By Cristin Monnich, Associate Director, Agent of Record, GoGlobal
Navigating the path of global expansion is like navigating a maze, full of twists and turns that can trip up even the savviest of companies. One mistake that many encounter is the temptation to cut fixed costs by classifying workers as independent contractors (ICs). This can certainly be a smart move when done carefully and strategically. However, when done incorrectly, it can lead to serious implications down the road.
In this blog post, we highlight the risks associated with non-compliance in engaging ICs, offering insights into two potential solutions to mitigate these risks. Additionally, we explore the circumstances under which it makes sense to engage contractors versus opting for a traditional employee-employer relationship.
Comparing contractors and employees
Before delving into the risks associated with engaging ICs, it’s essential to understand the distinction between contractors and traditional employees.
ICs, often referred to as freelancers or consultants, are self-employed individuals who work on a contract basis for clients. They should have greater autonomy over their work and are responsible for managing their own taxes and business expenses. In contrast, employees are individuals hired by a company under an employment contract, entitled to benefits, protections, and oversight from the employer.
With some nuance from country-to-country, the key difference lies in the level of control and independence afforded to the worker, with ICs generally having more flexibility and self-determination in their working arrangements.
Tread lightly: uncovering the risks
The rules regulating employment relationships and contract compliance differ across borders, adding a layer of complexity for companies with a cross-border workforce.
Misclassification of workers is a serious concern, wherein treating individuals as ICs rather than employees can lead to severe consequences. This misclassification may result from a lack of understanding of classification criteria or intentional avoidance of legal obligations. The fallout from misclassification includes potential fines, back-taxes, legal battles, reputation damage and even suspension or debarment – all posing a substantial threat to companies.
International companies may inadvertently incur tax and legal liabilities when relying on ICs for global expansion. This reliance can lead to the unintentional creation of a permanent establishment in foreign markets, triggering unexpected tax liabilities and compliance issues. Navigating foreign tax laws and regulations becomes challenging, potentially resulting in unforeseen tax bills, penalties and regulatory scrutiny.
Companies must also consider intellectual property (IP) protection when engaging ICs from abroad. Again, IP laws differ across borders so companies must be diligent in drafting contracts that effectively safeguard their assets.
Exploring Solutions: EOR and AOR
To mitigate the risks associated with IC engagement, companies can consider two alternative solutions:
- Hire Through an Employer of Record: An Employer of Record (EOR) solution offers companies the ability to maintain a traditional employer-employee relationship while expanding globally. By engaging workers through EOR, companies retain dynamic control over their activities, ensuring compliance with local labor laws and regulations. This approach provides stability and peace of mind, minimizing the risk of misclassification and legal liabilities.
- Engage Talent Through Agency of Record (AOR): For project-based work and deliverable-focused engagements, Agency of Record (AOR) solutions offer a strategic alternative. AOR providers specialize in managing ICs on behalf of companies, ensuring compliance with legal requirements and streamlining the engagement process. This model is particularly well-suited for functions where flexibility and scalability are paramount, allowing companies to leverage talent efficiently while mitigating compliance risks.
Comparing EOR and AOR
| Comparison Factor | Employer of Record (EOR) | Agency of Record (AOR) |
| Nature of Relationship | Position Based -general in nature: Reflects employment | Project Based – specific in nature: Reflects B2B relationship |
| Control over Activities | Dynamic control over employee’s activities | Limited control over IC’s activities |
| Compliance Responsibility | EOR assumes legal responsibility for compliance | AOR works with both the IC and the client to ensure compliance |
| Benefits and Protections | Employees receive benefits and legal protections | ICs do not typically receive benefits or protections |
| Flexibility and Scalability | May be less flexible due to traditional employment structure | Offers flexibility and scalability for project-based work without long term commitment |
| When to Use | Suitable for long-term, full-time positions | Ideal for project-based work or access to unique skills |
| International Considerations | Ensures compliance with local labor laws and regulations | AOR must understand how local regulations impact engagement |
| Cost Considerations | Generally higher costs due to benefits and compliance obligations | Cost-effective for project-based engagements |
| Administrative Burden | EOR handles payroll, benefits and compliance tasks | AOR manages IC engagement and payment processes |
| Risk Mitigation | Minimizes risk of misclassification and legal liabilities | Reduces risk associated with IC engagement |
When to use each option
Hiring through an EOR or engaging an IC through an AOR each offers distinct advantages depending on the nature of the engagement. It is helpful to consider the circumstances that warrant the use of one over the other:
- Employer of Record (EOR): EOR hiring is ideal for long-term engagements, full-time positions and situations where dynamic control over employee activities is necessary. It ensures compliance with local labor laws and regulations, making it suitable for companies expanding into new markets.
- Agency of Record (AOR): IC engagement through an AOR is best suited for project-based work and scenarios where flexibility and scalability are key. AOR solutions offer cost-effective ways to engage talent for specific deliverables that require niche skills, minimizing administrative burden and legal liabilities.
Additional considerations for your talent strategy
Talent management is a pivotal “make or break” for your global expansion endeavors. The decision between hiring through an EOR or engaging an IC through an AOR holds significant weight. Several other considerations come into play:
- Legal Compliance: Both EOR and AOR solutions necessitate a thorough grasp of local labor laws and regulations in each target market to ensure compliance. Vetting service providers to ensure their proficiency in the relevant market is imperative.
- Cultural Considerations: Cultural nuances and local business practices must be factored in by international companies, irrespective of their choice between EOR or AOR solutions, when engaging talent globally.
- Cost Analysis: Conducting a comprehensive cost analysis is essential for international companies to determine the most cost-effective solution. Factors such as the nature of engagement, regulatory requirements and long-term business goals should all be considered in this analysis.
Finding the right partner
Whether you’re hiring workers through an EOR or engaging IC talent via an AOR, the importance of finding the right cross-border HR partner cannot be overstated. A proficient cross-border HR provider can assist you in completing the necessary analysis to determine the optimal hiring arrangement for your talent goals.
Given the array of functions and roles inherent in global operations, many companies discover that a blend of both solutions yields the best results for their requirements in the long term. Furthermore, the necessity for agility in hiring across borders emphasizes the significance of selecting a provider well-versed in diverse regions.
Partnering with a cross-border HR provider capable of serving as both your EOR and AOR, such as GoGlobal, guarantees seamless access to a global talent pool. This ensures companies can recruit top-tier talent that perfectly aligns with their needs, irrespective of geographical boundaries.
Check out GoGlobal’s IC Solutions or contact us to talk with an international HR expert about your talent management needs.