Can a U.S. employer engage someone living in another country as an independent contractor?

Similar  to the United States, most countries have laws and regulations surrounding self-employment, and misclassification of employees and independent contractors can be costly. U.S. employers cannot just assume they can pay an individual living in another country to perform work for them in that country without establishing an employment relationship. Even where self-employment is found to be the accurate classification, taxes and fees may still be due in other countries. Before engaging independent contractors outside of the United States, the employer's legal counsel should conduct a careful review of each country's requirements.

While a full review of every country's requirements is beyond the scope of this article, there are some commonalities to be aware of.

Income tax reporting. While few other countries have reporting requirements like the U.S. 1099 Form, these requirements need to be reviewed in every location. Even where no such reporting requirement exists, many countries charge an income tax or "service fee" to be withheld by the employer and paid to the country in which the work is performed.

Establishment of a local presence by the employer. Some countries will not allow contractors to work for employers that do not have a local presence in that country. If this requirement is not followed, employers will have engaged employees, not contractors, and may have set up business without proper filings and permits.  

Registration as a sole proprietor. Some countries require self-employed individuals to register as a sole proprietor. While this burden is normally placed on the contractor, practices should be put in place to be aware of these requirements and require proof of registration from the contractor.

Contractor versus employee requirements. As in the United States, most countries have requirements related to self-employed independent contractors. While these requirements vary from country to country, some general criteria include the following: 1) who has control over how the work is performed, 2) does the contractor have other clients and assume a risk of loss, 3) is the contractor paid for the project or for hours of work, 4) are benefits given, such as vacation and sick leave, 5) do contractors make their own schedule and supply their own work location and supplies. These criteria are not much different from U.S. independent contractor laws, but the variances by country need to be examined closely for compliance.

Employers should ensure that independent contractor relationships adhere to local requirements. Penalties for misclassification can be higher than in the U.S., going beyond back taxes, social security payments and benefits due, and may include back pay for vacations, severance pay, notice pay, levied fines and perhaps even a case for unlawful termination, should the termination not meet country requirements.