Compliance: Converting International Contractors to Employees

Today’s growing business is facing increasing pressure to expand internationally—whether that is to meet demand from customers overseas, to test new markets, or to tap the worldwide pool of talent to strengthen their broader operation.international

Global HR teams are tasked with the responsibilities of managing their company’s global workforce, which often includes a blend of full-time employees and independent contractors. While the latter appears to offer an easy, efficient way to get “boots on the ground” quickly and avoids the hassle of setting up a foreign branch office or subsidiary, it may result in a ticking liability time bomb for your company because those independent contractors are probably improperly classified under local employment law.

For example, in France the determining element of whether an employment relationship exists is not the terms of the contract, but instead the subordination relationship between the principal and the worker. If a claimant is successful in challenging his or her independent contractor status, he or she would be entitled to unemployment insurance, back wages, overtime, bonus schemes and other benefits applicable in the company, Social Security contributions, damages for unpaid vacation, and other benefits of employment that were not received.

In addition, they may face criminal sanctions including of up to 2 years in prison and a fine of up to €45,000 (about $52,000 USD) against the company’s legal representative as well as a fine of up to €225,000 (about $261,000 USD) for the company. Furthermore, an indemnity in the amount of at least 6 months of wages would be awarded against the company in the case of a termination of a misclassified independent contractor.

To minimize risk exposure and ensure legal compliance in your organization, there are three considerations for HR professionals to bear in mind when it comes time to converting international independent contractors to employees:

1. Communicate the Organization’s Goal

At the outset of this transition process, have a detailed, transparent conversation with the contractor that will be transitioning to an employee about the impending transition. Lay out the vision and the next steps in a simple and uncomplicated way (e.g., what will happen and when? What changes can the contractor expect as part of the transition to employee status?).

Most contractors understand that the company that they provide services to is taking a risk because in some cases (depending on the country’s unique laws), engaging a person as a contractor is illegal if that person is really functioning as a full-time employee. Of particular risk is when a contractor has been with the company for a year or more.

In order to streamline the process, it is critical to ensure that the international contractors feels incentivized to get on board with the broader organization’s goals and is included in the process. HR leaders will want to communicate to the contractor that the company wants to be able to offer him or her a more extensive set of benefits, for example, and that the company wants to ensure its compliance with local employment laws and best practices, which provide more protections to an employee than to an independent contractor.

2. Understand the Individual Situation

Once everything is out in the open, take the time to get an idea of each worker’s individual situation, and determine why he or she agreed to work as a contractor in the first place. What was their greatest motivation to accept the job? Which benefits were they offered (mandatory or otherwise) that enticed them to sign on?  This information gathering phase will help you determine the best way to communicate the impending change in status and how the transition will benefit the worker.

While unfortunate, it’s common that as an independent contractor, your organization may not have been properly paying taxes for this person, which may be convenient for the employee but is high-risk for the company. It is the company’s obligation to ensure employment taxes are withheld and reported.

As such, it will also be important to get an idea of the employee’s, and thereby your, tax risk. Figure out whether or not this individual has been paying taxes, and keeping appropriate documentation, so that you can approach the transition negotiations with a tailor-made offer.

3. Make A Reasonable Offer, and Be Prepared to Walk Away

Contractors are often happy with the decision to switch to employee status because they receive some increase in benefits, even if that increase is through the payment of employer Social Security and other mandated benefits. However, many contractors in transition will come to the negotiating table prepared to fight for a salary increase, as they may not have had taxes withheld while serving as a contractor, or their contractor fee was higher per pay period than what it will be as a full-time employee.

It will require both a good strategy and finesse to strike the ideal balance between satisfying the company’s and the future employee’s needs. Be prepared to discuss self-employed taxes, to showcase benefits received as an employee, and to make a fair offer for salary based on net to gross estimates.

Typically, organizations over-compensate contractors transitioning to employees because they don’t want to lose the valuable skills that individual accumulated over his or her time with the company. If you made the contractor a fair market offer, provided concessions to meet her individual needs, and she is still unhappy with the new terms of employment, your best option is to walk away.

If you don’t and your company wants to grow its operations in a that country, one employee’s inflated salary can create challenging precedents for future hires, and do little to help achieve the organization’s long-term plans for international expansion.

Bottom Line

Converting contractors to employees can be challenging, and HR departments need to do everything they can to maintain a good relationship with these individuals throughout the transition process. The qualities of a company that can smoothly and successfully convert international contractors into full-time employees are those of great workplaces in general; open communication, individualized attention and recognition, plus reasonable (if not better) benefits packages and compensation. Regardless of geographic location, these things in business are fundamental to growing and maintaining a happy and productive team.

Nancy Cremins is currently General Counsel at Globalization Partners, where she advises the company’s clients on global employment law, compliance and risk management, as well as manages all contract negotiations and team of in-house legal counsel. Cremins came to Globalization Partners from Gesmer Updegrove LLP where she spent nearly a decade advising early stage companies and entrepreneurs in dispute resolution and employment law. She is widely regarded as one of Boston’s top lawyers for startups and entrepreneurial ventures, having been named as a Top 50 Women in Law by Super Lawyers, one of the Boston Business Journal’s 40 Under 40 and BostInno’s Fifty on Fire.

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