HR Solutions

SHRM's knowledge advisors answer common HR questions.

By Shari Lau, SPHR-CA, GPHR, and Lesa Albright, SPHR, GPHR Sep 24, 2014

1014-Cover.jpgCan a U.S. employer hire someone living in another country as an independent contractor?

Possibly, but misclassification of workers as independent contractors can be costly, so don’t assume you can pay someone living in another country to work for you in that country without establishing an employment relationship. Even if the individual is accurately classified as self-employed, taxes and fees may be due in other countries. Ask legal counsel with global experience to review each country’s requirements.

While rules vary, there are some common elements. Only a few countries have income reporting requirements like the U.S. 1099 form. But 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 being performed.

Some countries won’t allow contractors to work for employers that don’t have a local presence in that country. If you don’t have such a presence, local regulators may regard your workers as “employees,” and your business may be accused of operating without proper filings and permits.

Some countries require self-employed individuals to register as sole proprietors. If they fail to do so, it could establish an employment relationship between your company and the contractor. Ask the contractor for proof of registration.

To determine whether to grant independent contractor status, many countries would consider whether the contractor:

  • Has control over how the work is performed.
  • Has other clients and assumes a risk of loss.
  • Is paid by the hour or task, and not for vacations or holidays.
  • Sets his or her own schedule.
  • Provides the work location and supplies.

Finally, it’s important to maintain the relationship with the contractor as required. Contractors who seemed happy with the arrangement at the time may change their minds when the contract ends and may claim that an employment relationship existed. If a misclassification occurs, the penalties can be higher than in the U.S., going beyond back taxes and Social Security payments and benefits. They also may include back pay for vacations, severance and more.

—Shari Lau, SPHR-CA, GPHR

What is a compensation philosophy? Why does my company need one?

A compensation philosophy is simply a formal statement documenting the company’s position about employee compensation. It explains the official pay strategy and helps ensure consistency.

The objective is to show how the pay program fits into your business strategy.

The philosophy also may establish the factors used to determine employee base pay, variable pay (such as bonuses) and how adjustments can be made. In addition, it may lay out how market compensation surveys are used to set salary ranges.

The compensation philosophy serves as a guideline to a manager who wants to offer more pay to a job candidate or an employee who believes he or she should be paid more. And, when followed consistently, a compensation philosophy may help serve as a safeguard to defend against legal pay claims.

Compensation philosophies are typically developed by HR in collaboration with the executive team. The philosophy is based on many factors, including the company’s financial position, the size, the business objectives, salary survey information and how difficult it is to find qualified talent in that industry.

Some important questions to discuss with the leadership team are:

  • Does the organization want to lead, lag or meet the market in terms of compensation?
  • Is the organization having trouble hiring and retaining the employees it needs to be competitive?
  • Is the overall compensation program perceived as fair by employees?
  • Is it legally compliant?

The compensation philosophy should be reviewed periodically and modified as needed. For example, market conditions may make it difficult to find qualified talent in a particular specialization, and employers may need to pay a premium for these candidates. If the employer’s current compensation philosophy doesn’t support this value, the organization may need to change it.

A written compensation philosophy is most beneficial when it’s followed diligently, communicated clearly and understood by all employees. Share it through the company’s intranet, the employee handbook, policy manuals and bulletin boards as well as at employee orientation sessions and staff meetings. Coach managers on how to answer questions from employees.

—Lesa Albright, SPHR, GPHR

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