Prevent employee and 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. However, many IT companies work with IT freelancers on a full-time basis. We want to share a guideline to prevent employee misclassification for these individuals.
What’s the deal?
Suppose a US court determines a case of employee misclassification. In that case, the company will face liabilities such as back tax withholdings, due social security contributions, overtime hours, interest, and penalties. Suppose employee classification is determined outside the US. In that case, 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 them.
1. Hire a local accountant to do all the tax filings
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 something is wrong with the tax payments. Tax authorities will start an investigation, and if they believe this individual is a misclassified employee, they will call in the labor authorities.
A freelancer or independent contractor will often go to the labor authorities alone. A deteriorating working relationship with the client, coupled with the sight of a high severance payment, is 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, the revenue of the freelancer must come from multiple clients. If a German freelancer receives more than 80% of total revenue from one source, this is likely to trigger an employee/ independent contractor misclassification case. In countries such as the USA, it is more important to look at whether the freelancer has his website, business cards, and other methods to promote his business.
Employee/ independent contractor misclassification chances are close to zero if the freelancer works for multiple clients and when the working relationship is only for a brief period. An IT freelancer working indefinitely for one client is in danger. In these cases, you should pay extra attention to the criteria per country.
#3. Don’t work with full-time IT freelancers
Freelancers are great for leveraging internal project teams in times of need. They are ideal for short-term projects. But when you want to retain this talent indefinitely, 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.