Employee Classifications Around the World

Classifications in the Us

In the United States, the Internal Revenue Service is the agency that governs the rules and regulations between the different classifications of employees. The IRS distinguishes between employees and independent contractors, and in the US, this distinction is critical towards ensuring the legal success of your business.

What Is an Independent Contractor in the US?

The IRS has a strict definition for an independent contractor. The organization says, “People such as doctors, dentists, veterinarians, lawyers, accountants, contractors, subcontractors, public stenographers, or auctioneers who are in an independent trade, business, or profession in which they offer their services to the general public are generally independent contractors. However, whether these people are independent contractors or employees depends on the facts in each case.”

From there, they go on to say that an individual can be considered an independent contractor if the “payer” (aka, employer) has “the right to control or direct only the result of the work and not what will be done and how it will be done.” This is where things get interesting. Apparently, the IRS holds that a payer or employer— your business —could hire an independent contractor to provide a service, say something like web design. While you can hold the contractor accountable for the final product, you do not have a say in how they reach that final product.

The IRS then explains what they wouldn’t consider to be an independent contractor. “You are not an independent contractor if you perform services that can be controlled by an employer (what will be done and how it will be done).” This essentially means that the employer holds the legal right to control every single aspect of how a service is completed or offered.

The clearest line of distinction within the IRS’s definition of an independent contractor comes down to a simple sentence: “If an employer-employee relationship exists (regardless of what the relationship is called), you are not an independent contractor, and your earnings are generally not subject to self-employment tax.”

So, at face value, the difference between an independent contractor and an employee comes down to self-employment tax, and the contractor having the legal right to dictate how a service is performed. But is that all it comes down to?

What Does It All Mean for Your Business?

When it comes down to it, the differences between employees and independent contractors are important to consider, because they could dictate the ways in which your organization functions as a whole. For instance, let’s say you operate a high-end real estate firm. You have a number of salaried administrative employees, and you staff a team of realtors, brokers, and listing agents, all of which receive a salary, along with commission for sales.

All the employees listed above would be considered payroll employees. This means that you’d be required to withhold tax in their paychecks, and it means that you’re responsible for ensuring that their rights as employees are protected under state and federal law. And given their classification as full-time or part-time employees, you’re also responsible for ensuring that their benefits are taken care of.

On the other hand, it’s highly likely that in order for your realtors, brokers, and agents to market your listings and properties, you’re going to need high-quality photographs, immersive videos, and interactive graphics to show potential buyers. It might not seem entirely cost-effective to outright staff your own marketing team, complete with professional photographers, videographers, and graphic designers, so perhaps it’ll make more sense to hire independent contractors.

In this case, you could hire an independent real estate photographer, who can also create the types of videos that you’re looking for. Here, you would be able to negotiate a fair rate, which could be based on the amount of hours worked, the number of listings completed, the number of photographs submitted, or a general fee that would cover all expenses related to providing your firm with a collection of photographs, a video walk-through, and a PDF document that you can use for marketing a property all-in-one package.

This will help you save costs on payroll and benefits, while also allowing you to simply pay an independent contractor to give you exactly what you need, leaving the pathway to completion up to them. Essentially, you’re enlisting the help of a tradesman or an expert to complete work on behalf of your firm.

As you can see, this type of relationship offers a benefit both for your business and for the independent contractor.

Classifications in Europe

Remember, the European Union (EU) is made up of several member states, and employment rules, regulations, laws, and classifications can differ quite a bit from country to country. However, the EU itself does maintain larger context regulations in terms of protecting the rights of workers throughout all its member states.

This comprehensive list from Lexology looks at employment law throughout 28 different countries within the EU. They say, “EU employment laws protect the rights of workers across the EU. However, these laws often operate differently in different member states as most EU employment laws are created at the EU level and is then brought into national law by each member state.”

This is where law begins to diverge a bit from the central EU message. However, the areas that the EU seeks to cover include:

• Employee classifications (Part-Time, Full-Time, Fixed-Term, Independant Contractor)
• Discrimination Protections
• Equal Pay Rights
• Workplace Culture
• Protection of Rights
• Protection of Sensitive Information

Where Things Take a Turn

Elsewhere in Europe, say Austria and France for instance, things get a bit different.

• In Austria, non-EU nationals are required to receive an employment permit, or a work permit, along with an exemption certificate or something called a “red-white-red” card. In addition, Austrian law doesn’t require a minimum wage to be paid to employees.
• In France, workers are only required to work 35 hours per week, and it can be quite difficult to find yourself terminated. In France, grounds for termination go far beyond conduct or performance.
• In Norway, things are much more employee friendly. Like Austria, there is no required minimum wage, but there are a number of collective bargaining associations who negotiate fair wages on behalf of their employees. In addition, employees in Norway are rarely dismissed unless there is an “objectively justified” cause relating to the undertaking of one’s duties.
• In the UK, terminating an employee is a highly process-driven ordeal; one in which a business is typically forced to go through what seems like endless layers of bureaucracy to officially terminate an employee. Throughout this process, the grounds for termination are reviewed extensively, which means that by the time the termination does occur, liability to businesses is ultimately kept at a minimum. In addition, the UK permits women to take a maternity leave of up to 12 months, which can also be shared with their partner.

Compared to the US at Face Value

While US workers have some protections—at least in terms of discrimination, fair pay, minimum wage, and the classification criteria between independent contractors and employees—it’s clear to see that these rights and protections are severely lacking when compared to the nation-states that make up the European Union.

Maternity leave is present in the US, but it’s nowhere near as extensive as in other countries. Furthermore, spouses are rarely able to share in these benefits.

Family leave simply isn’t a guaranteed right for workers in the US, where it’s a given in other countries within the EU. In terms of termination, the US lags far behind and often places the employer ahead of the employee, which is essentially the opposite of the UK.

What It All Means for You

When it comes to your business, it’s clear to see that things are different no matter where you go. In the US, employee classifications are driven by the IRS. In Europe, the framework is put out by the EU, but it’s up to each individual country to expand upon or interpret that framework in a way that suits their economy and their workforce best.

It’s important to be aware of these differences because understanding what’s expected of you as a business is critical toward ensuring your success as a business. With that, let’s move on to another region.

Classifications in the Middle East and Asia

Outside of 2 of the world’s largest workforce populations, things can get even more difficult to navigate in relation to employee classifications. Throughout the Middle East, there is a mix of countries that enforce fair labor laws with comprehensive employee protections and benefits systems, while others exploit their workers for financial gain. Similarly, Asia and Africa deal with situations that mirror the Middle East.

At the end of the day, understanding the different classifications between countries in the Middle East, Asia, and Africa will change from case to case. In this chapter, we’re going to explore a few examples that should serve as miniature case studies for our purposes.

Classifications in the Middle East

Let’s begin with one of the economic powerhouses of the Middle East—India. India is a country that borders Asia and the Middle East, so it can also play a bit into the Asian market as well. But with that said, the country has a healthy economy and a strong workforce; one in which they choose to protect with a number of important labor laws. For instance, India’s private sector businesses are required to comply with a number of labor laws that protect the rights of workers.

These labor laws include:

• Payments of Bonus Act
• Equal Renumeration Act
• Payment of Gratuity Act
• Employees Provident Fund
• Miscellaneous Provisions Act
• Employees’ State Insurance Act
• Maternity Benefit Act

In addition, businesses in India are forced to comply with an extensive non-discrimination rule and regulation regarding the workplace. In fact, the Indian Constitution states, “No citizen can be discriminated against, or be ineligible for any employment or office under the state, on the grounds only of religion, race, caste, sex, descent, place of birth, or residence, or any of them.”

Along with non-discrimination regulations, businesses are also required to provide safe working environments with basic amenities. Employees are to be given appropriate working hours, with a fair wage, and the right to assured incentives.

What Does It All Mean for Your Business?

As you can see, India’s labor laws are quite extensive, and they’re quite protective over the employee. This means that establishing your business in India carries heavy weight regarding employee classifications and workers’ rights. Failing to adhere and comply with theses rules, regulations, and laws could spell disaster for your venture.

Now, let’s move on to another Middle Eastern country: the UAE. In the UAE, labor laws are just as important as they are in India. The United Arab Emirates has a massive workforce population that contains more than 7 million foreign workers who come from outside of the country. Employed by more than 250,000 organizations, this massive international workforce is protected under UAE’s labor laws. Most recently, “The UAE has ratified nine ILO conventions related to protecting the fundamental rights of foreign workers and is also an active member of the Arab Labor Organization. In 2012, the UAE was elected to serve on a 3-year term to the United Nations Human Rights Council and has since been elected to a 2nd term.”

Wait, Who Enforces These Laws?

In the UAE, there is an extensive bureaucratic system designed to enforce their domestic and international labor laws. For instance, “The UAE Ministry of Human Resources and Emiratization requires prospective workers to sign a standard employment offer in their home country that is in turn filed with the ministry before the issuance of a work permit.”

From there, “The UAE Ministry of Human Resources and Emiratization has a large body of labor inspectors that conduct random inspections every day, to ensure that businesses are following and complying with all known labor laws and requirements."

Now, these are 2 of the largest economies in the Middle East, so it’s easy to see just why their labor laws and employee classification requirements are so developed and comprehensive. But now, let’s move into a new region.

Classifications of Asia

In Asia, things are quite similar to the ways in which employees are classified in the US or in the EU. Generally, countries and businesses recognize full-time classification, part-time classification, fixed-term classification, and independent contractors. This is important to consider, because many of today’s businesses end up pursuing other opportunities in Asia, whether it be production, manufacturing, researching, distribution, etc.

Understanding how Asian countries classify their workers will be critical toward ensuring your compliance.

In most Asian countries, it is generally accepted that full-time workers work at least 35 hours per week. Many of these jobs are essentially permanent, and they come along with yearly salary or hourly wages. In addition, several countries throughout Asia provide good protections for employees of this status.

From there, part-time employees work less than 35 hours per week in Asia.

They’re given just about the same protections and benefits as full-time employees, and most of them also hold permanent positions within an organization, just like their full-time counterparts.

After full-time and part-time employees, we can move into fixed-term and independent contractors. Fixed-term employees are essentially hired only for a specific amount of time. They could be hired for certain projects, to fill a gap in a team, to cover an employee on leave, etc. Typically, these positions are contract-based that explicitly state the duration of the engagement. While it is rare, countries like Malaysia actually offer some statutory protections. However, if one were to hire a fixed-term employee in South Korea, that worker wouldn’t be eligible for employee protections.

Asia’s Gig Economy

Like anywhere else in the world, independent contractors are not permanent employees of a particular business or organization. Instead, they are essentially self-employed individuals who are not given protections by any type of state government within Asia,  which is fairly similar to most other places in the world.

Independent contractors negotiate their rates on their own behalf and they’re responsible for filing their own taxes, making social contributions, and reporting their income to the appropriate government income authorities. Asia’s freelance economy is effectively booming, and there are always millions of freelancers available for work, many of which go on to be contracted out by foreign companies and international businesses.

^{What Does it All Mean for Your Business?}

For any business looking to establish itself in Asia or simply wanting to do business in Asia, hiring workers is going to be critically important. Because Asia’s workforce is structured similarly to that of the US and the EU, the justifications for classifying an employee as a full-time employee, a part-time employee, a fixed-term employee, or an independent contractor are much the same for all 3 regions. So, what exactly is the business impact of choosing one of these classifications over the other?

When it comes down to it, the major business impact that comes along with hiring an employee or an independent contractor for your business deals with payments and relationships. Sure, we mentioned behavioral control as one of the major categories that businesses should consider when making the decision between an employee and an independent contractor, but that’s just a small percentage of the impact. It really boils down to how much you’re willing to pay, and how much of a relationship you’re willing to have. But this isn’t to say that it doesn’t vary from case to case.

Remember, all businesses are different, and oftentimes, independent contractors end up maintaining long-standing and productive relationships with a selection of clients.

It doesn’t necessarily mean that hiring an independent contractor results in some sort of awkward, cold relationship, and hiring an employee results in bringing your workforce together as a loving family. It simply means that the fundamental differences between payments and relationships make the largest impact on a business.

In the US, businesses are responsible for withholding federal income tax, social security tax, Medicaid tax, and unemployment tax on all wages paid to their employees. This essentially means that a business would pay a portion of these taxes every year to the federal government, while also withholding some of that money from your employee paychecks every pay period. Depending on the country in Asia, this is also true.

But what about the more emotional aspect of classifying an employee?

In the US, EU, and certain countries in Asia, it’s important to remember that most employees are protected by statutory laws. Independent contractors, on the other hand, aren’t privy to the same protections. This means that a business’ relationship with an independent contractor can be a bit more flexible in terms of how they proceed in purchasing their services or enlisting their assistance on a given project.

This is important to consider, because should the independent contractor not meet the expectations of their employer in terms of the quality of work performed, the business can sever ties with them after submitting payment.

From there, this business would be free to explore a new relationship with another independent contractor. With a formal employee, a business would be required to follow the termination rules, regulations, and protocols set up by the country in which they are incorporated.

As you can see, there are always going to be a few key areas of concern that business owners need to consider when deciding whether to hire an employee or an independent contractor for their business. At the end of the day, that decision will leave an impact on your business, either financially, or in terms of production. Use the information provided in this chapter to better understand the potential impact of your decision, so that you can make the right choice for your business.

Conclusion

As a business owner, you should now have a better understanding of the differences between employees and independent contractors on a fundamental level in various regions throughout the world.

From the US and the EU to the Middle East and Asia, we’ve looked at the ways in which different countries within these regions classify employees and regulate their employment. At this point, you should have a stronger understanding of the various implications that you could face as a business owner by employing workers within these regions.

Today’s world is becoming ever more globalized, which means that businesses are looking to expand into new markets around the world. Having a deeper understanding of employee classifications, employee rights, and employer requirements and compliance is critical toward ensuring a successful international expansion.

With this information, you can now rest assured in your decision-making process, knowing that as long as you try to navigate the grey areas gracefully, you should be able to avoid any potential misclassifications.

Thank you for reading, and we hope this eBook has helped to make you a better business owner!