Have you ever heard of the term ‘employee misclassification’? For businesses, employee misclassification can lead to non-compliance and have a significant impact on the company and employees alike. It is important to fully understand the criteria which differentiates an employee from an independent contractor in order to mitigate the legal risks associated with misclassification. When this is translated to a global scale, compliance can turn into a minefield.
We’re going to be detailing the important information about employee misclassification including what it is, the differences between an employee and independent contractor and how to prevent it from occurring. To learn more, carry on reading our article.
What is Employee Misclassification?
The correct classification of both employees and independent contractors is the legal obligation of all businesses and HR departments worldwide. This must be according to each individual’s country of residence and place of work.
Whether it be done deliberately or accidentally, the misclassification of employees denotes the practice of inappropriately classifying employees as independent contractors, and vice versa.
There are several reasons why misclassification may come about - while it can be done purely accidentally, there are unfortunately some business who may misclassify their staff members for the reasons of:
- Evading tax
- Breaching employee rights, such as working hours
- Cutting costs by reducing employee benefits
- Misunderstanding definitions and lack of awareness when it comes to international classification regulations.
As with many aspects of global recruitment, you need to consider each country’s (or even state, or city’s) specific set of regulations as determined by the local tax authorities and government.
The Differences Between an Independent Contractor and an Employee
From country to country, there will be a different set of criteria which defines an independent contractor versus an employee. On the whole, one of the key differences is that contractors have to invoice the company they are providing services to and therefore are not listed on the company’s payroll system. As well as this, contractors often work unsupervised and use their own equipment. Compared to employees of the company, contractors also have more flexibility in their relationship when it comes to their hours worked, their rate, location and so on.
Sometimes, contractors may become enlisted for work when the business is struggling for capacity, or they possess a skill set which is currently out of the employee workforce’s scope. It could be on an ad-hoc basis, or even a set time period for a certain piece of work. However, they differ from employees in the fact that they are not entitled to company benefits in the same way, such as paid annual leave and sick leave.
What are the Risks of Employee Misclassification?
No matter whether it is intentional or unintentional, misclassification can result in detrimental consequences for your international business. The risks posed through misclassification include the following:
Lawsuits from the Misclassified
For employees, there are several reasons why being misclassified as a contractor can be the beginning of a lawsuit. From the loss of workers’ rights, benefits and general legal protections, employees misclassified as contractors may be unknowingly vulnerable in the event of redundancies or a notice period, for example.
Evidently, if a misclassified employee is deprived of such employee benefits, protections and more, they may sue the company, especially if this misclassification is the cause of an impacted livelihood.
Damaged Reputation
An intact reputation is crucial when it comes to the successful expansion of your business internationally. So, if it becomes known that an employee or contractor has been misclassified at your company, it can not only damage your reputation but can also affect the experience of other employees working for you.
Similarly, misclassification can undoubtedly incur large fines from tax authorities and government regulators, no matter if it was done knowingly or not. This may have an impact on the workings of your business moving forward.
Back-Taxes
In addition, tax authorities are also likely to demand the lost funds which they should have otherwise received during the time period wherein the worker was misclassified.
Preventing Employee Misclassification With Leap29
It is clear that employee misclassification is not a route your business should plan to go down, for a host of reasons. Working with the leading PEO and EOR partner, Leap29 can offer their extensive expertise when it comes to compliant expansion into new countries, helping you mitigate the risk of misclassification.
Our solutions offer you a streamlined and efficient approach to employee sourcing, onboarding, retention and more, as well as running payroll correctly. Make sure your company continues to grow compliantly with our help, contact us to learn more about our services today.