HSBC Commercial Banking’s “Global Connections Trade Report” projects U.S trade is expected to rise 95 percent by 2026. In the next five years, the annual growth rate of U.S. exports to China are forecasted to outpace U.S. imports from China.
While the U.S. has charted a strong course for exports, exporters can be brought up short if they aren’t careful.
When expanding abroad, it is a fairly common practice to hire an independent contractor as the first footprint to develop and expand relationships with clients abroad. Despite some obvious advantages of hiring a contractor – such as avoiding foreign payroll procedures, benefit structures, and foreign corporate regulations – it is a risky move.
Lawyers, accountants, plumbers, guest speakers and other genuine contractors are not frequently subject to review as a misclassified employee. However, relationships that are long-term and exclusive in nature raise red flags. Foreign employment laws are often more strict than in the U.S., and foreign courts may look beyond the independent contractor agreement and evaluate the nature of the business relationship to determine if the independent contractor is really a de facto employee.
There can be severe penalties, fines and other costs associated with a misclassified employee abroad. And the fees aren’t limited to employment law violations, often there are violations of corporate rules and regulations.
To prevent misclassification issues from arising, exporters should evaluate all independent contractor agreements that are engaged for more than a discrete task. Consider:
1) Reclassifying the position as an employee, or find a surrogate employer. A surrogate employer is a local business that can hire the employee on behalf of a third party. The local business and the third party enter into a contract to enable the employee to provide services for the local business.
2) Draft the independent contractor agreement so that it establishes true independence and complies with local law. Generally, it is best to avoid non-compete clauses, bonus pay provisions, paid vacations, scheduled work hours and other terms, which are associated with employees. In all cases, it is imperative to consult with a local employment attorney for nuances in local laws. In India, for instance, an independent contractor agreement should include a statement that the contractor has a “permanent tax account number” and the independent contractor withholds and pays taxes.
3) Enter into business-to-business agreements. If the contractor can establish a corporate entity through which it engages clients, then many of the misclassification issues disappear. However, this may add a layer of administration the independent contractor may not be able to absorb.