What you need to know about independent contractor penalties

January 10, 2019

Independent contractor penalties

Using independent contractors can be a beneficial way for organizations to meet rapid staffing needs, but there are risks to consider—the greatest of which is misclassifying independent contractors.

Consider this common occurrence of misclassification: Two individuals work in the same area and carry out roughly the same job duties, but one is classified as an employee and the other is classified as an independent contractor. There is often a simple explanation—perhaps the individuals were brought on by different hiring managers or were hired on two separate dates—but this type of justification will rarely stop an auditor from issuing independent contractor penalties.

What is an independent contractor?

The definition varies from country to country; however, one factor remains constant: Independent contractors must be separate from the usual employer-employee relationship. Typically, the organization must demonstrate that it has provided the contractor with the latitude to complete the job without specific instruction. This differs from an employee, who typically is obliged to follow the instruction and day-to-day management of the employer.

Understanding and honoring this distinction can be burdensome and complex, but it’s not something to approach haphazardly, given how significant independent contractor penalties can be. If found guilty of misclassification, an organization may face:

  • Damage to your brand and company reputation in a country or region
  • Prohibition from hiring independent contractors or even from operating in a country

Some recent examples include numerous employers in Australia seeing record penalties for employee misclassification. Across Europe, where one of the most significant benefits of being an employee is the benefits, a court ruled that self-employed contractors could claim holiday pay going back 20 years when they should be have been hired as employees. In another recent case, an Egyptian court convicted 43 NGO employees for misclassification with sentences ranging from one year to five years in prison.

Steps to avoid independent contractor penalties

If your organization is considering independent contractors, there are steps you can take to help avoid some of the pitfalls that other organizations have incurred:

  1. Identify the full population of independent contractors within your organization—this includes reaching out to all departments across geographies. Once you have identified all your independent contractors, assess each situation to confirm that they are classified appropriately, or take action to rectify if needed.
  2. Engage with legal experts to assess your corporate level of risk and exposure of misclassification, and determine if there are any additional or unique criteria for independent contractors across the different countries in which you are operating.  
  3. Create an inclusive, thorough process for ongoing reporting and classification for any new independent contractor requests. Ongoing training should be made available and periodic internal audits conducted to ensure continued cooperation.
  4. Explore other avenues for satisfying your resourcing needs globally that can maintain compliance while also allowing for rapid deployment.

An employer of record service, like Global Employment Outsourcing (GEO), can help you mitigate many of the risks of independent contractor penalties. Learn more about the benefits of transferring your contractors to GEO, contact us today.


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