Many companies are tempted to draw on foreign independent contractors in order to overcome skills shortages in the home market and reduce costs. However, such a move can be fraught with problems.
The biggest potential risk is having a contractor challenge their status and claim that they are actually employed. FedEE has a useful checklist in its knowledgebase to help determine if this could be the case. The employment status test needs to be undertaken in both the country of origin and the host country. If veiled employment is found to exist, there are not only back-payments to find for annual leave and sick pay, but in some countries such as Argentina, France and Peru, there are criminal penalties for bogus self-employment. One way to overcome these difficulties is to lease workers from an agency or use foreign companies from abroad, rather than independent contractors.
Fighting a case in a foreign court can also be very expensive and take up much essential management time. Fortunately, some countries allow cases to be heard in foreign courts. For instance, if a company hires contractors from Brazil to work elsewhere, then the foreign company can call on Article 25 of the Civil Procedure Code, allowing the parties to agree in their contracts for cases to be exclusively heard in a foreign jurisdiction.
Unfortunately, this element in the code is quite new and cannot yet be relied upon. That is why it is far safer to include an arbitration clause in the contract with the foreign workers to allow cases to be dealt with by ADR in the home state of the client company using the contractors.
There are also tax obligations for companies that use independent contractors. In the US, if a company pays a contractor over $600 a year, they must complete tax form 1099-MISC. But there are certain exceptions for foreign contractors working in the US. These are that the total fee paid does not exceed $3,000, the worker is in the US for less than 90 days, and the work performed is for an office in the foreign country. Even if form 1099-MISC is returned, no withholding of tax will be necessary if the country concerned has double tax agreement with the US. Moreover, in all cases a further obligation exists for the contractor to complete form W-8BEN (for individuals) or W-8BEN-E (for companies).
In the UK the government is in the process of rolling out reforms to “off-payroll working”. These will take effect in the private sector next year. This will end the former advantage of self-employed people working through personal service companies and shifts the responsibility for determining tax status from the contractor to the business that hired them. It remains clear, however, how this will affect the use of small companies with two or more principals, companies with a single employee, and especially foreign contractors. It is also evident that the tax authority – the HMRC – has a bad record in assessing the tax status and has a record of losing more than half its cases when matters go to court.
Another area of great concern is intellectual property. In many jurisdictions, independent contractors have ownership of the work they undertake and this can include both copyright and patents. That is why it is necessary to have in place an agreement that passes all such rights to the client company. In a similar way, contractors need to be subject to non-disclosure agreements (NDA) to protect company secrets.
Finally, a company does not only have a health and safety duty of care obligation to employees, but to all those working on their premises and on their behalf. This can pose special risks for foreign-based workers because they will often not be included in programmes for safety training and may not have the linguistic abilities to read safety signs. Companies providing accommodation for contractors will also need to ensure that it meets a basic standard.