International Employment Laws
The Pros and Cons of Hiring an Employer of Record (EOR)
Lucas Botzen
Founder
International Employment Laws
Published on:
April 18, 2024
Written by:
Lucas Botzen
Key Takeaways:
False self-employment is when a worker is labeled as self-employed but works under the same conditions as regular employees.
Companies face fines and legal repercussions if they misclassify workers. This could potentially lead to costly penalties.
Workers can protect themselves by maintaining control over their work. They could also rely on using an Employer of Record service to ensure compliance.
Table of contents
Hiring self-employed individuals or independent contractors is a common practice for companies. It significantly simplifies signing work agreements. It also significantly simplifies hiring people from other countries.
However, both companies and freelancers should be cautious. When hiring independent contractors, the working relationship can easily resemble employment. But, there are significant differences between independent contractors and employees. It’s even more important to follow them.
False self-employment describes individuals who are classified as self-employed but are actually employed. From the company perspective, this is known as misclassification of employees.
Let’s examine the main difference between independent contractors and employees. This will help us understand the criteria for false self-employment, why it is a problem, and what the risks are.
The main difference between independent contractors and employees lies in the level of control.
Independent contractors operate as their business entities. They control how, when, and where they complete tasks. They are also often relying on their tools or resources. Unlike employees, they usually work for multiple clients and are paid per project or task rather than receiving a regular wage.
Employees, on the other hand, are bound by a company’s internal rules and procedures. They work under the supervision and control of their employer. The employer dictates their working hours, duties, and how tasks should be carried out. Employees also receive benefits such as paid leave, health insurance, and pension contributions. The benefits are typically unavailable to independent contractors.
It is never easy to determine whether someone is an employee or independent contractor. It gets trickier if your employees are working remotely, making the lines blurier. However, the tax authorities look at several factors to determine if someone is falsely self-employed, so let’s go through them.
Typically, independent contractors have niche expertise. They also follow a set of best practices to complete their tasks. This differs significantly from employees who have to follow instructions set by the company. The independent contractor may or may not accept guidance from the client. This applies also to when and where the work is completed.
Possibly the biggest difference between self-employment and employed is in the salary. With self-employment, the payment is generally dependent on the completed work. With employees, it is set on a specific schedule, and output rarely affects it.
The way the self-employed present themselves is an important part of whether they are actually self-employed. If the independent contractor feels like an integral part of the company, the contractor is actually an employee.
The distinction becomes crucial when determining tax obligations. It also affects social security benefits and legal protections. Independent contractors handle their own taxes. They also aren’t entitled to unemployment insurance or workers’ compensation benefits.
Employees, by contrast, have taxes automatically deducted from their paychecks. They also benefit from protections such as labor laws, overtime pay, and severance packages. Misclassifying an employee as a contractor can lead to serious legal and financial consequences.
False self-employment poses several issues for both workers and the broader economy. One major concern is tax evasion. Employers can use this to skip essential contributions like social security and taxes. As a result, governments may miss out on important revenue, which affects social safety nets.
Another issue is the unfair treatment of workers. Falsely classified employees often miss out on the protections and benefits. This includes essential rights like minimum wage, overtime pay, and paid sick leave.
Without these protections, individuals may be overworked and underpaid. On top of it, contractors are without the legal means to address these issues. It leads to an unequal playing field, where some workers are left vulnerable to exploitation.
Failing to meet the criteria for self-employment can lead to serious consequences. One of the primary risks is being subject to additional assessments or correction obligations.
Tax authorities may determine that the working relationship more closely resembles employment. As a contractor, you may be required to adjust past filings and make payments to cover missed taxes or contributions.
Another significant risk is the potential loss of valuable tax benefits. Self-employed individuals in many countries can take advantage of allowances. This includes the self-employed person’s allowance, the SME profit exemption, and the starter's allowance. If the tax authorities reclassify you as an employee, you could lose access to these benefits. It will also increase your tax burden and reduce the financial advantages of being self-employed.
For companies, hiring workers who are falsely classified as self-employed carries its own set of risks. The most immediate concern is the possibility of fines and additional tax assessments. If a company misclassifies an employee as a contractor, it may be liable for unpaid taxes. There are also unpaid social security contributions and penalties. It can create unexpected financial burdens.
Beyond the financial risks, companies may also face the logistical challenge of having to hire the worker as an employee. This would need handling payroll and providing employee benefits. It also means adhering to labor laws that govern employees rather than contractors. This shift adds complexity to managing the workforce and increases administrative responsibilities.
Protecting your rights as a worker is crucial. If you're a self-employed worker and suspect your working relationship resembles employment, here's what you can do.
First, clarify the terms of your agreement with your employer. Ensure that the nature of the work and expectations are clearly defined. Consider whether you are receiving fixed monthly payments or having limited control over your work. If that's true, consider discussing the issue with your employer.
You can request formal recognition as an employee to access the benefits and protections you're entitled to. Seeking legal advice is also essential to understand your rights and obligations under employment law.
Additionally, stay informed about the criteria that distinguish self-employment from regular employment. Understanding these differences can help you avoid the risks associated with misclassification. Itt can help you avoid the loss of tax benefits or social security contributions.
For employers, the key to avoiding false self-employment is ensuring clarity in your hiring practices. Make sure you understand the legal differences between employees and independent contractors.
Review your working relationship with self-employed individuals and ask questions like:
Are they in control of their work schedule and tasks?
Do they operate independently, or are they subject to the same rules as your employees?
Defining these boundaries upfront can help reduce the risk of misclassification. You should also create clear contracts that reflect the nature of the relationship. If you intend to hire contractors, the agreement should include terms for self-employment. This includes flexibility in how the work is done and payment based on project completion rather than monthly wages.
Regular audits and consultations with HR or legal professionals can also help. It can ensure that your business complies with labor laws. When unsure, consider transitioning the worker to an employee status to avoid legal risks.
One effective solution for dealing with cross-border hiring is relying on Employer of Record (EOR) services. EORs act as intermediaries between businesses and workers. It handles the administrative tasks involved in employment. It includes managing payroll, tax compliance, and benefits. This option is especially useful if self-employment is being used because the worker lives in a different country.
Employers using an EOR ensure that all legal requirements are met, reducing the risk of misclassification. The EOR takes responsibility for complying with local labor laws. It allows businesses to focus on the work rather than the complexities of international hiring. It also provides a clear structure for employment relationships. EOR ensures the worker is recognized as an employee with proper rights and protections.
For workers, EOR services offer the security of being treated as employees. This means standard benefits like social security contributions, health insurance, and paid leave. EORs ensure that you’re properly classified and protected under local labor laws. Overall, these services can help avoid the pitfalls of false self-employment.
What is false self-employment? False self-employment happens when a worker is classified as self-employed. However, in reality, their working relationship resembles that of a regular employee. This can lead to tax and legal issues for both the worker and the employer.
What are the risks of false self-employment for companies? Companies that misclassify employees as self-employed may face fines. They may also have additional tax assessments and legal penalties. They may also be forced to offer the worker the full benefits and protections of an employee.
How can workers avoid being falsely classified as self-employed? Workers should ensure they have control over how they perform their tasks, can refuse work, and set their own hours. If unsure, seeking legal advice or using an Employer of Record service can help.
International Employment Laws
Lucas Botzen
Founder
Career Development and Leadership
Lucas Botzen
Founder
Career Development and Leadership
Lucas Botzen
Founder
We're here to help you on your global hiring journey.