Cracking the classification conundrum: Overseas independent contractor or de facto employee? That's the often difficult choice many multinational employers have to make in determining whether to bring new workers onboard or rely on outside contractors from afar.

• Author: Dowling, Donald C., Jr.
• Position: Read for CPE credit

A human resources professional posted a query on an Internet HR bulletin board that asked: "Our company is looking to have independent contractors rather than employees work for us throughout Latin America. I wanted to know if the laws in those countries are just as strict as in the U.S."

The short answer is simple: No, they are even stricter. Fixing independent contractor classification problems can be substantially more expensive outside the U.S. since working outside an employment-at-will environment can lead to extra areas of potential exposure.

Multinationals often take their first steps into a new overseas market not by hiring an in-country employee but by engaging a local representative nominally as an independent contractor--a consultant freelancer or entrepreneur.

The contractor approach offers an enticing shortcut around expensive local payroll obligations, benefits mandates, employment laws, corporate registration rules and tax requirements. It's especially attractive where a multinational still has no local subsidiary or other corporate presence, and where local bureaucracy is slow.

Yet the independent contractor alternative to traditional employment is dangerous. The risk is real, not theoretical. Independent contractor status is fragile, with nominal "contractor" designations constantly getting attacked in foreign courts and agencies.

Meanwhile, multinationals keep engaging nominal independent contractors even when the actual relationships appear like employment.

The international classification conundrum of genuine independent contractors versus misclassified de facto employees can be examined through six areas of discussion.

1. The Four Corners of The Contract

   An independent contractor by definition is party to a contract with a principal. There is a persistent myth of the "killer app" contractor agreement--the perfectly drafted form containing all a local jurisdiction's legally blessed boilerplate provisions, all its bells and whistles and all the right magic words that shield the parties' designation as an independent contractor.

   But few, if any, legal systems defer to parties' own classification as contractor and principal. Laws most everywhere elevate substance over form to scrutinize the parties' actual relationship. This reduces the contractor agreement document to a mere starting point in the classification analysis.

   The 2007 British employment tribunal decision Ministry of Defence Dental Services v. Kettle reaffirms the near-universal rule that these cases require looking "outside the four corners" of the parties' agreement.

   Of course, where the text of a poorly-drafted contractor agreement betrays a misclassification, then a nominal contractor should be regarded as a de facto employee. But where the contract makes the parties' independent contractor relationship seem airtight, the analysis merely shifts to the facts of the parties' actual relationship.

   Even so, there are a few classification issues that affect the drafting of an overseas independent contractor agreement:

   * Special jurisdictions: Courts most everywhere look beyond the four corners of an agreement to assess the legitimacy of contractor status, but a handful of countries give substantial weight to certain special provisions, which become vital. For example, in India an independent contractor agreement should say the contractor has a "permanent tax account...