Compliance Corner: Dispelling the myths around payroll contractors Compliance Corner: Dispelling the myths around payroll contractors

Compliance Corner: Dispelling the myths around payroll contractors
30 Sep 2014

In this month’s Compliance Corner, Purely Global columnist and Celergo’s executive chair Michele Honomichl dispels various myths around employing contractors.

“What about Bob?” says one of your peers from the operations department, “I have a Rob Smith, a Robert Jones, but not a Bob. Who is Bob?” Your colleague goes on to explain that he is a guy who has been working at the company for the last eight months and he has been complaining he has not been paid. But you do not have a Bob on payroll? Uh oh. You realise he is a contractor.

In payroll, we just do not worry too much about contractors, who are also often referred to as independent contractors. Frankly most of the time, we do not know (or care) that they even exist. But sometimes they become a compliance problem that leaks into the payroll world. So when is Bob just a contractor and when does Bob start creating compliance issues?

So you start digging into the ‘Bob story’ (not the Billy Murray movie from the early nineties although there are similarities). Bob questions start popping up everywhere. So why do we have Bob at our company? Should Bob be an employee? What risks does Bob pose to our company?

Let’s look at the possibilities

Did we hire Bob to perform a short-term and specific project? Is the duration less than 12 months?

Yes, we did. Bob is working on a specific assignment for us at an international location. Companies often hire contractors in countries where they do not have a legal presence and they need some defined assistance, usually regarding market research, business formation activities, initial staff functions or project support.

Is Bob too much like a real employee?

Contractors who are too aligned with the hiring organisation may cause some governments to perceive these people are more like employees than contract hires. If the contractor’s work is controlled by the company, he works similar hours to everyone else and he is on a project for longer than six months, many countries will start scrutinising the relationship.

In some cases countries will start to question organisations about why the person is a contractor versus an employee. They may be inclined to pursue the company to provide the contractor with the same fringe benefits as his employee counterparts or force the company to make him an employee. Ok, Bob has been with us eight months This might be an issue.

Are we handling Bob’s taxes appropriately?

Governments are basically looking to ensure they receive all taxes. If the contractor neglects to declare his income, then the government is missing wage and social security taxes. In certain countries, the government requires reporting on payments to contractors to ensure they collect their taxes.

In others, companies are required to withhold taxes from contractors and pay them over to the government like payroll taxes. It looks like we are just paying Bob a gross amount based on his hours worked. We need to check on local requirements to ensure we are in compliance.

Is Bob going to stay on after the project is complete?

Often as companies are initially establishing entities in new countries, they hire local employees and pay them as contractors until the entity is finalised and a proper payroll is set-up. The company needs to be aware this can create several issues for the soon-to-be employee.

In Europe specifically, employees receive their health care, pension funds, life insurance, etc. through statutory deductions via payroll. If an employee becomes ill or has a life event, they may not be covered as they are in-between employers.

Additionally, many countries will not honour credits to prior periods even if the payroll is back calculated at a future date. This means the employee has fewer credits in his pension and against other policies. If the time to establishment is short, only a month or two, this may not be a big concern.

But if the situation continues to stretch out, then utilising a Professional Employer’s Organisation (PEO) may be a better option to ensure the employee is receiving proper benefits and the company is in compliance. This will help with retaining the employee during this time of high change. Not an issue with Bob – we just need him for the project!

Is Bob legit?

Contractors should be screened just like employees, including back ground checks, Office of Foreign Assets Control (OFAC) screening, drug testing etc. It is important to ensure a contractor follows the same policies as employees, which will in turn, ensure the company follows its own protocols.

Often contractors are used for specific client engagements, and the last thing a company wants is to find out a contractor is violating a contractual obligation at a client site. The company will often be held liable if the contractor is not in compliance, not just the contractor himself.

Lastly, the company can be substantially fined if the company violates OFAC, Foreign Corrupt Practices Act (FCPA), UK Bribery, etc.

Conclusion

Bob is a contractor on a specific project for less than 12 months. We do not intend for him to be an employee and he should be rolling off the project soon. We need to ensure that he is screened properly and we track his time on the project. Otherwise Bob is good to go and the ‘what about Bob’ questions should be put to rest.



Celergo’s executive chair Michele Honomichl

In this month’s Compliance Corner, Purely Global columnist and Celergo’s executive chair Michele Honomichl dispels various myths around employing contractors.

“What about Bob?” says one of your peers from the operations department, “I have a Rob Smith, a Robert Jones, but not a Bob. Who is Bob?” Your colleague goes on to explain that he is a guy who has been working at the company for the last eight months and he has been complaining he has not been paid. But you do not have a Bob on payroll? Uh oh. You realise he is a contractor.

In payroll, we just do not worry too much about contractors, who are also often referred to as independent contractors. Frankly most of the time, we do not know (or care) that they even exist. But sometimes they become a compliance problem that leaks into the payroll world. So when is Bob just a contractor and when does Bob start creating compliance issues?

So you start digging into the ‘Bob story’ (not the Billy Murray movie from the early nineties although there are similarities). Bob questions start popping up everywhere. So why do we have Bob at our company? Should Bob be an employee? What risks does Bob pose to our company?

Let’s look at the possibilities

Did we hire Bob to perform a short-term and specific project? Is the duration less than 12 months?

Yes, we did. Bob is working on a specific assignment for us at an international location. Companies often hire contractors in countries where they do not have a legal presence and they need some defined assistance, usually regarding market research, business formation activities, initial staff functions or project support.

Is Bob too much like a real employee?

Contractors who are too aligned with the hiring organisation may cause some governments to perceive these people are more like employees than contract hires. If the contractor’s work is controlled by the company, he works similar hours to everyone else and he is on a project for longer than six months, many countries will start scrutinising the relationship.

In some cases countries will start to question organisations about why the person is a contractor versus an employee. They may be inclined to pursue the company to provide the contractor with the same fringe benefits as his employee counterparts or force the company to make him an employee. Ok, Bob has been with us eight months This might be an issue.

Are we handling Bob’s taxes appropriately?

Governments are basically looking to ensure they receive all taxes. If the contractor neglects to declare his income, then the government is missing wage and social security taxes. In certain countries, the government requires reporting on payments to contractors to ensure they collect their taxes.

In others, companies are required to withhold taxes from contractors and pay them over to the government like payroll taxes. It looks like we are just paying Bob a gross amount based on his hours worked. We need to check on local requirements to ensure we are in compliance.

Is Bob going to stay on after the project is complete?

Often as companies are initially establishing entities in new countries, they hire local employees and pay them as contractors until the entity is finalised and a proper payroll is set-up. The company needs to be aware this can create several issues for the soon-to-be employee.

In Europe specifically, employees receive their health care, pension funds, life insurance, etc. through statutory deductions via payroll. If an employee becomes ill or has a life event, they may not be covered as they are in-between employers.

Additionally, many countries will not honour credits to prior periods even if the payroll is back calculated at a future date. This means the employee has fewer credits in his pension and against other policies. If the time to establishment is short, only a month or two, this may not be a big concern.

But if the situation continues to stretch out, then utilising a Professional Employer’s Organisation (PEO) may be a better option to ensure the employee is receiving proper benefits and the company is in compliance. This will help with retaining the employee during this time of high change. Not an issue with Bob – we just need him for the project!

Is Bob legit?

Contractors should be screened just like employees, including back ground checks, Office of Foreign Assets Control (OFAC) screening, drug testing etc. It is important to ensure a contractor follows the same policies as employees, which will in turn, ensure the company follows its own protocols.

Often contractors are used for specific client engagements, and the last thing a company wants is to find out a contractor is violating a contractual obligation at a client site. The company will often be held liable if the contractor is not in compliance, not just the contractor himself.

Lastly, the company can be substantially fined if the company violates OFAC, Foreign Corrupt Practices Act (FCPA), UK Bribery, etc.

Conclusion

Bob is a contractor on a specific project for less than 12 months. We do not intend for him to be an employee and he should be rolling off the project soon. We need to ensure that he is screened properly and we track his time on the project. Otherwise Bob is good to go and the ‘what about Bob’ questions should be put to rest.



Celergo’s executive chair Michele Honomichl