5 countries clamping down on worker misclassification

Misclassifying workers as independent contractors when they should be classified as employees is a misstep which can result in severe penalties for both the business and worker.

When deliberately done, misclassifying employees as independent contractors seeks to avoid paying minimum wage, overtime, certain taxes, insurances, and employee benefits. While it may save money in the short-term, the long-term repercussions of misclassification can be severe. Apart from leaving the worker dangerously exposed – uninsured, unsupported, and, often, under paid – misclassification leaves the business open to severe penalties.

If misclassification is found to have taken place, the offending business can be subject to large fines, and the revocation of its sponsorship license. The issue becomes two-fold, as worker visas can be cancelled and their employment terminated.

In light of ongoing issues in the area and high-profile misclassification cases involving big businesses, many countries are beginning to clamp down on the issue.

1. The US

The United States has been the site of many recent misclassification lawsuits, involving some of the world’s biggest companies – including Nike and FedEx. This month introduced legislation that would make it harder for employers to misclassify workers as independent contractors. The regulation, brought in by the Biden administration, sought to replace regulation introduced by the Trump administration, which was easier on businesses and less rigid regarding classification rules.

Officials from the Labor Department stated that Trump’s rule increased the likelihood of workers being exploited. On June 14^th, it was reported that the National Labor Relations Board has returned to the earlier standard for determining who is an independent contractor.

2. The UK

In 2020, the United Kingdom introduced IR35 legislation, aiming to prevent the misclassification of employees as contractors – for the purpose of tax avoidance, by both the worker and the firm hiring them.

Since IR35 came into effect, Britain has been taking a hardline approach to misclassification cases. Recently, non-departmental funding body UK Research and Innovation (UKRI) was ordered to pay HM Revenue & Customs (HMRC) £36 million in back-dated tax, after misclassifying the IR35 status of the contractors they used.

3. Australia

Australia is another country cracking down on the misclassification of workers, recently issuing $334,888 in fines to Happy Cabby, an airport shuttle service, for treating employees as contractors in 2013.

In 2022, the High Court of Australia recently handed down two key decisions regarding the categorisation of workers; ruling in both cases that the terms of a contract are the primary consideration, when determining whether a worker is an employee or a contractor. Prior to 2022, the most common way to determine worker classification was through a ‘multi-factorial test,’ involving the assessment of all aspects of the relationship – therefore, making it harder to determine if a worker had been misclassified.

4. Spain

In the last number of years, Spain has seen several misclassification cases which have led to the enactment of Royal Decree Law 9/2021 and, subsequently, Law 12/2021. In turn, this amended the Labor Act so that ‘product delivery or distribution work carried out within the framework of digital platforms is now presumed to be employment,’ meaning that workers such as food delivery drivers are now classified as employees.

5. Czech Republic

Worker misclassification is taken very seriously in the Czech Republic. If a company is found to have misclassified their workers, they can be fined up to CZK 10,000,000 (that’s upwards of €400,000). In addition to this, the business would also be liable for employment income tax, health insurance, and social security contributions for the misclassified worker. This would include a duty of payment of overhead surcharges, related interests, and sanctions.

If you’re an employer seeking to hire compliantly overseas, Mauve can help. Contact us to learn more about our suite of solutions and how we can support your business through every step of your expansion.