In the DCR blog, we have repeatedly discussed the various aspects of the strictness with which America penalizes the misclassification of independent contractors. Let us now look at the laws in other countries across the world, where the laws are – if anything – stricter! By employing an independent contractor to provide ‘consulting’ services, organizations assume they can avoid dealing with maintaining a local payroll administration, follow employment laws, and meet the applicable benefits requirements and other corporate and taxation mandates.
In every country we examined, to accept a consulting relationship as that of an independent contractor and not employee, no legal enforcement agency looks at the wording of the work contract. Each looks at the way the relationship is managed and analyzes the relationship to determine the validity of independent contractor classification.
Australia: The Independent Contractors Act of 2006 was further strengthened by Australia’s Fair Work Act of ‘09 Law, which imposes severe penalties for attempts to disguise employees as independent contractors. In addition to federal regulations province or territory regulations may also apply.. ICs are required to have an Australian Business Number and may enjoy protections against discrimination and also retirement benefits for superannuation.
Brazil: Contracts need to be project-based only and cannot extend for indefinite periods. Long projects automatically turn into employment relationships. Certain core functions of a business have to be performed by employees and not ICs. ICs need to register as autonomous workers and set up their own commercial entity. Clients need to document all services rendered and payments made by professional service receipts, applying appropriate service taxes.
Canada: Canada has three categories of workers – independent contractors, dependent contractors and employees. Contractors are deemed dependent when they are financially dependent on one major client, who cannot terminate them without reasonable notice. Each of the provinces has its own labor laws and when contracts do not specify a notice period, the employee may be entitled to common-law notice or statutory notice which can be a month per year of service. The independent contractor will be deemed an employee if the company provides the necessary training for the job, provides the required tools or equipment or the contractors work results in a profit or loss for the company and not the contractor.
China: China regards anyone who executes a critical part of a company’s business or is subject to a company’s internal rules and regulations as an employee. Any employer who does not execute an employment agreement with a worker is required to pay double the agreed upon salary to the worker. An independent contractor will need to have their own corporate entity, and will need to execute two agreements with any client –the work contract with the business entity, and the employment contract.
France: An independent contractor in France needs to register as a professional or commercial agent. Even such a registered contractor will need to prove that the relationship with the client is not one of subordination. Companies who employ ICs must make all required social security charges and contributions and file all mandatory tax returns with the tax administration. An IC who employs others will need to comply with all employment laws with regard to them.
Germany: The independence of a contractor is determined in Germany by looking at the IC’s freedom to choose how, when and where to perform their services. While there is no need to register as a business, misclassification leads to criminal liability for fraud.
India: An IC cannot be under the control or supervision of the company. India expects the contract to be a formal, legally admissible document on stamped paper, which must contain the Permanent Account Number (PAN) of the consultant, so that the payments can be linked to the taxes paid by the contractor. Clients must ensure that taxes are deducted at source (TDS) and paid to the government when making payments to a contractor. When the contractor files the annual tax return, these TDS payments will be taken into consideration and additional tax may be paid by the individual (or refunded by the government). This arrangement ensures that there is no loss to the exchequer. The contract is limited to less than 240 days.
Israel: A contract includes a provision which specifies the amount of the compensation paid to a contractor as service fee that will be deemed as salary (up to 70 to 75%) in the event the contractor is considered to be an employee. The rest would constitute the contributions to social insurance, pension and severance in case the relationship is deemed to be an employment agreement.
Korea: Korean law specifies ten rules used to determine if a contractor is properly classified. Korea tracks the scope of duties, submission to the company’s work rules and control, submission to supervision in the work being performed, who determines the time and place of service, the contractor’s freedom to take up other work, payment of expenses for work, tools and materials; structuring of payments, tax and other withholdings, and participation in the company’s benefit plans. Violations invite criminal penalties.
Mexico: Misclassification could lead to serious fines, and penalties for tax evasion. If misclassified, the contractor gets to receive all benefits due to an employee. The law in Mexico entitles a worker to share in 10% of the profits of the employer.
Netherlands: An independent contractor in Netherlands requires an exemption from the government for tax purposes. The application will need to specify the scope of work required on the contract so the authorities can verify if the task does not require a regular employee to perform it. A person without such an exemption will be treated as a regular employee. When employing a person who already enjoys an exemption, an employer has the duty to ensure that the scope of work being offered is similar to what was approved by the authorities, or be held liable for misclassification and face the charges.
Spain: Spain, like Canada, protects dependent contractors who provide personal services to a client on a regular basis and derive at least 75% of their income from that client. This entitles them to benefits like leave and damages for termination without cause.
United Kingdom: An independent contractor needs to operate in a relationship of independence as with other countries. The IC is also protected by the employment laws, as a worker – though not an employee. Agency Workers Regulations stipulate a limit of 12 weeks on obtaining temporary services from a worker. After this period, the worker is entitled to the same rights and benefits as a regular employee of the company.
With an independent contractor relationship, most laws ensure that the worker’s rights under the various employment laws are not compromised and the taxes due on the worker’s income are being paid promptly. If sourcing your workers globally, and remotely, be sure to avoid misclassification by learning about the local laws that apply to such a relationship.
Excellent overview of the IC compliance requirements around the world. Interesting observation that contracts never supersede the relationship between the parties and depending on the country that relationship can be defined by the length of service, direction and control or payment type. It is curious that our government hasn’t dealt with the independent worker as an integral part of the workforce.The US seems to want to discourage independence so as to support the entitlements built into the system.
Thank you for your appreciation.
Yes, the relationship with independent contractors is, as you so rightly said, an integral part of the workforce strategy for many companies in the US. It is time the regulatory environment recognized this and clarified the requirements. It should be possible to retain control while encouraging business opportunities for independent contractors and the companies that utilize their services.
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