contractors employed in compliance with host country labor and contract requirements – and no risk of misclassification
  2. All tax, social security and employee withholding is accurate under local laws
  3. The new employees enjoy regular compensation and the full range of benefits, increasing their loyalty and commitment to the company
  4. Proper visas and work permits secured for the new employees
  5. An incremental increase in employment costs, but the risk of significant misclassification fines, penalties and back payments are avoided
  6. A flexible and dependable structure for hiring new employees, offboarding and repatriating

As you look at these obvious benefits you have to ask yourself:

Is your company really willing to risk hiring contractors against a trend of global hiring changes?  Do you want to experience the “Uber-effect” unprepared?

Let Shield GEO help you find a modern, cost effective and compliant solution today, before tax and labor authorities start to intervene.

Can you afford and manage a DIY approach in multiple foreign locations?

Shield GEO can help you navigate the employment and payroll regulations in 89 different countries, for 1 to 100 employees.  We make international employment simple, and are prepared to assist you in expanding your global mobility program.

Please contact us today for a no-obligation consultation and to learn about the options open to you.

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