Name: How to Avoid Global Worker Misclassification (and Litigation) in 2025
Uploaded: 2025-02-04T16:46:08.121Z
Duration: 34 min
Description: How to Avoid Global Worker Misclassification (and Litigation) in 2025

Transcript for "How to Avoid Global Worker Misclassification (and Litigation) in 2025": Good morning, everyone. Thank you or good afternoon, depending on where you're based. Thank you so much for joining us today. Before we, get into things, we'll just start with a tiny bit of housekeeping. This webinar will be recorded and shared with you afterwards. We have a chat and a q and a feature on on the right hand column that you can use to send us questions or reactions, and we'll save some time at the end for q and a. So, we'll try to answer them throughout too. And if we don't get to it, don't worry. We'll we'll save some time for the end. And if you have any questions after the webinar, as always, you can feel free to reach out to the Rippling team, via rippling.com. Alright. I'm gonna turn it over to my colleague, Zena, to introduce herself. Amazing. So my name is Zena. I'm EOR legal counsel here at Rippling. I'm based in London in the UK. Before joining Rippling, I was an attorney at a law firm called Taylor Wessing specializing in labor and employment law. Super excited to be talking to you today. And I'll I'll let Caroline introduce herself. Hi, y'all. My name is Caroline Esser. I'm AGC at Rippling for our products and employment, and I work primarily on our PEO and EOR products. I'm based in Chicago. I work remotely from here. And before joining Rippling, I was a litigator at Latham and Watkins, where I mostly did copyright and antitrust litigation. Alright. So here's our agenda for today. We're gonna walk through some of the key differences between a contractor and an employee, some of the risks of worker misclassification. Zena is gonna walk us through some 2025 trends and tips for avoiding misclassification. And then as I mentioned, we'll leave some time for a recap and q and a. So I wanted to get started by just talking a little bit about the reasons a company might hire a contractor. And we thought it would be interesting to start with a quick poll to get a sense of your experience. So I'm gonna switch over to the poll for a second. You should see it, show up. Oops. Sorry. Hold on. I did that wrong. Okay. I'm gonna open it. You should see a pop up in the right hand column. Sorry about that. And you can vote there. Are you planning to hire international workers in 2025? Seeing some some responses come in, so I'll share that in a second. Awesome. Thank you so much for for sharing there. So here's the responses we've gotten so far. A lot of yeses. So it makes sense that you're here today. Alright. So back to our deck. So a few reasons you might hire a contractor. It's a way to bring someone on with specialized expertise to work on the street projects. Maybe you don't have someone with that expertise in house. You don't need a local entity, and onboarding and offboarding is much more simple and streamlined for for contractors than it is for employees. And the individual can manage their own work and work schedule, bring their own equipment. You don't have to kind of manage all that day to day or provide them training and all of the benefits associated with an employee. So what are the differences? How do you know whether you should hire someone as a contractor or an employee? Generally, contractors, are an individual or an entity that provides services to another entity under terms specified in a contract. So they are self employed. They are not considered an employee of the entity that they are providing goods or services to. An employee, on the other hand, is an individual who's hired to work for our company on a regular basis. They're integral to that business's work and they are entitled to benefits and protections like minimum wage and workers' comp, health benefits, things that contractors are not. And then one just kind of like PSA here is that what we're talking about here is independent contractors, not temp agency employees. I think people do tend to get these confused. So temp agency employees are someone you hire into a position. They're doing the same or similar things as your other full time employees, except that they're being employed through a consulting or temp agency, who's providing their salary and benefits. That's not what we're talking about here today. We're talking about true independent contractors, as compared to employees. So what are what are some of the key differences that set these two sets of of workers apart? One of the the most important is direction and control. So generally, employees perform work under the direction and the control of their employee, and they're supervised on a daily basis by their direct manager. By contrast, contractors are, temporary. They're played on a per project basis. They can work for multiple clients at the same time, and they set their own hours and schedule. Another distinguishing factors is training and equipment. Employees might receive training from their employer and, be provided equipment that they need to do their job like a laptop or desk and monitor and chair. Contractors by contrast are responsible for the, providing and maintaining their own tools and equipment. They purchase what they need to perform the work that they're expected to complete. Taxes are another factor. In the US, employees will fill out a w four for the IRS and have Social Security and income tax and other mandatory tax related fees taken out of their paycheck by the employer. Whereas a contractor sends invoices to the company and they fill out their own, w nine and pay self employment taxes. And then the protections that these two categories of workers are entitled to are very different. Employees are protected by many employment and labor laws, like and they have unfair dismissal rights, minimum wage entitlements, overtime, mandatory benefits, leaves of absence, protection from discrimination. And generally speaking, contractors do not have those same protections. So this is kind of just a distillation of the prior slide, but, most jurisdictions use a totality of circumstances test. So there's no one factor that controls if a court is looking at whether an employee is properly classified. They kind of look at this altogether, And these are the factors in almost or most countries that that the courts will look to. Again, nature and degree of control, permanency of the relationship, skill and initiative, chance of profit and loss, I e, can a contractor realize a profit or incur financial losses from their work, and the extent to which the work is integral to the business. So hopefully that was a helpful just background. I'm gonna turn it over to Zena to talk through some country specific nuances and misclassification risk. Yeah. So, I mean, the the legal test, as as Colin was saying, for when someone is, is a contractor or not, they're pretty consistent globally in that the tests are based on several factors, not one single factor. But there are some country nuances. So we can talk through a few examples just to give you kind of a flavor of of the positions across a few countries. So starting off kind of in in in Europe, say, with with France, one of the key factors they look at is this concept of subordination, I e, the company's power to to give orders and direction and control the the execution of the work by the contractor. And also looking at, can they sanction the contractor if if they do something wrong? So it's similar to the kind of the control and integration tests that that Caroline mentioned. In the UK, interestingly, there are 3 categories of of work relationship. And so we've got employees on the one hand and contractors on on the other side of the spectrum. And then somewhere in between, we've got this 3rd category of of worker. And, again, the the tests that apply to decide which category someone falls into depends on several factors. And and in the UK, this this tends to focus on on things like, mutual obligation, I e, does the company have an obligation to provide work to the to the worker? And does the worker have an obligation to actually do the work? I. E. Do they have the option to turn down an offer of work or not? Other factors, control, again, is is pretty important. And then personal service, is really important in in in the UK. And this looks at whether or not the contractor is allowed to send a substitute to do their work or delegate their work to someone else, or whether it's, or whether the company is actually hiring that specific individual. So it's not the only country with this kind of third category. Some other countries do have this. Spain comes to mind. And we can talk a bit about kind of the the worker category in in the UK. So a worker is defined as as someone who's contracted to work, with a company, but not in a client customer relationship. And that individual is required to work personally, so can't send a substitute in to do, to do their work. And as I said, the worker category sits somewhere in between self employed and employee, in terms of the employment rights that they have and the the tests that apply. So, typically, workers would have less control over how, when, and where their work is, is carried out compared to contractors. But then typically can turn down offers of work, compared to employees who can't. I'm kind of a classic example just to kind of demonstrate this distinction. So looking at kind of when you hire a plumber, you you wouldn't typically have say over who which specific plumber the the company sends or how they do the work. So this is more consistent with genuine self employed contractor. And typically, workers will be freelancers, 0 hour workers, and and kind of casual staff. And workers are entitled to some employment rights like minimum wage, pensions, paid holiday, even if they're not full employees. And that's just a good example. I think of, you know, it's important to do some country specific analysis. Like, the the tests are pretty similar across the world. But as an American lawyer, I did not know about this, 3rd category of worker in the UK until Zena taught me about it. So, there's little nuances like that that can come up when you really dig in. Yeah. Yeah. Exactly. In terms of Canada, Canada's approach is pretty similar to the US and focuses on the level of control again that the employer or company has over the workers' activities and the workers' opportunity for profit or loss. And are you typically contractors are more financially independent? They bear the financial loss if the work isn't completed to the right standard, for example. Australia is is quite quite an interesting one. So Australia, they have what's called the whole relationship test. And this generally requires looking at the what a, the terms of the contract, but the other factors relating to kind of the the totality of the relationship. And that includes kind of how the contract is performed in practice beyond what it just what it says in the contract. There is an important, caveat, that's kind of high income earners. So, that's contractors who receive over a 175,000 Australian dollars. And that figure, I think, changes each year. So high income earners can agree to opt out of these, of those kind of statutory provisions on the whole relationship test. And what this means is that the test that applies is the common law one which focuses solely on the contractual terms between the contractor and the company. And this essentially means the risk of workers, who opt out being deemed to be employees is is much lower. And just fun fact, if if you are thinking about hiring contractors in Australia, in certain circumstances, companies may still have an obligation to make superannuation or pension contributions for self employed contractors. Turning to Mexico. Mexico is similar to the US, in terms of the factors that it uses, but it tends to lean more towards classifying workers as employees, again, with a high focus on subordination. So looking at kind of the the company's power to give orders and and sanction the worker, and economic dependence. I how financially or economically dependent is the contractor on, on your business? Do they have other clients? Are they allowed to work for other clients? The next three jurisdictions broadly similar, in terms of the the approaches, but with some interesting nuances. So with the Philippines, worker classification relies on on a fourfold test. And the most important factor is, again, control. And they're looking at, you know, the the the company's authority over the working the workers' way of working, their working schedule. And then also the economic dependence test is is important. Contractors will will need to be able to show business independence and the flexibility to work with with other clients. In India, again, classification of sets, kind of several tests. The focus in India is on the concept of control and subordination again, and looking at whether the contractors integrated into the company's business and workforce. And so workers would need to kind of get demonstrate a level of autonomy to be able to be classified as independent contractors. In Brazil, again, control and subordination are also important. Workers who are economically dependent on one company or lack autonomy in terms of the way that they perform their work are typically classified as employees. Brazil's labor laws labor laws give, really strong protections for employees and courts are generally seen as being pro employee, which makes, you know, compliant contractor classification even more important. But what is consistent across across the globe is that, you know, all jurisdictions have penalties for misclassification. And broadly speaking, these can fall into 4 categories. And so tax issues, you know, companies can find themselves having to pay back employee related taxes and social security payments, plus fines and penalties imposed by local tax regulators. And often these can go back several years to recover unpaid taxes if a contract is found to be misclassified. Labor laws. So employment related misclassification claims. And what I mean by that is kind of contractors bringing claims that only employees can bring, and as part of that arguing that they were misclassified and should have been treated as an employee. So these claims can be, you know, holiday pay or unfair dismissal. And in some countries, such as Australia, there are specific claims for misclassification or sham contracts. And con contractors could potentially get, you know, hefty compensation going back several years, and sometimes covering the whole period of the of the engagement. And then we have civil lawsuits. And here we're really looking at kind of class actions, if you're really unlucky, I e one disgruntled contractor bringing a class action on behalf of all of your other contractors. And as you can imagine, this can this can result in pretty significant compensation, if they're successful. And then finally, reputational damage. You've probably seen there's lots there's been lots in the press about misclassified workers over the last few years, particularly in the kind of context of the gig economy. And companies are often portrayed as, you know, trying to take advantage of workers by denying them their their employee rights, or just being kind of weak on compliance. And obviously kind of generally speaking, investors tend to be hesitant to invest in companies with weak compliance. So hopefully that's given you an idea of, you know, why it's crucial to to avoid misclassification. You know, the the costs of of getting it wrong, both financial and reputation can snowball quite quickly. And so we're gonna look at kind of a hypothetical example, just to kind of work through how this could play out, focusing kind of a on a contractor in the UK in the UK. So here in our in our example, you know, we're we're a start up company. And in the 1st few years of the start up, we hire we hire a contractor in the UK doing design work for the company, paying them around £50,000 a year. Over time, the business grows, and we keep this contractor busy full time. We don't want them working for anyone else, and we don't let them delegate the work to any other contractors. 3 years in, we felt having issues with this contractor, and we designed we decide to end the contract with them. Naturally, the contract is disgruntled, convinced we've only canceled their contract because they were late on the last project. So he they go to see an attorney. And then what what we'll do is we'll kind of walk through some of the, the risks from a UK perspective and the numbers that that could could play out. So taking our UK contractor. So when when we hire when you hire workers and employee in the UK, their income is subject to income tax and national insurance withholdings, from the beginning of the the employment relationship. So let's suppose HMRC, which is the UK tax authority, carries out an audit of the of of the contractor engagement and decide that we've misclassified the employee, as an independent contractor, and they should have been employed as an employee from the beginning. Here, we could be subject to back payment of income tax and national insurance contributions, potentially going back 6 years based on the kind of misclassified employees wages. So in our example, let's take 3 years of, unpaid income tax at 20% tax band. So we're looking at about £22,000 of unpaid income tax, about £32,000 of unpaid National Insurance contributions, plus interest, plus potentially penalties. And, obviously, tax is much more complex than this. But for the sake of the example, I've I've simplified it. And then in terms of employment claims, let's let's suppose the, the contractor has spoken to an attorney. They believe they've got claims from pay dismissal, the holiday pay, and unpaid pension contributions on the basis that they should have been hired as an employee from the beginning. Let's assume kind of worst case scenario. The contract is successful in all of their claims. They win on an unfair dismissal claim. Let's assume it takes them 3 months to find another job, and they get £12,000 compensation for unfair dismissal. Notice pay. So employees on title to minimum notice period. So here, 3 years, we were engaging their contract of 3 years. So I get 3 week notice period at about £2,000. Unpaid pension contributions at about £12,000, and holiday pay, which have been kind of the most, popular claims in in recent years. In some circumstances, these this can go back to the beginning of the engagement. So 3 years worth of holiday pay at about £16,000. So you you could see kind of just working through that example how the kind of the consequences and penalties can quite quickly snowball. And, you know, if this is a contract in the US, you've got an an added layer of risk with with potential class action lawsuits, which again could very quickly snowball into kind of 6 or 7 figure liability depending on how many contractors you you engage. So what to expect in 2025? In 2025, I think we're going to see kind of an increasing number of countries adopt stricter laws around contractor and employee classification. There's been a kind of a real shift in this area. And the shift really is has risen, by concerns over worker classification, but, you know, coming from the gig economy, which really brought the issues into center stage. So, you know, employees, companies, regulators are all much more alive to these issues. Governments are also intensifying kind of enforcement of misclassification rules, because of the potential loss of tax revenue, from contractors or misclassified contractors. So I think we can expect, you know, status classification to to continue to be a big topic on the agenda for, you know, for governments, for companies, for individuals. And we've already started seeing kind of announcements and changes in labor laws in several countries. So for example, you know, in Canada, we're seeing, misclassification. Lawsuits have been on the rise, and and damages in in recent lawsuits have ranged from, you know, around $30,000,000 to $200,000,000. So, yeah, pretty eye watering numbers. In the EU, we've got the platform worker directive. And this is a piece of kind of EU legislation, and that's looking at increased regulation and enforcement of platform workers, which, you know, typically refers to the gig of gig economy workers. But one of the kind of most important rules coming out of this directive is, is is the introduction of a presumption of employment status for platform workers. So because as an European UN directive, it has to be implemented by each EU state nationally. And they have to do that by the end of 2026. So we can probably expect to see some country specific nuances, but some of the the key principles will be will be kind of implemented across the board. In Australia, mentioned earlier, kind of the the law recently changed with the introduction of the the new statutory provisions, which which bring the test back to this whole relationship test, in order to to determine whether or not an individual is a contractor or an employee instead of focusing just on the on the contract itself. And this means kind of whether a worker is an employee or independent contractor really depends on on the real substance and and the reality of the relationship in practice, not only what it says in the in the contract. In Netherlands, I think we're gonna we're going to see stricter enforcement, work classification from January 2025 onwards by the Dutch tax authority. And they're also considering a presumption presumption of employee status for those earning €33 or less an hour. And in the UK, the new labor governments, promised to kind of crack down on on sham contractor arrangements with with increased enforcement. And it's announced that it will consider simplifying this 3 tier system that I mentioned earlier into a 2 tier system. Clarifying, you know, the categories and and in in principle, making it easier to correctly classify your workforce. So that proposal that at this stage, but it gives you an idea of of what's to come, you know, on the horizon. So, yeah, as we've discussed, courts generally use this kind of totality of circumstances test. Looking at all factors together, there's no one single factor that that controls, the test entirely. But one red flag can be the the kind of ratio of contractor to employee population. So it it's important to kind of keep an eye on this as your business grows and matures. Just to jump in there, a lot of the questions we're seeing coming in in the q and a are about like, well, what if we need the employee or the worker to work regular hours? What if we need to require training? What if we, wanna offer them some benefits? What if we need them to come to company meetings? Like to Zena's point just now, like, those those are all factors that would tend to make someone look more like an employee than a contractor if you are requiring them to work specific hours, come to meetings, etcetera. But it is no one factor is determinative. So you do have to look at the whole relationship in its entirety. I would say probably, like, providing benefits to an independent contractor is, gonna be kind of a red flag, but but there are, again, definitely totality of circumstances. I'll turn it back for you. Yeah. Exactly. Yeah. It was just one kind of one, one kind of final piece of advice. Some workers are pretty employment savvy and will ask to be engaged as contractors when the reality of the relationship is an employment one. So it's it's just important, you know, don't give into the temptation. Make sure you've thought through each contractor engagement properly, including kind of any country specific nuances. And I'll just turn back over to you, Caroline. Awesome. So I'll try to address some of the questions as I talk about this. But so if you do decide, you know, you're confident you can hire someone as a contractor, one of the things you wanna get in place is a consulting or contractor agreement with the worker, that specifies the working relationship, makes clear there's no exclusivity of service. And generally, there is a set term with a specific end date, because contractors work on a a project basis. And then a provision to just about how the termination process will work when the relationship needs to come to an end with the contractor. There are some questions about can do you work with a contractor as an individual or as an entity? Generally, you can do either way. There are some downstream impacts in some countries. Like for example, that superannuation or pension obligation that Zena was mentioning in Australia. I believe that is only relevant if you hire a contractor as an individual, but not as an entity. So worth taking a look at that for for each country, but, generally you have flexibility there. We also got some questions about what about if you use an EOR or use a PEO? I'll skip over that. So that's a great option for you if if you actually think this person would be better classified as an employee. So an EOR stands for employer of record. This is a way to, come to a company like Rippling or any of the other URLs on the market and say, hey. I found this great engineer in the UK, but I don't have an entity there. I don't know anything about labor laws there. Will you employ them on my behalf? The EOR will send out a compliant, local employment agreement, make sure they get all the required policies and trainings for that country. And then if you do need to end the employment relationship with that person, the EOR will also handle the termination or offboarding. I know we are over time, but we will just try to speed through a few more questions. Zena, feel free to jump in if you have any We can freeze some of that. Someone else asked about can you hire c level execs like a CEO or a c CFO as a contractor? Like, again, that that demonstrates that the person is very integral to the company's business. They're likely getting benefits. They're likely required to work a set schedule to they're provided equipment. Lots of factors that would indicate that that person is really an employee, not a contractor. And someone also asked about like, is the risk different if a company is early stage versus a more mature company? And you know, this is a risk based decision that you as a company need to make. I would say folks tend to take more risk when they only have, like, 1 or 2 contractors in a country as they have a lot more or like Zena was saying, a higher proportion of contractors to employees that you might start reassessing the risk and how they're classifying folks. Zaina, anything to to add there? No. I mean, yeah. No. I think you just said, someone just asked what does 4 fold mean? Sorry. That might be a UK phrase. I I just meant kind of a full stage test. Well, I know we are, over time, but there are quite a few resources on the Rippling website if you need more information. We have a handy little, employee contractor classification tool. We have some blogs and Bloomberg articles. And then, of course, if you want to find find out about how to manage international contractors within Rippling with our contractor balance product, or our soon to come contractor of record product, or how to use our EOR, we are here for you to tell you more about all of that. We have a lot of options and can help you find the best solution for your individual workers. Alright. Well, with that, I think we will wrap it up. Thank you so much for joining, and I hope everyone has a good rest of their day. Thanks so much, everyone. Alright. Bye.