The Risks of Hiring Contractors to Grow Your Global Workforce

When you’re expanding internationally for the first time, it’s tempting to rely heavily on hiring contractors to staff your workforce. The benefits of using contractors are numerous.

• Contractors can be hired quickly - you don’t need to set up a local or foreign entity.
• You’re less likely to have to deal with complex employment laws.
• Using contractors can give you the flexibility to scale your workforce up or down as needed, which is crucial when you’re testing a new market.

However, while this strategy might seem attractive in the early stages of expansion, it can create significant problems later in your business’s lifecycle. The advantages of hiring contractors comes with its own risks.

Hiring contractors: the misclassification risks

Each country has its own regulations governing the use of contractors versus employees and every country treats worker classification slightly differently.

With many countries around the world tightening their employment laws around

the correct classification of contractors, the risks of misclassification are becoming greater. These risks could include:

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• Financial penalties.
• Reputational damage.
• Potential lawsuits from contractors/employees affected

Let’s take the USA as an example. The USA has several overlapping laws and governing bodies that contribute to the regulatory landscape around worker classification. The most prominent governing body is the Department of Labor (DOL), which recently introduced changes to the Fair Labor Standards Act.

Conversely, Spain has historically codified two kinds of workers: dependent employees and independent contractors. The classification has historically been straightforward; however, the Spanish government has recently introduced a new category of “dependent self employed” workers whose engagement with a client is akin to an employer relationship.

Spain is an example of a country where the penalties for worker misclassification are particularly severe. Misclassification can carry penalties up to €10,000 and employers who misclassify their workers can face up to six years in prison.

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“There are tests, there are factors, but you can speak to two different employment lawyers and get two different answers about whether a particular person is more properly categorised as an employee or a contractor.”

Raoul Parekh, Partner at Littler

Lack of workforce stability

Contractors, by nature, often have a more transient relationship with the company. This can result in higher turnover rates, which can disrupt projects and lead to a lack of continuity in the workforce.

As the business grows and its operations become more complex, the need for a stable, long-term workforce becomes critical. Relying on contractors might hinder the company’s ability to build a skilled team over time.

Cultural integration and engagement

Contractors may not be as invested in the company’s mission or integrated into the organisational culture as full-time employees. This lack of engagement can lead to lower productivity and a disconnect between the company’s goals and the day-to-day actions of its workforce.

As the company expands, this disconnect can become more pronounced, particularly in international markets where cultural integration is key to successful operations.

Challenges in scaling operations

In the long run, a business that relies too heavily on contractors may struggle to scale effectively. Contractors typically operate independently, which can create silos within the organisation and impede collaboration.

Plus, while you may initially hire contractors from a belief that it’s going to give you greater flexibility, staying ahead of changing employment laws as they pertain to contractor misclassification can actually cost you more in the long run.

How to grow your workforce without the risk of contractor misclassification

At first glance, hiring contractors in a new market might seem like a smart way to scale your workforce without the associated complexity of setting up a foreign entity.

But the inherent complexity of worker classification laws, coupled with the risk of misclassification, means that contractors are not the most sustainable means to grow a multinational company.

When you’re trying to expand internationally, flexibility is key. But the mistake that many CEOs and senior leaders make when planning their global expansion is to think that contractors are the only route to this flexibility. But scaling companies have a range of innovative options at their disposal.

For example, an Employer of Record (EOR) offers a more sustainable path to flexibility when expanding globally. Unlike hiring contractors, which can expose you to legal risks and compliance issues, an EOR enables you to hire full-time employees in new markets quickly and compliantly. This approach combines the flexibility of expanding your workforce as needed, with the security of knowing you’re adhering to local employment laws, reducing the risks of misclassification or penalties.

There are two key reasons why Employers of Record are a better option than hiring contractors in your own right.

1. Many EOR providers allow you to manage your contractors on one platform, ensuring you’re both paying your contractors on time and staying compliant with relevant employment law.
2. EOR providers offer you the scope of switching your contractor workforce to full time employees, giving you the scope to maintain business flexibility without having to set up an entity.