Independent Contractors vs Employees: What are the risks?

independent contractors

Increasingly, the traditional understanding of work being a 9-5 job with one employer is being disrupted. Whilst the permanent employment relationship is still the dominant model, new ways of work now recognise more short-term, contract-based agreements to meet business needs. Organisations worldwide increasingly have unprecedented access to a global talent pool, which has led to many expanding their workforce to incorporate contract workers for short-term projects.

Whilst the contractor economy represents an exciting new frontier in approaches to work, choosing to hire non-permanent employees may introduce various risks and hidden costs for an organisation. Ultimately, organisations may benefit more from hiring permanent employees, particularly in African countries. This article demonstrates how partnering with a global employer of record may be beneficial to your organisation in hiring permanent employees.

What is a contractor?

Often referred to as the ‘gig economy’, the rise of the contract market describes how temporary positions are made available based on business needs. Contractors are typically skilled workers, who are paid to do a specific job/project for a specified period. While they sign an agreement with the company, they navigate their working styles, use their equipment, define their working hours and schedule, and pay their tax and insurance. The relationship a contractor has with a company is one as a service provider to a client, as opposed to an employee-employer relationship. Digital developments in remote work have meant that those seeking non-permanent work, are no longer limited by geographic constraints, and contractors are now viable in a global labour market.

Organisations that have embraced a global and hybrid work model and are seeking to expand into Africa are now able to tap into the African labour market due. However, expanding into Africa and the African markets is challenging, and given the uncertainty of these ventures, employing short-term workers, such as a contractor, may be an attractive option.

Benefits of hiring contractors

Companies are increasingly turning to contract workers (including freelancers, consultants, or seasonal workers etc.) generally for project-related or urgent work. Engaging with contract workers brings various benefits, including:

Cost-effective in the short-term

Labour laws in different African countries grant regular employees several rights and benefits. These include benefits that incur a financial cost (e.g., tax, health insurance, pension, minimum wage, paid overtime) and those that incur a loss of time when the employee is not at work (e.g., paid vacation and sick leave, maternity and paternity leave).

Hiring a contractor reduces the financial obligations, as contractors are paid based on the number of hours they bill for or upon the completion of a project. Rather than the company calculating and paying tax, this falls on the employee, which ultimately streamlines the organisation’s process.

Hire the right talent, at the right time

Organisations are increasingly breaking up goals and projects into manageable projects or steps. Each of these steps may require people with different skill sets and expertise. Thus, should a project team require a particular skill set for a short-term project, a contractor with those skills can be contracted.

Building multi-dimensional teams

Increasingly, multi-dimensional teams are being recognised for innovative solutions to obstacles or approaches to new products. Incorporating a short-term contractor as part of the team may bring a fresh viewpoint and perspective to a context where the team may be feeling stuck. Should a contractor join the team in a constructive manner, they may challenge the permanent member’s approaches and upskill permanent employees in new best practices.  

Risks of hiring contractors

Some significant risks and costs may arise when engaging with short-term contractors. The greatest of these threats are employee misclassification and lack of long-term investment in employees.

Threat 1: Worker Misclassification

Misclassifying an individual as a contractor is a trap that many expanding companies unknowingly fall into. Typically, worker misclassification occurs when a contractor fills the role of a permanent employee but does not receive the legal rights and benefits of a permanent employee (e.g., organisation does not pay statutory contributions). Such misclassification is a violation of an individual’s rights and leads to serious penalties and costs to the implicated organisation. For instance:

Financial penalties

Authorities view infringements on an individual’s rights through misclassification as poor practice, and perhaps an attempt to avoid paying employment taxes and social security. African legislation is particularly tough on foreign organisations infringing workers’ rights, leading to hefty financial penalties. Further, misclassified individuals can bring legal action against the company. Misclassification leads to employer liability and costs, including:

  • Non-compliance penalties in the organisation’s country of origin and in the foreign country for the misclassification of workers and infringement of their rights
  • Back payments for all benefits that were unpaid, for instance, employment tax or statutory entitlements (e.g., annual or sick leave).

Thus, employee misclassification poses a serious threat to the financial viability of the organisation.

Reputational damage

A significant proportion of organisations’ market value is attributed to intangible assets such as brand equity and goodwill. Thus, organisations with positive reputations tend to attract better people, both as employees and customers, and tend to deliver more sustained earnings in the long term. Should an organisation be exposed to reputational risks, its market value is negatively impacted, impacting its attractiveness as an employer or service provider.

How to determine if there is employee misclassification?

Three key characteristics help determine whether a worker qualifies as an employee or as a contract worker:

Table of Contents

Payment terms Contractors are paid for work completed and should not receive employee benefits (e.g., a regular fixed salary or equipment and training)

Organisations expanding into Africa need must ensure to undertake correct contracting, which incurs significant costs to the organisation. This can be done by:

  • Learning the labour laws: Each African country has its own intricate and nuanced labour law. Accurate contracting requires thorough knowledge and adherence to these laws. Reaching this level of expertise will require a significant investment of time and resources from the organisation.
  • Routinely reviewing roles: Roles need to be reviewed in alignment with any changes to the relevant labour laws. This will require an expert to keep up to date with shifting legislation to advise business as to how it may impact roles in the organisation.
  • Clear contracting: Organisations need to have very clear and thorough contracting procedures to protect them from legislative issues or loss of intellectual property. Further, this ensures that the contractors’ rights are not violated, and that the company is operating compliantly. This requires a legal expert to draft the contract and support the organisation in ensuring there is no risk incurred.

Threat 2: Lack of long-term employee investment

Whilst engaging with contractors may be appropriate for short-term projects, employing and investing in employees is more beneficial in the long term. The main impacts include:

Lack of skill consistency

Contractors engaged for short-term or project-based work will move on to other assignments once their agreement with the host organisation is complete. Subsequent contracts will depend on the contractor’s availability and capacity, which introduces skill instability in organisation’s project planning. Organisations may find the varying availability of a contractor frustrating, particularly if they are reliant on the contractor’s skill set.

In the long term, a stable skill pool is important when executing multiple projects. When expanding into a new African country, having a trusted team is important in executing projects to the required level. Further, by investing in permanent employees by ensuring to upskill them in scarce and critical areas, the organisation will gain a competitive advantage from a consistently available skills pool.

Threats to intellectual property

Different African countries may have different definitions of ownership of intellectual property between a contractor and the organisation. Thus, should the contract not explicitly state that an organisation owns the copyright for intellectual property created, this means that the contractor may use this knowledge in their work with competitor organisations.

African markets invite innovative business strategies and ideas, and thus, organisations seek to protect their ideas and strategies. Engaging permanent workers means that all knowledge is kept within the organisation, and organisations protect their sources of competitive advantage.

Choose a Payroll Outsourcing Service in Africa

In the long term, employing a permanent workforce is more advantageous to an organisation than continually employing contract workers. Key contributors to this are the reduction in organisational risk, deepening of the organisational skill pool, and protection of intellectual property and sources of competitive advantage.

Should you be seeking to expand into Africa and hire a permanent employee, Africa HR can help. Africa HR Solutions offers payroll outsourcing services to companies in Africa. As part of these services, AHR takes on the role of a trusted advisor to guide company’s expansion into Africa.  By employing workers on your behalf, we mitigate legal risk and administrative tasks, ensuring that your expansion remains compliant.

Contact us now to find out how we can help you with your employer of record needs.

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