- Overview: Latvia
- Global HR Compliance
- Global PEO and Payroll
- Work Permit for Hiring Expats via PEO
- Expand without a company set up
- Contractor vs. Employee: Which Is Better?
How to Convert Contractors to Employees in Latvia
Find out how you can make an informed decision on whether you should engage and pay employees or independent contractors using our free ‘Employee vs. Independent Contractor’ Checklist.
If you’re considering hiring remotely in Latvia, here’s a helpful checklist to ensure you don’t miss any key steps! It will help you decide whether to onboard your new hires as employees or independent contractors.
What Our Clients Are Saying?
I’d like to share my experience dealing with Acumen International company.
Speed & responsiveness: Very prompt in response to my first inquiry about converting contractors into employees to follow-up questions.
Completeness of information: I like how detailed the estimates and the transparency make us feel more confident about where the money goes.
Overall experience: I am pleased and impressed with how fast they respond to my inquiries. We can trust the company to employ the contractors we want to keep.
Quah Shen Dee,
People Success Officer
I have always found Acumen International very supportive, professional, and helpful. They pay salary on time and are always ready to sort out any issues.
I must admit I truly enjoy my time as an Acumen International employee and feel like they care about me as an individual. I have a dedicated manager that provides me with detailed explanations when it’s needed. Payments are always prompt, and the entire team does its best to respond to any of my questions.
I highly recommend Acumen International to anyone that requires their services.
A Complete Guide to Converting Independent Contractors Into Employees in Latvia
Throughout the world, the tax and employment laws are constantly changing. To remain compliant with these laws, businesses need to stay on top of the new changes affecting their business and tax liabilities.
Acumen International, a global Employer of Record and PEO solutions provider, helps businesses ensure that they are following all necessary international and in-country laws when it comes to workforce hiring and how they classify them.
Why Does Compliance Matter when Hiring Independent Contractors?
One of the most challenging compliance issues that companies face today is independent contractor misclassification. While the independent contractor (IC) model is viable in many situations, it’s important to recognize that it isn’t a catch-all solution for every situation.
Employee misclassification risk occurs when a company incorrectly classifies an employee as an independent contractor and vice versa. This can lead to severe consequences, including penalties and back taxes.
Many different factors determine whether someone is classified as an independent contractor. Employment laws in different countries vary greatly, and a single contractor may be subject to three, four, or even six various tests under wage-hour, unemployment, workers’ compensation, employment tax, safety, and equal opportunity laws.
Acumen International is here to take the guesswork out if you want help with your global employment decisions. We update all of our tools in real-time, so you can be confident that the guidance you receive is accurate and up-to-date. We can help you make the best decision for your situation.
Who Is an Independent Contractor vs. Employee
An independent contractor is a professional who provides a service to another person or organization under the terms of a contract. Independent contractors are not employees and are often highly skilled, offering their clients specialist skills or extra capacity as needed.
An independent contractor is an individual who trades as a sole trader, in a partnership, or via a limited company and who provides services to clients. Independent contractors work for more than one client simultaneously and are not obliged to work exclusively for any client.
They are self-employed and are therefore responsible for paying their own income tax and social contributions.
The advantage of being paid as an independent contractor is that they will usually be taxed less than if employed by someone else. This means that they take home a greater proportion of their gross earnings.
Contractor vs Employee: How to Determine Accurate Employment Status
Independent contractors (freelancers) are professionals who provide services to companies under contract. They may work remotely or on-site and are typically distinguished from employees based on the degree of control exercised by the company. In general, the more control a company has over an individual, the more likely that person is an employee rather than an independent contractor.
If the client provides explicit instructions on how to complete a task, including what needs to be done, when it should be done, and where it should be done, this is referred to as “how, what, when, and where” testing. In these cases, the workers are usually controlled by the client and would therefore be considered employees.
One of the key distinctions between employees and contractors is that employees are typically required to complete the work that “comes down the pipe,” as stipulated in their job description.
A high degree of control over the contractor’s work or schedule might also help show that they are more like employees than independent businesspeople.
The employment relationship is built on two key concepts:
- that the employee is an individual and not a legal entity;
- that the employee cannot be replaced.
The employment contract is personal to the individual, based on their skills, experience, and identity. The employer hired them because of these qualities, which are essential to the contract.
It is implied that a worker given the right to substitute for themselves and to have work assigned to someone else is not providing a personal service and is not an employee. This would suggest that the employer can quickly replace the contractor, indicating that they do not need such a contractor personally for their business. Also, suppose the employer has the right to assign work to someone else. In that case, it means they control how many people work for them at one time and when which would mean the contractor is not considered to be working under an employment contract but under a contract of service.
3. Mutuality of Obligation
The concept of mutuality of obligation means that both an employer and employee have specific duties and responsibilities to each other. An employer is obligated to provide work for their employee while the employee is required to complete the assigned work.
Suppose a worker is not focused on a specific project and has to do any task allocated by the client. In that case, there is probably mutuality of obligation, and the worker is not seen as an independent contractor by tax authorities.
4. The burden of Entrepreneurial Risk
When examining the rights and responsibilities of an independent contractor, there is often confusion over what classifies one as an employee. the most important distinction between an employee and an independent contractor is financial risk. If a contractor can make a profit or a loss, i.e., financial risk, this would suggest that the contractor is an independent contractor. Otherwise, they may be considered an employee.
OECD, Commentary on Article 5
Whether a person is independent of the enterprise represented depends on the extent of the obligations which this person has vis-à-vis the enterprise. Where the person’s commercial activities for the enterprise are subject to detailed instructions or to comprehensive control by it, such person cannot be regarded as independent of the enterprise. Another important criterion will be whether the entrepreneurial risk has to be borne by the person or by the enterprise the person represents. An independent agent will typically be responsible to his principal for the results of his work but not subject to significant control with respect to how that work is carried out. He will not be subject to detailed instructions from the principal regarding the conduct of the work. The fact that the principal is relying on the special skill and knowledge of the agent is an indication of independence.
Note: The Organisation for Economic Co-operation and Development (OECD; French: Organisation de coopération et de développement économiques, OCDE) is an intergovernmental organization with 38 member countries, founded in 1961 to stimulate economic progress and world trade. It is a forum, and its members are countries that describe themselves as committed to democracy and the market economy, providing a platform to compare policy experiences, seek answers to common problems, identify good practices and coordinate domestic and international policies of its members.
Fundamental Rights and Responsibilities of Employees under a Contract of Service
- The worker is controlled by their employer—they must perform the tasks they are instructed to by a line manager according to their job description. The employer is responsible for paying the worker and providing them with benefits such as health insurance, paid time off, and retirement contributions. In this sense, the relationship between the two is between an employee and an employer.
- The worker is expected to be at their assigned workspace during specified hours on required days.
- The worker must be present for work and cannot send a substitute in their place.
- Employees are legally entitled to certain types of paid leave, including holidays, sick days, and maternity or paternity leave. In the event of job loss, they may also be eligible for redundancy pay.
- There are certain legal protections regarding how employees can be asked to leave their jobs (termination procedures).
- Full-time employees enjoy a wide range of benefits in addition to their salary and vacation days. These benefits include company cars, private health insurance, staff canteens, health clubs and gyms, and more.
- Employees are not held liable for any mistakes they might make while completing work for the employer. They are also not expected to make up for these errors in their own time.
Why Convert Independent Contractors to Employees?
The pros and cons of converting freelancers or independent contractors into full-time employees have been a hot topic of debate lately. In Latvia, more and more businesses are coming up against this problem. Companies are often reluctant to convert independent contractors into full-time employees because of the potential liability of hiring someone as a full-time employee. However, they may need to fill specific positions and may not have the budget or staff to hire additional full-time personnel in Latvia.
1. Avoid Misclassification Risk
It is not uncommon for an employer to misclassify an employee as an independent contractor. An employer may misclassify an employee to save on taxes, overtime, and worker compensation. Working with Independent Contractors is also an invitation to a potential lawsuit. The employer can be found liable if the tax authorities come after him for employee misclassification.
The tax authorities have been cracking down on independent contractors who are not independent but rather full-time employees. This happens when a company misclassifies an employee as an independent contractor. Workers misclassified as independent contractors are not provided with certain benefits that are available to employees. These include unemployment taxes and workers’ compensation insurance.
The tax benefits of hiring independent contractors are only available for employers if the contractor is treated like one. That means they should be able to negotiate with you over their hours, rates, and projects; they should have ultimate control over how and where their work is done, and they should have the freedom to offer their services to multiple employers at once to incur entrepreneurial risk. If your employee seems more like an independent contractor, you should ask yourself why: are you treating them like an employee, and what are your potential misclassification risks?
If it turns out that your workers were misclassified, as an employer, you can be held responsible for back taxes owed on their behalf.
The tax authorities have developed multi-faceted tests to determine whether someone is an employee or an independent contractor. It includes factors such as
- whether a worker can substitute someone else to do their work;
- whether they have control over how they perform their work;
- whether they own their tools (as opposed to renting or borrowing them);
- whether they perform work outside their employer’s place of business (which would indicate they are part of the company).
The more factors present, the more likely someone is an employee rather than an Independent Contractor.
2. Avoid Under-taxation
Independent contractors (ICs) are self-employed individuals; as such, they can deduct a range of expenses from their gross income that employees are not allowed to.
Independent contractors are not subject to the same tax laws as employees. Instead of paying a fixed amount of money in taxes yearly, they pay a percentage of their income. In other words, they get to deduct expenses that employees cannot. Most independent contractors are subject to a broader range of tax deductions than employees. Take equipment purchases, office rent, or communications and travel expenses, for example.
3. The Independent Contractor Is an Asset for Your Company. Don’t Lose Them
Their work is exceptional, and their skills and expertise are unique. You can’t afford to lose them.
You may think that Independent Contractors aren’t worth the hassle or expense of adding to your payroll, but here’s why they are invaluable to your company.
Independent Contractors Are Valuable Team Members
Independent Contractors have a good work ethic and reliability in their job. They know the value of their time and services and don’t waste any time with unproductive tasks that do not add value to their output. This is excellent for any company concerned about maximizing its productivity.
Independent Contractors Have Unique Expertise
They are smart. Independent contractors are highly skilled and knowledgeable professionals with years of experience under their belts. They bring a wealth of wisdom and insight as team members. They have unique capabilities that can help your business succeed in new ways. Not just anyone can be an independent contractor— they must have skills and expertise that are unique and difficult to find elsewhere.
Independent Contractors understand that their work is essential — it’s more than just a job for them; it’s something they take pride in doing well. They have a sense of ownership regarding their role in the company, which means they’ll never shirk doing meticulous work. If there’s ever an issue with quality or delivery, you won’t see them making excuses.
Independent Contractors Are Loyal and Passionate
Independent contractors take great pride in their work. They often choose a few companies to focus their efforts; they don’t hop from job to job. As such, they tend to have more loyalty toward your company as a client and will want to do their best for you. Independent contractors are passionate about their work. They want to be challenged, and they want to make a difference. They’re invested in the success of your business, even if it doesn’t always feel like it.
The Case of an IT Freelancer You Most Certainly Want to Avoid in Latvia
Here is the litigation you would want to avoid… One American company worked with a Slovakian IT freelancer for approximately three years. The American HR director decided to contact Acumen International to employ this freelancer so that they would be in compliance with labor laws and avoid future misclassification issues.
The finance department of this US company did not approve of our offer to employ the Slovakian freelancer as it seemed higher than what they were currently paying the freelancer. An employee misclassification case did not seem imminent, so they decided not to act.
Half a year later, the company contacted us to employ a Slovakian freelancer. Our offer got approved, but the freelancer refused to sign our employment agreement. In this half-year, the relationship between the freelancer and the US company went sour. The freelancer decided to go to the labor authorities instead. We never heard the ultimate verdict, but from communication with the HR director, we understood that they risked owing social security taxes, vacation, severance payment, and additional fines totaling about seventy thousand euros.
5 Advantages of Payrolling Employees over Independent Contractors in Latvia
- Engaging and paying foreign talent via a global PEO solution is about 30% cheaper than engaging in-house.
- Saves around 50% of costs compared to working and paying through your own entity.
- With the help of employment, employee loyalty grows by 47%, which is why you can retain the top minds long-term.
- Legal and compliant foreign employment eliminates 95% of legal, financial, and business risks. Also, using this service, you can get flexibility and take up more projects of different duration.
- You can start a bare-bones operation in Latvia with just one or a couple of employees and easily add any headcount as you move along.
Acumen International – Your Trusted Global PEO and EOR Solutions Provider in Latvia
Headquartered in London, UK, Acumen International, a Global Employer of Record (EOR) and Professional Employer Organization (PEO) service provider, was founded in 2001. The company gives mid-sized and enterprise companies the power and flexibility to grow internationally with streamlined and simplified global labor expansion.
Acumen International helps solve the frustrations faced by founders and leaders of technology companies looking to expand globally quickly but cannot or do not want to take on the liability, costs, burden of direct employer status, or other risks associated with operating in individual countries. International employers can also use our global resources to test a new market quickly before establishing a local legal entity.
- Immediate service coverage in 190 countries.
- Both a single point of contact and a dedicated account manager for your project for all target countries.
- A single contract for all in-country services (employment, immigration, legal, etc.)
- Intellectual Property protection.
- A single PEO provider assumes full responsibility for your international employees in multiple countries.
- Payments are made within the UK or to the UK bank company account.
- Fully compliant and standardized procedures and reporting systems.
- Standard payroll breakdowns for all target countries.
- As soon as we receive your request for a project in any country, we will send you a payroll breakdown and offer within 2 working hours.
- Full 100% fee money-back guarantee for employee or contractor payment delays.
- Tailored and 100% compliant employment contract drafts.
- No need to set up a new entity in every country where you have operations. You are not required to hire local employees or worry about local compliance requirements.
- The ability to scale your business quickly by hiring employees in multiple countries without having to set up a new entity in each country.
- A single point of contact for all employment-related questions and concerns.
- A single point of contact for all tax compliance questions and concerns.
- No need to worry about managing multiple payroll systems, tax filing requirements, or employee benefits programs across multiple countries since everything is handled by Acumen Global Employer of Record (EOR).
- Less time spent on recruitment, evaluation, onboarding of globally distributed teams of professionals, or a learning curve.