Legal & Compliance

The Risks of Contracting and Why You Should Be Employing Remotely

Wondering whether employing or contracting remotely is the best option for your business? Here we demystify the risks and costs of contracting with full time employment for companies hiring remotely or expanding their international presence.

7 min
Lucia Linares
November 18, 2020

Independent contractors are hired for particular services and for shorter periods. It is a hiring option with considerable flexibility, but with many hidden costs. Good contractors will hike their fees to cover their out-of-pocket expenses. Contractors are also not dedicated to a client company’s interests, but are incentivised by their pay.

Many multinational and remote companies try to avoid hefty employer costs, employee benefits and local employment regulations by hiring independent contractors instead. But employees are far more committed to company values and growth. Particularly for growing businesses and start-ups, employment may actually be far more profitable in the long run. With countries clamping down on tax evasion strategies and informal employment, contracting is also exposing global companies to considerable risks. Remote employment rather than contracting is a safer and more viable option for today’s global businesses.

Employing Requires Legal Compliance...But So Does Contracting

Many employers assume that employment comes with a far greater compliance baggage than contracting. But contracting can be even more risky than you might expect. 

One of the biggest draw-backs to contracting is the risk of non-compliance. As businesses expand into all corners of the world, remote and remote-first companies in particular have to deal with a host of local tax and employment regulations. These include providing and organising:

  • benefits and welfare
  • compensation
  • termination and severance
  • collective agreements
  • payroll tax

You’re probably thinking: this is a lot of work. Why not simply hire an independent contractor? Many companies assume that they can avoid local employment regulations by employing contractors. However, the data shows that it’s not as simple as that. 

Misclassifying Employees as Contractors

One of the major pitfalls to watch out for is misclassifying employees as contractors. This does not only run the risk of non-compliance, but can lead to severe legal damages and penalties.

One of the fundamental differences between contracting and employing is the relationship between the employer or client company and the hired individual. Though this is defined differently from country to country, contractor or employee status is generally decided according to: 

  • whether a person is subordinate or dependent on a company for paid work
  • whether the remuneration for a job is a person’s only source of income
  • how long a person is working for a company
  • the integration of an individual in a company
  • whether the working hours and place of work are stipulated by the employer
  • how crucial a worker’s role is to the routine running of the company
  • the control which the employer exerts over a person’s work

While you may think a contract (of employment or service) is enough to define the relationship with an employee or contractor, local authorities can challenge your definition of this relationship.

Reclassifying contractors as employees also tends to be an extensive - and expensive - process. In China, reclassifying requires employers to meet the minimum requirements of an employment agreement. In addition, company’s can expect severe legal and administrative penalties and damages for their misconduct.

Like China, many countries are actively putting in measures to ensure employees are not wrongfully labelled, or labelling themselves, as contractors. In the UK, the IR35 regulation – which regulates contractors’ status – has recently been changed. It was previously introduced to ensure that contractors are not actually functioning as employees, allowing contractors to avoid costs associated with employment. As of April 2021, client companies and employers will define whether a contracting service or an employment agreement is taking place. Employees or contractors will then be able to dispute this classification and demand a formal explanation.

Cultural Norms Define Employment and Contracting

The question of whether to identify a worker as an employee or independent contractor is not only a question of legal definitions. It can also come down to cultural norms and customs of employment.

In South America, contracting is not popular or common. Any form of agreement of service in exchange for monetary compensation is treated as an employment contract. While contracting is possible in Argentina, for instance, the state usually assumes employment. The onus is on the employer to prove that they hired a contractor rather than an employee. This is a complex and difficult process, so contracting is largely avoided.

The case is similar in several Asian countries. In China, there is no legal definition for an independent contractor. Companies who hire contractors in China run the risk of engaging in a de-facto employment arrangement. Employing is a much safer option in this instance.

These cultural trends tend to be in line with other social norms. In many regions where contracting is limited or uncommon, being employed grants access to social security as well as practical everyday necessities. To continue with the example of China, where a child attends school is also tied to parents’ access to social security.

While employing can offer security to employees, it provides employers with far greater transparency compared to contracting. Particularly in countries where contracting is not the norm, companies may find themselves in a better position if they employ right from the start.

Ensuring Your Company’s Intellectual Property Rights

As companies create innovative products and services, they also want to retain the rights to any intellectual property produced by their employees. Sadly, neither contracting nor employment offer a one-size-fits-all solution. 

Intellectual property can be anything, but the four most common types are:

  • copyright
  • patents
  • trademarks
  • trade-secrets

These can be created in agreement with or using the resources of an employer or hiring client. This is stipulated in the employment or service contract. 

As with all legal matters, local jurisdictions define intellectual property law. They also decide who retains ownership and rights to any intellectual property created while an individual is working for an employer or client.

While employment contracts do not necessarily guarantee intellectual property rights to employers, additional contracts or clauses can easily be added to secure these rights. When hiring independent contractors, it is significantly more difficult for employers to obtain intellectual property rights.

The safest option is to add an additional contract or clause when an employment agreement is signed. Your company can benefit from a strong and secure relationship with your employee and the assurance of intellectual property rights. 

Can Contracting Help You Avoid Permanent Establishment Risk?

Unfortunately, the opposite is the case. While contracting may seem perfectly viable, employment is actually a far safer way of dealing with permanent establishment risk.

Permanent establishment risk refers to the presence of a fixed place of business in a country where a company is carrying out business activities. Permanent establishment is generally triggered by revenue-generating activities. This makes a company liable to paying corporate taxes. 

We’ve gone ahead and broken down permanent establishment risk and how to avoid it for you. But the important thing to remember here is that permanent establishment risk is not triggered only when you start employing in a country – an independent contractor puts your company at exactly the same risk.

With contractors, your company’s legal status in a country can be unclear. Non-compliance can lead to hefty fines and lengthy lawsuits. In contrast, employing can give your company greater security right from the start. While as an employer you might still be liable to pay corporate tax, employing is both legal and transparent in the eyes of local authorities. Employing, when done right, can give you the peace of mind you need to focus on your business.

Retain the Best Talent Through Remote Employment

Compared to contracting, employing remotely can offer your company some considerable perks. The key advantages include: 

  • employment is favoured over contracting in most countries apart from the US and UK
  • social security is accessed via employment
  • employment is straightforward for employees - contracting is cumbersome & bureaucratic
  • personal development and leadership training is offered to employees, not contractors
  • employees can be incentivised to identify with your company’s values
  • employees are incentivised to contribute to your company’s growth

Nurturing home-grown talent is an investment that promises great rewards. While contractors can get a job done, employees add exceptional value to your business and foster growth.

Sounds easier said than done? Well, we are here to tell you that we’ve gone ahead and devised a plan for you.

Employ Remotely With Omnipresent

At Omnipresent, we have developed the answer to seamless remote employment. We cover all the administrative and basic HR functions associated with remote employment for you. 

Omnipresent’s process is effective and transparent. Our service includes:

  • employing talent on behalf of your company
  • remote employment all around the world
  • a broad range of expertise
  • making you aware of potential risks in advance
  • a transparent and compliant employment process
  • ensuring your company’s intellectual property rights

The table below summarises the benefits of remote employment as compared to contracting.

Omnipresent’s solution includes an exceptional digital platform, OmniPlatform, for all your records and HR activities. Our software is user-friendly and highly secure. We value your privacy and we are going to the greatest lengths to ensure your data is completely safe.

Say good-bye to the risks of contracting. Omnipresent offers a holistic solution to businesses looking to employ remotely. Get in touch for a free consultation so we can help you find the best path for your business.

Lucia Linares
Lucia Linares is a Content Marketing Researcher at Omnipresent. She has extensive experience in research, publishing and editorial work. She holds an MPhil and PhD from the University of Cambridge.