Remote companies tend to hire people from all over the world. This sounds like a great idea to reduce the costs of having an office, as well as have a more diverse workforce and also reduce labor costs.
How is it done in practice?
There are two ways: Contractor agreement or Employee agreement.
Most companies require that the people they hire set themselves up as self-employed contractors and they then bill the company once a month.
As you might expect, some countries are not very enthusiastic about such a setup, as technically speaking, the company should setup a branch in every country they will be hiring in. This is very cumbersome in practice, and that’s why the self-employed route is the most straightforward way to do it.
Germany, for example, has very strict labor rules, and it’s pretty difficult to hire someone on this basis there. It is very likely that the German people you’d be interested in hiring will themselves not want to get set up in this manner. On the other hand, Eastern European countries, to cite another example, have pretty lax rules and enforcement, so it is straightforward to hire from there.
The 4 litmus tests that governments use to determine if people are contractors or actually employees are the following:
- Control – most frequently used, this test assesses the ability, authority, or right of the payer to control the actions of the worker, including the amount, nature, location, and management of the work to be done including the right of the worker to delegate work.
- Economic Reality – this test explores the economic practices of the worker, including whether s/he bears the ultimate responsibility for any profit or loss of the contract. An individual who faces financial risk, bears all responsibility for profit or loss, and accounts for all costs incurred in the pursuit of profit, is likely to be determined a contractor. The absence of these factors likely reflects an employment relationship.
- Fourfold – this test incorporates elements of the Control and Economic Reality tests above. The presence of the following factors indicates an employee/employer relationship: (a) control; (b) ownership of the tools; (c) chance of profit; and (d) risk of loss. Control in itself is not always indicative.
- Organization/Integration – this test considers an individual’s role within an organization and presupposes that integral services more accurately reflect an employee relationship. However, if the services are ancillary or separate altogether, then the individual may be better viewed as a contractor. Note however that the ever-increasing complexity and inter-dependency between businesses renders this test increasingly archaic.
In practice, most contractor-company relationships in the remote work realm would fall foul for these 4 litmus tests, hence the setup lies in a grey area.