With an estimated 72 million Americans listed as independent workers in 2024, working as an independent contractor is an attractive, flexible option to businesses, particularly those expanding rapidly into untested markets. However, with as many as 10-30% of employers potentially misclassifying workers, the risks of contractor misclassification remain significant.
Contractor misclassification risks increase with global expansion because of the different nuances around how workers are classified and processed in each country. For an often overworked HR team, managing everything from efficiency to due diligence with a rapidly growing global workforce, the overwhelming workload can lead to unexpected errors. As a result, many companies could be facing serious risks of contractor misclassification as governments tighten their regulations.
The penalties for misclassifying your workers are high – but companies that see these challenges as opportunities to transform their team can better position themselves for future growth.
The High Cost of Contractor Misclassification Risks
Governments around the world have grown more stringent in recent years in codifying the distinctions between independent and employed workers. With recent legislation such as California's 2020 Assembly Bill 5 (AB5) in California and the United Kingdom's updated 2021 IR35 rule, expect more countries to follow suit with similar regulations.
If companies are found liable for employee misclassification in these countries, they can expect to pay:
Back wages if the employee received less than minimum wage,
Social security contributions,
Back income for withholding taxes plus interest,
Penalties for failure to file and pay tax returns on those workers’ wages; and
Legal fees associated with defending against misclassification claims.
These can quickly add up, and lawsuits against companies have been on the rise. In June 2024, the Government of Massachusetts settled their lawsuit with Uber and Lyft, where the companies will pay a combined total of $175 million in fines. Meanwhile, Nike may face potential tax fines of more than $530 million across the United States, United Kingdom, Netherlands and Belgium for misusing independent contractors to perform work such as business consulting, creating T-shirt graphics, photography and event planning.
These cases underscore how systemic these issues can become as well as the high financial cost. The reputational fallout can be just as serious, with companies being seen as unreliable employers. In a competitive hiring environment with a 75% global talent shortage this reputational damage can significantly hinder talent acquisition efforts.
When companies lack a clear understanding of their workers, it’s easy to slip into non-compliance. Auditing your staff to get a clear picture of that risk becomes essential.
Distinguishing Between Contractors and Employees
While your company will need to be well-versed in the compliance variations in each country, such as Germany’s 2 year-limit on fixed-term contracts or France’s contractor registration requirements, quickly assessing the global workforce is also sometimes necessary.
You can understand your staff in terms of a scale of risk, gauging that scale by asking these core questions:
Does the business decide what work is done and how it’s performed?
Does the business supply the equipment that the worker will use?
Does the business determine where the work is performed?
Is the worker engaged in an ongoing, indefinite relationship with the business?
If your business is answering yes to even a few of these, it’s likely you’re dealing with workers that need to be properly employed – and that you could risk legal scrutiny if you don’t.
5 steps for Transforming Your Global Workforce
Preventing contractor misclassification risks is no easy task. Companies that have grown rapidly will often have a team that’s a complex mix of contractual and employed labor. This can create compliance risks, slow company growth and leave workers without a clear vision of their role in driving that growth.
To combat this, you should be considering these 5 steps:
1. Use a Risk Calculator
Sometimes, there’s no clear line that differentiates employees and contractors, as each working relationship might come with different specificities. Using a Global Compliance Risk Calculator like Atlas’s can help you clearly assess the scale of risk. By identifying which regions, activities or worker types might be risking non-compliance, you’ll be able to quickly pinpoint current or future problems in your global personnel.
2. Consult legal experts on how to minimize potential legal exposure
If you discover potential issues with the Risk Calculator, consulting local legal experts in the countries affected is crucial. They’ll understand both the nuances of employment practice and also potential upcoming legislation in those countries, helping you ascertain the degree of potential misclassification, as well as the scope of back-pay workers might be due for benefits and social contributions.
3. Convert misclassified workers
If you find your workers are misclassified, it will set off a complicated series of steps that include: updating contracts, communicating those changes to the workers, adjusting payroll, enrolling the workers in benefits as legally required per region, and providing back pay to the workers according to the time period that they’ve been misclassified.
This process will cost less than potential legal fines if ignored – and your employees will appreciate the proactive steps taken to ensure they receive their rightful benefits.
4. Improve HR compliance measures
To prevent future misclassification, educate your HR team on proper worker classification compliance for each country you conduct business in. Regular audits will allow you to stay ahead of changing regulations and determine whether reclassifying workers might better benefit the company long-term.
5. Strategize your global workplace for future growth
Beyond risk assessment, this is a chance for you to consider what kind of a team and company culture you want to build.
Perhaps a team of independent contractors helped you grow initially thanks to the hiring and onboarding speed in new markets. But by offering fully employed workers long-term contracts and great benefits packages, you’ll foster a more unified and committed work culture. These team members will be more dedicated to helping your company grow during its next stage of global expansion.
Turn your compliance challenges into opportunities with Atlas
Building a permanent team while minimizing contractor misclassification risks doesn’t mean sacrificing flexibility. Atlas can help you both expand into new markets and transform your existing workforce ease and efficiency
As an Employer of Record (EOR), Atlas assumes the legal responsibility for hiring workers on your behalf. We stay up-to-date on evolving labor and employment laws across the 160+ countries where we operate, significantly reducing the burden on your HR teams and minimizing the need for external legal consultations. This approach mitigates risks while eliminating typical administrative headaches, saving you up to 87.5% of the cost associated with global HR rollouts.
By working with Atlas, you can turn your worker classification challenges into an opportunity, as inDrive learned when they collaborated with Atlas to streamline the switch from contractors to employees. This collaboration enabled them to deploy a committed and dynamic team, positioning inDrive for faster, more efficient growth on the global stage.
To start your own workforce transformation and see where your business stands with potential misclassification risks – try our Global Compliance Risk Calculator.