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 outline for companies hiring remotely or expanding their international presence the risks and costs of contracting as compared to employing full time.
Wondering whether employing or contracting remotely is the best option for your business? Here we outline for companies hiring remotely, or expanding their international presence, the risks and costs of contracting as compared to employing full time.
Typically what distinguishes a full time employee from an independent contractor is that the latter is hired for a particular service, over a short period of time. It is a hiring option with considerable flexibility, but with many hidden costs that are often overlooked. Many multinational and remote companies try to avoid 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 can be far more profitable in the long run. Moreover, with countries clamping down on non-compliance strategies and informal employment, contracting is also exposing global companies to considerable risks. For today’s global businesses, remote employment rather than contracting is by far the safer and more viable option.
Employing Requires Legal Compliance...But So Does Contracting
Many employers assume that employment comes with 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 with local employment law. As businesses expand into all corners of the world, remote and remote-first companies in particular have to deal with a host of local employment regulations. These include providing and organising:
- benefits and welfare
- termination and severance
- collective bargaining agreements
Many companies assume that they can avoid local employment regulations by employing contractors. However, compared to contracting, employing can actually reduce your admin and costs in the long-run especially in cases where employees are misclassified as contractors.
Misclassifying Employees as Contractors
One of the major pitfalls to watch out for when contracting is misclassifying employees as contractors. This can lead to severe legal damages and penalties due to non-compliance.
One of the fundamental differences between contracting and employing is the relationship between the employer or client company and the hired individual. Although this is defined differently from country to country, contractor or employee status is generally decided upon according to the following criteria:
- 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 has been working for a company
- how integrated the employee is in a company
- whether the working hours and place of work are stipulated by the employer
- how crucial an employee’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, employers must meet the minimum requirements of an employment agreement in order to reclassify an employee. In addition, company’s can expect severe legal and administrative penalties and damages for their misconduct.
Like China, many countries are actively introducing 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. Previously it ensured that contractors did not function as employees, thereby 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.
Employing compliantly from the start does away with the hidden financial costs of contracting. As measures to regulate hiring contractors are increasingly implemented across countries, employing compliantly can reduce your bureaucratic and legal burden in the long-run.
Cultural Norms Define Employment and Contracting
The question of whether to identify a worker as an employee or independent contractor is not only a legal question . It can also concern the local 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 the parents’ access to social security.
In comparison to contracting, employing is far more transparent.. Particularly in countries where contracting is not the norm, companies will be judged as compliant by authorities if they employ right from the start. This can help your company avoid bureaucratic and legal obstacles, while focusing on high-priority return on investment activities.
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:
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. This is both compliant and compatible with your company’s needs. Your company can maintain control over the intellectual property produced by your employees. In addition, your employees’ work is directly tied to your company. Unlike contractors, employees are incentivised by your company’s success. A committed workforce is much more secure, cost-effective, and dedicated to the long-term goals of your company.
Can Contracting Help You Avoid Permanent Establishment Risk?
No. Rather the opposite is the case. Employment is actually a more secure way to avoid 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.
The important thing to remember 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 help you avoid being non-compliant. Compared to contracting, it can give you the peace of mind you need to focus on your core business activities.
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.
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.