Across the globe, independent contractors and employee status is a hot topic, particularly with the rise of the gig economy. It is important for businesses who engage independent contractors or workers to assess their exposure and the associated risks related to the employment status of those who carry out work for them. In our webinar series, we have been looking at some of the common themes around the world.

Test for employment status

There are many similarities between the test for employment status in the UK and other jurisdictions. In our experience, courts across the globe tend to look at similar factors to the courts in the UK, including:

  • Does the individual have control over their hours, schedule and workplace?
  • Is the manner in which the individual provides services subject to supervision?
  • Can the individual use a substitute if they are unable or unwilling to carry out the work personally?
  • Does the business supply equipment to the individual, or does the individual provide their own equipment?
  • Who bears the business risk and how are liabilities apportioned?
  • Is the individual treated like the end user's employee?
  • Does the individual invoice for work done or are they paid through payroll?
  • What is the reality of the working relationship between the individual and the business i.e. what is actually happening on the ground despite the contractual agreement between the parties?

The predominant differences between jurisdictions is usually how much weight is placed on a particular factor. For example, in Sweden one of the key factors is where the business risk lies. The Swedish courts would expect a contractor to be responsible for any errors and bear the liabilities for those errors. In Germany, the right to substitution is a critical factor when determining employment status. The key factors the UK courts consider when determining employment status are predominantly mutuality of obligation, the degree of control and personal service.

Risks and exposure

If a company has misclassified an individual who carries out work for them, it may face both monetary claims and penalties, as well as reputational damage. The types of sanctions for misclassification are very similar across different jurisdictions. These can be broadly split into three categories:

  • compensation arising from employment-related claims and in lieu of employee benefits, such as holiday pay;
  • requests for the back-payment of social security contributions and related fines by tax authorities; and
  • enhanced penalties for companies which deliberately misclassify individuals to save on costs.

Practical tips

  • Ensure you have clear, comprehensive and robust written contracts in the relevant country.
  • Avoid providing the individual with a company email address and other company equipment to ensure there is a distinction between employees and contractors.
  • Assess what is actually happening on the ground and make alterations where possible to reflect a contractor relationship and mitigate the risk of misclassification.
  • Consider introducing global business guidelines on using contractors, which create a standardised process for managing contractor agreements.
  • Provide regular training sessions to hiring managers and HR teams to ensure compliance and help to protect the business from claims.
  • Converting a contractor to an employee may minimise the likelihood of non-compliance and avoid the regulatory complexity regarding employment status in other jurisdictions.However, consider if there is a permanent establishment tax risk if they do not have an entity in the jurisdiction in which the employee is to carry out their work.
  • If employee status is not a viable option, explore alternative models such as the use of personal service companies, agencies and professional employer organisations (or employers of record), which might mitigate the tax and social security risks.