The Rise of Self-Employed in the Global Workforce and What Business Owners Need to Know Exploring the pros and cons of hiring self-employed and freelancers across borders, the legal considerations, the correct classification of employees and independent contractors, and more.
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The gig economy and remote work have contributed to the growing prevalence of self-employed people in today's workforce. Take this for example, from Eurostat:
In the EU-28, among the 33 million self-employed persons, 71.8 % were self-employed without employees in 2017; 20.2 % of the self-employed without employees (24 million persons) had one client or a dominant client in the last 12 months.
At the same time, between 2021 and 2022, 36% of employees in the United States (approximately 59 million people) were gig workers. While hiring independent contractors offers access to a global talent pool through platforms like Indeed, LinkedIn and my company Transformify (TFY), businesses must be aware of the complexities and risks associated with hiring self-employed and freelancers overseas.
Why do companies hire independent contractors and freelancers instead of employees?
Independent contractors are self-employed individuals who are hired to provide specific services without being classified as employees. Hiring independent contractors, service providers and freelancers offers several advantages, making it a fast, cost-effective, and efficient option, especially in today's era where companies have access to a global talent pool.
Differentiating between independent contractors and employees can sometimes be challenging since some differences are evident while others are more subtle. To determine if a worker qualifies as an independent contractor, consider at least the following factors.
Equipment and tools: Employees typically receive all the necessary tools and equipment from the employer, such as office space, computers, software licenses, and work supplies. In contrast, contractors and freelancers use their own tools and equipment and are not entitled to reimbursement for expenses like phone bills, internet costs, or software licenses.
Schedules: Employees adhere to the company's schedule, which may include mandatory meetings and extracurricular activities. On the other hand, independent contractors and freelancers have control over their schedules and can set their own working hours.
Training: Employees often receive onboarding and necessary training from the employer to perform their job effectively. In contrast, independent contractors and freelancers possess the skills and expertise required to complete their tasks and usually only require a briefing or minimal guidance.
Supervision: Employees work under the supervision of managers who provide guidance and oversight. Independent contractors, however, have autonomy over their work processes and require minimal supervision.
Substitution: Self-employed, independent contractors and freelancers may assign a sub-contractor to the task. To the contrary, employees in most cases have no right to reassign tasks to other team members without the explicit approval of a direct manager.
Considering these factors, along with other vetting rules that may vary by country, can help determine whether a worker should be classified as an independent contractor or an employee. If in doubt, it is strongly recommendable to seek legal advice.
The advantages of hiring independent contractors.
Cost-effectiveness: Independent contractors, self-employed and freelancers usually act as service providers and issue invoices for the services rendered by them. In most countries, there are rules and regulations around the applicable social security payments, health insurance, etc. that apply to self-employed. Typically, It is the self-employed who need to take care of administering all tax and social security payments.
Quick and easy onboarding: Hiring an independent contractor involves fewer legal hurdles and administrative processes compared to hiring a new employee. This allows for a faster and more streamlined onboarding process.
Flexibility in staffing: Ending the relationship with an independent contractor is generally easier and less complicated than terminating an employee. Contractors often work on specific projects with agreed-upon deadlines, providing greater staffing flexibility for the hiring company.
Increased productivity: Independent contractors are typically highly skilled and experienced in their respective fields. They often require minimal training and resources to perform their tasks, leading to increased productivity.
Access to top talent: Hiring independent contractors provides access to a global talent pool. Companies can seek out and engage with the best professionals in their industry, regardless of their geographic location.
Disadvantages of hiring independent contractors.
Lack of control: Unlike employees who can be closely supervised and guided, independent contractors work autonomously. This means the hiring company has less control over how the job is performed. This can be an advantage if the company relies on the services of highly-skilled experts having a strong reputation in the industry as they require minimum guidance and control.
Availability issues: Independent contractors often work with multiple clients simultaneously. This means they may not always be readily available when the hiring company requires their services, potentially causing availability conflicts. Such conflicts can be addressed by building a pool of vetted freelancers allowing flexibility at any time.
Worker misclassification: The classification of workers as independent contractors varies across countries and jurisdictions. Misclassifying employees as independent contractors can result in legal consequences, including investigations, sanctions, and compensation lawsuits for the hiring company. Business need to seek legal advise if in doubt and benefit from advanced vendor management systems.
It's important for companies to carefully consider the specific needs of their projects and the nature of the work when deciding whether to hire independent contractors or employees.
What are the legal considerations when hiring contractors in different countries?
Hiring independent contractors in different countries involves navigating the unique legal aspects and regulations of each jurisdiction. Here are some key legal considerations when hiring contractors in various countries:
National labor laws: Each country has its own labor laws that companies must adhere to when hiring contractors. For example, in the UK, companies hiring contractors need to follow off-payroll working rules (IR35). It's important to be aware of specific labor laws and regulations in each country.
Employment protection legislation: Countries prioritize different protections for workers, such as race, age, religion, sexual orientation, health condition, and gender expression. For instance, in Australia, independent contractors might be protected from adverse action if they report workplace rights violations to a regulator.
Public holidays: Independent contractors are generally not entitled to statutory holiday pay, but local holidays should be considered if the agreement specifies a timeframe for service delivery.
Personal time off (PTO): Independent contractors typically do not receive PTO, although some exceptions exist.
Minimum wage: Depending on the country, independent contractors may or may not be subject to minimum wage laws.
Overtime pay: Independent contractors do not receive overtime pay, but it's advisable to outline the maximum number of hours per working day in the contract agreement. In most countries, contractors and freelancer can sub-contract their tasks if/when needed.
Employee benefits: Contractors are not entitled to employee benefits like health insurance, pension plans, or other perks provided to employees. Still, in most countries, self-employed are required to administer specific social security and health insurance payments.
Compliance with local tax authorities: Different countries have different tax year ranges, and companies may need to report annual earnings for self-employed and contractors accordingly. It's important to be aware of the specific tax year dates in each country.
Currency: The currency in which the contractor will be paid should be specified in the agreement.
Types of leave: Companies hiring self-employed and contractors abroad may need to comply with national policies on maternity/paternity leave, medical leave, bereavement leave, etc.
Contract deliverables: The definition of contract deliverables and their relationship to the issue of subordination can vary based on local labor laws. It's important to understand how local laws define independent contractors' responsibilities.
Length of contract: Contracts that exceed a certain duration may be classified as employment contracts. The duration of an independent contractor agreement is typically limited and tied to the length of the specific project. Still, in some countries, contracts exceeding 3 years might be classified as an employment arrangement.
Working hours: Local labor laws may restrict a company's ability to dictate working hours for a contractor.
Termination of contractors: While independent contractors cannot be "fired" since they are self-employed, a hiring company can terminate their service agreements based on issues with work quality, changing company needs, or reduced budget for outsourced services.
It's crucial for companies to consult legal experts and thoroughly research the specific laws and regulations in each country to ensure compliance when hiring independent contractors abroad.
Hiring through Company-as-a-Service ( CaaS): A Solution for Contractor Misclassification Risk
One effective way to mitigate the risk of contractor misclassification is to opt for hiring through a Company-as-a-Service ( CaaS).
A Company-as-a-Service ( CaaS) is a third-party organization that acts as the authorized re-seller of the services rendered by independent contractors and freelancers in a specific country. By engaging with a CaaS provider, companies can ensure compliant service arrangements, as the authorized re-seller takes on responsibilities such as proper classification, service agreements, mandatory reporting, VAT reporting, self-billing, payment automation, reconciliation and more.
As more people seek financial freedom through self-employment, the gig economy is likely to continue its fast-paced growth. At the same time, businesses demand flexibility to remain competitive, thus fueling the growth of an on-demand workforce. Inevitably, in the coming years, this trend will result in changes in the applicable regulations to ensure transparency and protect the rights of all parties.