Independent Contractor Versus Employee Status: A Global Perspective
This QuickCounsel covers the general features of an independent contractor relationship and it's differences from that of a full-time employee position. The question of difference between an independent contractor and an employee turns on local law in the place the service provider works. (Choice-of-foreign-law clauses in contractor agreements rarely control, because public policy of fundamental employee protection is at stake.) Every country's local law offers up some list of factors distinguishing contractors from employees. Generally, countries' lists of factors are surprisingly similar, from nation to nation. This is one of very few areas in international employment law where broad generalizations across jurisdictions can be useful. Most all countries uphold independent contractor status if the service provider can truthfully answer "yes" to five questions:
To be considered an independent contractor, generally a person has independence to perform work and is not subordinate to a company's directives and regulations, and there is no exclusivity in the relationship between the parties.
Due to the current economic climate, the United States has seen an uptick in hiring of independent contractors. This benefits companies by allowing them to pay for just the end-product or work they need done while avoiding administering workers compensation claims or paying payroll taxes, workers compensation premiums, or unemployment insurance, required by the Fair Labor Standards Act for employees.
In general, an employee, as distinguished from an independent contractor who is engaged in a business of his own, is one who "follows the usual path of an employee" and is dependent on the business that he serves. The Supreme Court has said that there is no definition under the Fair Labor Standards Act (FLSA) that resolves all questions of whether an employment relationship exists. FLSA considers independent contractors to be 'self-employed' under its regulation and does not state specific terms for independent contractors, but rather, terms for what makes a person eligible for benefits as an employee. Thus, if a person does not meet these terms, by inference he could be considered an independent contractor, but a clear definition of an independent contractor is not given. The Court has also said that determination of the relationship cannot be based on isolated factors or upon a single characteristic, but depends upon the circumstances of the whole activity. The goal of the analysis is to determine the underlying economic reality of the situation and whether the individual is economically dependent on the supposed employer. The factors that the U.S. Supreme Court has considered significant, although no single one is regarded as controlling, can be found here.
The European Commission, the governing body of the European Union, outlines the responsibilities of employers in the 27 member states of the EU. The EC covers free movement of workers, a core EU principle, which allows every EU national to work in any other EU country without a work permit. This helps employers find staff with the right profile, especially if candidates in their home country are in short supply. Employers have to apply the same rules to workers from other EU countries - e.g., access to employment, working conditions including salary and paid annual leave, and dismissal - as they do for national staff. They may not impose any additional conditions. In terms of specific rules on independent contractors, the individual countries are responsible for creating the standards by which an independent contractor is judged. From that, it can be determined what roll an independent contractor will take when entering into an employment situation with a company. Although the free movement of workers is acceptable and encouraged in the EU, the rules by which contractors versus employees are judged still remains within the individual country's control.
In the United Kingdom specifically, if the worker is not an employee, he may be an independent contractor and the contract between him and the employer will be a contract for services. The principle of "at will" employment does not exist in the UK and employees have a number of statutory protections. They cannot be dismissed except for just cause such as redundancy, misconduct or incapability, and then only if certain stringent procedures are followed and appropriate notice is given. By contrast, an independent contractor's job receives much less protection than that of an employee in the UK, since such stringent constraints are placed on the dismissal of an employee. Another key distinction between employees and independent contractors in the UK is that an independent contractor is taxed differently than an employee, and is responsible for making those payments himself.
The Labour Code (Code du Travail) is the primary basis for labor law in France. Most employment contracts are for an open term and a major legal distinction exists between top managers and lower grade staff. Many specific employment contract types are required when working in France. There are a set number of contract types that cover different types of employment in France, such as open-ended contracts, fixed-term employment, apprenticeship contracts, and intermittent contracts, to name a few; France is well known for a large public sector with heavy and rigid bureaucratic administration.
However, in recent years, the country has encouraged self-employment and the creation of new business. It is sometimes easier for a worker from outside of the country to become self-employed (i.e., work as an independent contractor) than to gain a work visa in France. Those who would consider the use of an independent contractor agreement are referred to as 'freelancers' in France; these are consultants, translators, accountants, doctors, lawyers, architects, artists, who are likely to work without employees. To be self-employed in France, you must also receive permission and show the seriousness of your intent and your ability to generate revenue in the country.
As with France, Germany has very serious tax rules that affect the self-employed person. Failure to properly show that the contractor is not an employee may lead to the client being liable for social security contributions. This is considered 'disguised employment'; this is more likely to occur the less skilled the individual is and the longer the individual supplies his services to one client at one site. For contractors in Germany, tax liability is from commencement of contract, and social security registration is not compulsory. If an issue arises, the contractor could apply in writing at the social security authorities, Deutsche Rentenversicherung, to decide the status of the contractor as self-employed or employee.
The Canada Revenue Agency (CRA) uses a four-point test to determine the relationship status between an individual and a company. The CRA regulation, "Employee or Self-Employed?" (RC4110) defines the distinction between employee and independent contractor and "sets out a method that should, in most cases, allow payers and workers to determine the nature of their relationship." The four points relate to: (1) control, (2) ownership of tools, (3) chance of profit/risk of loss, and (4) integration. If the relationship clearly shows that the individual has control over the manner in which the work is performed, he does so with the use of his own tools (this may mean machinery, however, this also covers office supplies, office space, and personal technology), is in control over the profits or risk of not obtaining such profits, and is not integrated into the daily workings and responsibilities that come with working as an employee, then he would be an independent contractor. An independent contractor agreement in Canada should, therefore, contain clear clauses on the contractor's right to maintain where, when and how the work will be done. This will be helpful documentation should the CRA inquire into the business relationship.
Maintaining the proper classification of employees versus contractors is very important to ensure compliance with labor law regulations. Execute an independent contractor agreement, and include proper documentation in the agreement that clearly states that a contractor is independent from the company, is self-employed, and will be responsible for final deliverables, not the method in which they are produced. The rules are unique to each country, and Human Resource professionals are urged to review the specific requirements for each country as needed.
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Reprinted with permission from the Association of Corporate Counsel
2013 All Rights Reserved
Additional ACC Resources
May 2013 Top Ten
Ten good reasons to consider hiring an independent contractor rather than a full-time employee.
On-Line CLE/CPD Program