Multinational companies are often seen engaging self-employed contractors for their foreign-based business as opposed to hiring full-time employees for seemingly cost-effective reasons. By hiring a foreign independent contractor, a company escapes the responsibility of fulfilling financial-based employee benefits like health-care, sick leave, paid vacations and retirement benefits.
However, the long-term sanctions that come with foreign independent contractors are exponentially larger than any amount that the company may end up saving.
Some of these risks include but are not limited to the following:
- Owing to decreased organizational authority and absence of company culture, the contractor may not feel part of the team and may withhold necessary or valuable information.
- Loss of intellectual property that the contractor takes with themselves when they decide to leave or the contract ends
- Low employee retention owing to the fact that a contractor is not obligated to stay with the company, which forces the company to make replacements continuously. This includes time and efforts invested in advertising, interviewing, screening, hiring and onboarding the new worker.
- Losing top IT talent means losing an edge over your competitors.
- The legal hassles and penalties that may result when a contractor claims for employee benefits.
The Misclassification of Employees Lawsuits: Financial Costs
Misclassification of employees as independent contractors and vice versa is perhaps the riskiest outcome, especially for multinational companies in a foreign land who are unfamiliar with the domestic legal systems. This process gets complicated by the involvement of legislation of more than one country, both of which may have distinctive customary practices.
Additionally, while it is clear what IRS’s six standards for classification of independent contractors are, another country’s standards may be entirely different and may include additional expensive grounds like mandatory thirteen-month pay, mandatory bonuses and contributions to unemployment funds. Some countries impose fines along with withholding tax in cases of mislabeling.
Switching to Full-time Foreign Employees Ensures Full HR Compliance
While turning self-employed independent contractors into employees initially increases the costs by an approximate of 30% (Steve Santiago, 2009), the aggregate increase in labor cost is exponentially lower because of employee retention and efficiently trained staff. (Biz Carson, 2015)
Additionally, a long-term staff allows better business growth as opposed to short-term contractors for the following reasons.
- Full-time employees devote full-time to the company’s project as opposed to part-time contractors.
- There is decreased staff turnover and higher employee retention.
- A business needs loyal ‘on-deck’ workers and a dedicated team of professionals to carry the tasks forward.
- Business longevity is directly linked with the fluidity with which employees can climb up the corporate ladder; something that gets hard to gauge with independent contractors.
- Businesses are better prepared for when someone unexpectedly resigns when it has a group of well-trained all-encompassing individuals, as opposed to contractors that are not as fully immersed.
- Hiring employees creates a company culture where everyone works as a team towards the same goal, as opposed to working with off-site and inconsistent contractors.
Global Professional Employer Organization (PEO) Services can effectively help your multi-national company transition from self-employed foreign contractors to foreign employees with the minimum risks possible.
Global PEOs can help your business through the following crucial steps:
- Successfully switching to full-time, consistent and long-term foreign employees as opposed to foreign independent contractors.
- Providing compliance with domestic labor and employment laws, familiarity with the legal system and official nitty-gritty.
- Helping your business attract foreign IT professionals seeking stability and security of employment
- Aid your company in getting in touch with global IT talent in a fully compliant manner and retain them long-term, thus reducing employee turnover and increasing employee engagement.
- Making sure that your company’s intellectual property remains within the company.
- Allowing the company to make more profits because of their trained set of individuals that have a shared
knowledge of the goals, and hence can easily transition from project to project.