Prevent employee/independent contractor misclassification of your foreign IT freelancers

Working with freelancers, especially foreign ones is often a fantastic way to augment your in-house team with unique external expertise in a short period of time. However, many IT companies work with IT freelancers on a fulltime basis. We want to share a guideline on how to prevent employee misclassification for these individuals.

What’s the deal?

If a US court determines a case of employee misclassification, then the company will be faced with liabilities such as back tax withholdings, due social security contributions, overtime hours, interest and penalties. If employee classification is determined outside the US, then the company will additionally be liable for paid vacation days, mandatory benefits such as a thirteenth month pay, severance payment, notice pay and fines, which are often a combination of a lump sum plus a percentage over total liabilities.

These are severe liabilities but luckily there are a few ways to prevent it.

#1. Hire a local accountant to do all the tax fillings

Your IT freelancer may be the best in his field but he is often not very entrepreneurial, let alone a great administrator. An employee misclassification case can be triggered because tax authorities discover that there is something wrong with the tax payments. Tax authorities will start an investigation and if they believe this individual is a misclassified employee then they will call in the labor authorities.

Most often the freelancer/ independent contractor will go to the labor authorities by himself. A deteriorating working relationship with the client, coupled with the sight on a high severance payment, are often enough for the freelancer to make this step.

#2. Check the criteria for employee misclassification

Criteria that determine employee misclassification differ per country. In a country such as Germany it is important that the revenue of the freelancer should come from multiple clients. If a German freelancer receives more than 80% of total revenue from one source then this is likely to trigger an employee/ independent contractor misclassification case. In countries such as the USA it is more important to look whether the freelancer has his own website, business cards and other methods to promote his business.

The chances for employee/ independent contractor misclassification are close to zero if the freelancer works for multiple clients and when the working relationship is only for a brief period of time. An IT freelancer that works indefinitely for one client is in the danger zone. In these cases, you should pay extra attention to the criteria per country.

#3. Don’t work with fulltime IT freelancers

Freelancers are great to leverage internal project teams in times of need. They are ideal for short term projects. But when you want to retain this talent for an indefinite period, then it makes more sense to employ this individual. Acumen International can employ your IT freelancers on your behalf as soon as you find them. We would act as the employer of record, pay the wages, fill out the taxes and make sure everything is compliant with local labor laws.

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