17 July 2009

Independent Contractors vs. Employees

We have a question that comes today about hiring employees vs. independent contractors.

Reader's Question
Can a US company that does not have a legal presence in Argentina hire an independent contractor (argentinian national or other national) to do work in Argentina on behalf of a global contract. Client’s client wants some temporary work performed in Argentina. Can client craft an IC contract or insist that the Argentinian national become a sole proprietor and not end up as a defacto employee. This could be occasional work, eg auditing.

I am aware some countries are very strict about IC arrangements and therefore deem IC’s employees and then end up resulting in permanent establishments for tax purposes. I am aware Argentina is fairly pro labor.

How to Set-up an Independent Contractor Arrangement in Argentina
The proper way to setup this arrangement would be to ask the worker to register either as a monotributista or in the regimen general (depending on how much he will be charging). After that, he'll need to register as an exporter with the customs office (since he will be performing services for export). This second step wouldn't be necessary if the company had a presence in Argentina.

Each time he needs to receive a payment, he will issue you an invoice with an "E" (for export) at the top. These invoices are numbered starting at 00000001. You can then wire transfer the funds to his account and he can collect the funds by presenting his copy of the "E" invoice to his bank.

Independent Contractors vs. Employees
Even though you may ask him to sign an independent contractor contract, in Argentina, labor rights cannot be renounced willingly by an employee. The labor courts can very well rule that your arrangement is a simulated independent contractor arrangement and that it was being used to cover up the employee/employer relationship. This is something that happens frequently in Argentina due to the fact that it is extremely costly to maintain employees on the payroll (due to social security charges).

How does the court determine if the employee is actually an independent contractor? The same way they do in the United States. They look to see whether you were the only employer of this person (i.e. checking the invoices). If you are receiving sequentially numbered invoices from the worker, you know that you are the only employer and you're putting yourself at risk. If you are paying monthly invoices that always have the same amount, it looks like a wage instead of pay for a specific work product. They also look to see where the work was performed, who provided the materials to complete the work, whether the worker was directed in his work, or whether he worked independently and was paid for a finished product.

Incentives For The Worker to Be Classified as an Employee
It will almost always be in the worker's interest to be classified as an employee rather than an independent contractor since the company will be responsible for providing a health plan and paying the social security charges.

There's also another important point. An employee in Argentina is entitled to mandatory severance pay when he is fired or laid off. An independent contractor is not entitled to anything when the contract ends.

If your company had a presence in the country and assets in Argentina, the worker could very well sue at the end of the contract and try and get the courts to declare that he was an employee. He would be demanding the company then make all the back payments for his social security plus pay him the required severance pay.

Practical Advice
Practically, I don't see this happening due to the fact that no employment lawyer here is going to take on a lawsuit against a foreign company with no presence or assets in the country. I just don't see it happening. My recommendations to the company would be to ensure that the invoices it receives are not sequential, that it structures the pay to be on a per job basis instead of a monthly basis (and for different amounts), and that the worker sign a contract with jurisdiction for all disputes being your jurisdiction rather than Argentina. If there ever was a dispute by the employee in Argentina you may be able to get the courts here to throw out a claim due to the jurisdiction clause.

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