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What is an Employee?
An employment relationship is the traditional working relationship between employee and employer governed by an Employment Agreement and labor laws. It is characterized by, but not limited to, the following elements: Individual, hierarchy, salary, work frequency, and exclusive relationship.
What is an Independent Contractor?
An independent contractor provides services to a customer/client through an Independent Contractor Agreement, subject to general rules of business/corporate contracts and civil law rather than labor law. Some elements that characterize this relationship are: The contractor receives remuneration that does not constitute a salary, there is no exclusivity, there is no predetermined work schedule, the contractor uses his own work tools, has autonomy and independence, and is regulated by a declaration of Services and Compensation.
How can we mitigate misunderstandings or misclassification between an employment relationship and an independent contractor?
All tests for independent contractor status are based on a variety of factors and no single factor is dispositive of a worker's classification. Before engaging an independent contractor, companies should not only evaluate the contractor's experience and ability to complete the project but also whether the contractor can satisfy certain indications of an independent contractor relationship. Companies should make and keep copies of contractor documents that will support an independent contractor classification if it is later challenged.
The mutual treatment given by both contractor and company to the relationship is crucial in order to avoid misclassification. The relationship should not reflect a dynamic of subordination between contractor and company.
Does the contractor have to invoice for services?
The contractor has the obligation to invoice for services for the amount of remuneration the contractor makes. The invoice should state the contractor's name, address, and EIN number (Employment Identification Number) if any, in case of being located in the USA. If the contractor is located in another jurisdiction, it must confirm under the laws whether it must bill for services rendered.
What are the main risks in contracting an Independent Contractor in this Jurisdiction?
Independent contractors are not employees, entities contracting with them can avoid many of the financial and other obligations of using employees to perform work. An individual’s status as an employee or independent contractor often determines whether the company is responsible for different obligations. Using independent contractors is often beneficial, but the financial costs and penalties of misclassification can be significant.
In addition to ensuring compliance going forward, a company that misclassified independent contractors as employees may be liable for obligations that are usually related to an employment relationship:
Back pay, including overtime compensation.
Employee benefits, including vacations, and stock options, among others.
Retirement benefits, and health plan coverage (for example, penalties involving the Affordable Care Act employer mandate and information reporting requirements, if the contractor is located in the USA).
Disability payments and workers’ compensation.
Tax and insurance obligations.
What is the document to prove the existence of the legal entity?
Each country and jurisdiction has a different document to prove the existence of a legal entity. We, therefore, strongly recommend consulting the website of the local authority in charge of such matters and/or consulting your legal advisor.
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