The contracting model has served its purpose – it’s time for employers to take responsibility for their international workers

The contracting model has served its purpose – it’s time for employers to take responsibility for their international workers

Dee Coakley - CEO at Boundless

This article is By Dee Coakley, CEO at Boundless

The business world has a contractor compliance problem.

For years, private sector organisations have used independent contracting as an easier, speedier alternative to making full-time, permanent hires. In the UK, it seems, the game may finally be up.

Last month, it was revealed that 65% of UK firms had lost at least half of their contractors since the country’s off-payroll legislation came into effect in April 2021. The legislation, which forces medium and large businesses to take responsibility for the tax status of their contractors, sends a clear signal that misclassifying full-time workers as contractors will no longer be tolerated.

With the crackdown on mass-contracting likely to gather further momentum over the next 12 months, it’s worth taking a moment to consider how we got here. What first made the contractor model so popular? And how has it spiralled into the current situation, with millions of people globally denied employee basic rights and benefits, despite carrying out roles that are indistinguishable from those of full-time salaried employees?

Wave upon wave of outsourcing

Until the 1980s, it was customary for companies to employ their entire workforce – from the management executives to the cleaning staff. However, this approach quickly fell from grace over the next decade, superseded by a new philosophy whereby organisations would retain a strong core of salaried employees and outsource ‘non-core’ roles like catering, facilities management, or anything not directly related to a company’s primary product/service.

Generally speaking, this approach was good for company shareholders and not so good for employees in ‘non-core’ roles, who were forced to seek employment with third-party contractors offering less favourable pay and benefits.

Fast forward to the present day, and the difference in company structure is stark. Many of the biggest multinational companies have amassed unprecedented revenues and profits with a fraction of the permanent staff members employed by the corporations of yesteryear.

They’re able to run such lean operations – and scale so quickly – because they’ve taken the outsourcing model well beyond the non-core concept, leaning heavily on third-party contracting firms but also directly hiring more and more independent contractors themselves. Today, contractors can be found at the highest levels of management, occupying technical roles, working in marketing, HR and finance or, as we’ve seen with Uber and Deliveroo, providing the front-line services that define the business.

While in recent times this model has been increasingly contested, leading to high profile lawsuits, financially speaking, it has consistently delivered over the past few decades. However, it has too often proved damaging for the contractors themselves. While some senior contractors do earn more than their salaried peers, in general, the contracting economy has reduced average take-home pay. It has also left millions of would-be employees without basic employment rights or access to company benefits, and has reduced corporate tax revenues – bad news for government coffers..

Contracting infiltrated overseas employment too

The explosion in domestic contracting has been accompanied by similar growth in overseas contractors, used to help organisations to find the talent they need beyond their locality to fulfill relocation requests or simply pursue a pathway to more rapid international expansion.

However, the process of employing people internationally remains as complicated as it has ever been. Every country has its own unique legal requirements and government stipulations with which organisations must comply to employ people there. They would be hard pressed to fulfill this without a legal trading entity in the jurisdiction and employer registrations. Again, this process is complex, protracted and differs from place to place.

Given these complexities, it’s no surprise that the number of full-time contractors has skyrocketed in line with the growth of the global business community. We have normalised contracting for so many decades that it’s often seen as the most desirable option when hiring overseas because the alternative is a degree in international employment.

Companies’ legal obligations towards contractors are minimal; the onus is squarely on the contractor to find their own place of work, secure their own benefits and protections and, of course, to pay their own taxes.

The solution to the contracting conundrum

In recent years, the widespread use of contracting to fuel growth and profit has come under increasing scrutiny. Ever-tightening employment legislation – such as the EU’s recently announced plans to shift the burden of proof on employment status from employee to employer – is starting to force even the most resistant firms to reconsider their use of full-time independent contractors.

And away from this imminent, looming danger, there’s also evidence that organisational culture is changing of its own accord. In part, this is being driven by employees demanding better rights, benefits and protections and showing themselves willing to walk if their needs are not met. But it’s also down to savvy, progressive employers recognising that they can gain a crucial competitive advantage in the battle for talent simply by treating people the right way.

So how can global employers solve these compliance issues and do right by their employees? Well, more and more organisations are considering adopting the Employer of Record (EOR) model, which takes care of the legal relationship with workers by using a locally-based Professional Employer Organisation (PEO) to employ the worker on behalf of the organisation.

Developed in the 1960s to help US firms expand domestically without tripping over state-specific employment legislation, the EOR model is taking off worldwide, with PEOs being contracted to manage everything from employee payroll and taxes to visas and sponsorship applications on behalf of their professional customers.

Time to do the right thing

Mass contracting has served its purpose, playing an essential part in establishing today’s global business community. But the model has had its day. Whether companies solve their current international contractor problem by embracing the EOR model, or they decide to bite the bullet and set up legal entities of their own in overseas markets, they need to accept that being a compliant global employer is going to cost more in the next decade than it did in the previous one.

Besides, ‘solving’ international employment is about more than compliance. It’s about being a good employer. In fact, it is fundamental to being a good employer. Because good employers value their employees – wherever they are in the world.