Guest author: Anja Simic is the Head of Marketing at Deel, a fully distributed team that built the first remote payroll system for contractors. As experts in remote worker compliance, they are developing a solution for full-time employment. Employ anyone, anywhere in the world as a compliant and legal full- time employee. Join the waitlist here.
Working remotely and hiring talent globally has become a trend, if not a norm for hundreds of companies. However, many of them still do not realize the legal implications and risks a cross-border work relationship carries. It’s not merely “sending money” or downloading an online sample contract and exchanging signatures.
On the other hand, governments are catching up and introducing policies such as AB 5 in California and IR 35 in the UK. Those policies aim to reduce the misclassification of employees who are hired as independent contractors.
Truth be told, it’s hard to obtain all the information regarding setting up and hiring remotely. Not to mention keeping up with all the changes and new policies. This article will give you and overview how to assure compliance and what are the things to keep in mind when hiring remotely.
Different setups for working with foreign talent
Let’s take a step back and see how you can work with foreign talent. There are three options to choose from when you want to hire people internationally:
- Opening a subsidiary in the country you’d like to hire
- Hiring via a PEO (a third-party Professional Employer Organisation)
- Hiring independent contractors
Opening a subsidiary
When a company has multiple workers in another country, opening a subsidiary might be a good option. Basically, you need to open “a local office” and hire people as local employees. Keep in mind that this setup requires help on the ground, which entails legal work, opening a local bank account, and so on, which makes things a bit complex.
Hiring a professional employer organization (PEO)
Contracting a PEO can help you reduce administrative complexity by doing HR services on your behalf, and ensure compliance. These services include international payroll, benefits, tax reporting, and training of your workers. The PEO enters into a contractual co-employment agreement and becomes the employer of record for your employee. Since this setup introduces a third-party, it can be quite costly and takes away the administrative management responsibility as the PEO is, in fact, the legal employer.
Hiring independent contractors
This setup is widely spread across all company sizes, but especially favoured by startups. Although it’s the easiest to set up, it can lead to tax evasion when you do not fully understand local laws and the different setups a contractor should have.
I want to hire a contractor- what do I need to do?
First of all to ensure compliance, you should start with a classification process and decide whether the person is an independent contractor or an employee.
There are factors which might indicate that the worker is an employee. In contrast, other factors indicate that the worker is an independent contractor.
If we’re talking about the US, the IRS (Internal Revenue Service) has some guidelines to distinguish the two but says no particular factor is definitive when assessing the case.
Who is an independent contractor?
In general, according to many countries’ regulations, independent contractors offer their professional services to clients, well, independently. Every country has its regulations that define their independence. Usually, independence revolves around working hours, paid holidays, benefits, and overall control over work.
According to the IRS, in the United states, “A person is considered independent if the payer has the right to control only the result of the work and not what will be done and how it will be done.” If the payer is in any way controlling the work in terms of working hours or activities, the relationship might be viewed as employment. A similar determination exists in other countries as well.
Who is an employee?
On the other hand, when the company controls the work and working environment as a whole, the service provider is usually considered an employee. On top of that, if the company reimburses expenses, provides tools, conducts training and offers paid vacation or benefits, the person is most probably an employee.
Conduct thorough research on local labor laws, compliance and new regulations
The complexity arises when a company hires a person considered independent regarding the law of a specific country, but who isn’t independent according to the criteria established by the law of another country. Each country has its local labor laws around the principles defining the notion of “independent contractor”. A person can be considered as a contractor in one country, but it doesn’t necessarily mean that they are contractors in another.
This is the reason why you should ensure the person you hire as an independent contractor is not, in fact, an employee according to local laws. For instance, some countries require obtaining a contractor license, which can help you to be clear with the worker’s status and avoid any case of misclassification.
Moreover, some countries have different kinds of independent workers’ setups, without having a specific “independent contractor” classification. Those setups are, for instance, entrepreneur, auto-entrepreneur, sole-trader, etc. and you must meet certain conditions to be able to register for it.
To avoid misclassification risks and the consequences triggered by it, it’s worth investing in local legal counsel who can help you determine how local laws interpret a working relationship.
Minimize classification risks to ensure compliance
Generally, wrongful interpretation of local labor laws can lead to unintentional misclassification. However, some companies will misclassify an employee as an independent contractor, on purpose. This allows a company to reduce costs by not paying the traditional employee benefits. In addition, it lowers payroll taxes and overall labor costs.
Tax and employment law violations and penalties can be triggered by misclassification cases. Depending on the state where the misclassification happens, the amount of the penalty can go up to hundreds of thousands of dollars.
Invest in drafting a solid contractual agreement
Now that you have the right setup, it’s time to put things into paper. A substantial contractual agreement is vital when you are hiring any contractor, especially a foreign one. You need a contract regardless of the compensation value, project duration, or other factors, so don’t avoid having one just because it’s “a quick task”. It will protect both you and the contractor from misunderstandings and ensure both parties hold their end of the bargain.
You might be tempted to download an online template and get it over with. It may seem like a time-saver at first, but it can cost you a lot of money, time and nerves if you get it wrong. Online templates don’t have all the necessary elements or take into account only the laws of one country. There is no one-size-fits-all contract.
Take time to create an agreement that is taking into account local labor law regulations of both countries involved. Keep in mind that the length of the contract, liability, ownership (among others) can differ between countries. In case the scope of work changes, it would be best to renew the contract to take into account all the changes.
A good contract should always outline the following:
- Scope of work, detailing the services offered by the contractor
- Compensation and expenses, if applicable
- Relationship of the parties, including the status of each party, liability, and indemnification clauses
- Ownership of work. Keep in mind that not all countries have the same regulations when it comes to ownership, and in some, the work is owned by a contractor.
- Confidentiality and data clauses used to protect the data of the client. You can also include an NDA clause here.
- A non-compete clause that determines the activities that are limiting the contractor from doing the work for a competitor
- Termination and notice clauses that outline the duration of the contract
- Governing law determining the body responsible in case of any disputes
Learn about reporting income and tax responsibilities
Independent contractors are usually responsible for paying and reporting their taxes, and the hiring companies are free from this responsibility. However, depending on the contractor’s country, the company might be involved in the process of compiling and reporting compensation.
Companies in Europe: The case of Liability in the EU
In Europe, the law has established a joint liability for fiscal and social debts between the client and its direct contractors.
Indeed, independent contractors must pay social debts and taxes. The principle of joint liability allows the independent contractor not to be the only one in the relationship liable for that payment. The independent contractors’ clients are also liable for them, and must pay contractors’ debts in case of the contractors’ failure or inability to cover them.
Prior to signing the contract, clients should ensure the contractor doesn’t have any outstanding fiscal or social debts.
Italy, the Netherlands, Austria, Belgium, Finland, France, Spain, Austria, and Germany have adopted legislation about the contractor’s joint liability. However, the regulation details differ from state to state. For instance, in Germany, Italy, Spain, and Belgium the joint liability of the contractor applies exclusively to the construction sector. Some other European countries have specific criteria with joint liability, such as Finland, where the principle of joint liability applies if the duration of temporary work exceeds a total of 10 days.
Companies in the US: Always collect the required tax forms
1. File a 1099 Form to report US-sourced income to the IRS
If a US-based company hires US-based contractors who earn more than $600 within a year, Form 1099-MISC or Miscellaneous Income should be filed to the IRS.
A Form 1099-MISC needs to report the total payments made during the year to each contractor that received more than $600. A Form 1099-MISC should be filled to the IRS by January 31st for the previous year.
2. IRS is re-introducing the 1099-NEC Form for reporting in 2020
IRS is re-introducing the 1099-NEC Form for the tax reporting in 2020. Effectively for Tax Year 2020, what is now Box 7 on the Form 1099-MISC becomes Box 1 on the From 1099-NEC and Box 7 on the 1099-MISC will be removed.
When reporting nonemployee compensation on Form 1099-NEC, the IRS explains that payment must be reported if all four of these conditions are met:
- It is made to someone who is not your employee
- It is made for services in the course of your trade or business
- It was made to an individual, partnership, estate, or, in some cases, a corporation
- The payments made to that payee were at least $600 or more for the year.
3. Collect a Form W-9 Form for US contractors
W-9 Form or Request for Taxpayer Identification Number and Certification is used by US companies to get information from independent contractors they hire who are based in the US. You can learn more about it in this article.
4. Collect a W-8BEN (or W-8BEN-E) Form for foreign contractors
The equivalent of the W-9 Form for foreign contractors is called W-8BEN. It has two variations: W-8BEN for individuals and W-8BEN-E for entities. The Form which needs to be collected is determined by the contractor’s status.
These forms are used to prove a person (or entity) is not, in fact, a US citizen. The hiring company is entitled to rely on the claims made on these forms to determine obligations regarding tax reporting and withholding. If the information on the Form differs from facts, and the worker does not qualify as a foreign contractor, the company is free from liability for not meeting tax requirements.
These forms are valid for three years and should be renewed if the relationship continues beyond that time. You can learn more about W-8BEN forms on the IRS’ W-8WEN page.
As you can see, there are many things that should be taken into account when hiring talent. Luckily for you, Deel can help you streamline the process and help you have an all-in-one solution for onboarding, payments, and compliance.
Disclaimer: This article is intended for informational purposes only and does not constitute legal or tax advice.