Contractor or employee? Avoiding the traps when expanding your workforce

If you’re looking to test a new market or grow more gradually without committing to a permanent headcount in a country, there are a number of options to consider. A query we often receive is whether someone can be hired as an independent contractor rather than an employee. This may well be an option, but there are tax and employment status risks that need to be reviewed. Each jurisdiction has different tests to determine whether someone is genuinely an independent contractor or whether the reality of the situation is that they are an employee – and, importantly, this will override the label that the parties give to the arrangement.

When considering the current and future costs of misclassifying employees, it’s worth paying attention to those in the grey areas: individuals who are neither quite employee nor fully independent contractors. Where your business relies upon those individuals, seeking advice ahead of time means you can feel confident that you will avoid the sometimes unexpectedly high costs associated with misclassification.

Contractor or employee?

Telling the difference is a challenge, and there are some differences in interpretation across jurisdictions. Some of the key tells include the following:

• Control and direction: how, when and where is the work done? Who decides?
• Personal service: is the individual able to send a replacement in their stead?
• Mutuality of obligation: is the contractor able to refuse work with no penalty?
• Contracts: what does the contract say ? (but note that paperwork is indicative not determinative)

Where there is uncertainty, seek advice.

We strongly recommend that “prevention is better than cure” here. The consequences can extend beyond tax and payroll issues, as the misclassified employee may be entitled to additional employment rights, leaving the company exposed to greater liability. In the UK, this is an area that is increasingly under scrutiny from both the tax authority (with the interest and penalties that can entail) and also Employment Tribunals (determining whether employee rights such as paid holiday and termination protections apply). Other jurisdictions are also very alive to this issue with the increase in gig economy work models.

What can you do?

You may choose to bring contractors in as employees to mitigate your risks, and if you do so, care should be given to the hiring process and the questions you ask. Just as California and New York have recently precluded potential employers from asking the candidate’s salary history, the laws vary across Europe and you’ll want to ensure these questions are acceptable in the country in which you are hiring.

For example, Germany has specific rules about this because the right to privacy is so well-entrenched. Where you can ask other questions – related to the type and length of experience, for example – it’s not necessary to ask questions relating to salary. Case law certainly suggests avoiding the question if at all possible.

Some jurisdictions are relying on the gender pay gap to explain why questions relating to salary are no longer a reasonable part of recruitment, claiming that relying on prior salary history is not a good enough reason to perpetuate inequality. However, the UK remains relaxed on this issue, relying instead on reporting obligations relating to the gender pay gap to address this potential pitfall.

In line with other employment practices, all recruitment questions should be designed with the aim of avoiding discrimination; most jurisdictions have concepts of discrimination which are recognisable to the international business. Where there are differences, Osborne Clarke has the international reach and expertise needed to help guide you through the process.

If employing individuals is not in the cards, you can continue to engage them as independent contractors, but you should seek advice in order to stay ahead of the game in this constantly developing area of law. Seeking local advice might be the best thing you do.