The IR35 grass isn’t necessarily greener across the pond, or anywhere else overseas

We’ve heard lots of talk about contractors leaving the UK market as a result of the April 6th 2021 changes to IR35. Yet anyone who thinks the grass is greener might be in for a surprise. There is legislation in place to regulate the engagement of workers in most jurisdictions around the world, writes Carl Henning, associate legal and compliance director at Brookson Legal, a People2.0 Company.

Common ground

Workforces broadly fall into one of the following categories:

• independent contractors;
• contractors supplied by a personnel supplier;
• apprentices,
• fixed term employees, or finally
• permanent employees.

And each category carries their own burdens and responsibilities.

The risks of mis-classification of workers is pretty consistent around the globe – higher taxes, greater benefits for the individual and increased risks for the ‘employer’.

So should genuine independent contractors be concerned?  In theory no, as long as they genuinely are in business of their own account and bearing the risks of being self-employed.

Movement in the US towards IR35-style obligations on businesses

In the US, we have seen from the Obama and Biden administrations (with a brief reprieve for businesses under the Trump administration), that there is a more aggressive pursuit of businesses which intentionally misclassify workers as independent contractors.

Some states use an ABC test for labour, employment and tax status, which was introduced in 2000; others use a non-exhaustive ‘all of the circumstances’ test to establish employment, or independent contractor status.

The Department of Labor is now looking to go further with a six-factor test to make it harder to justify the engagement of independent contractors, versus employees, in some circumstances.

ABC versus 6-factor tests in the US

The ABC test looks at

1) control

2) integration/similarity to other employees of the hirer; and

3) in business of own account.

All three tests are to be satisfied before a worker is classified as a true independent contractor.

In June 2021, the Department of Labor sought to reverse the Trump administration’s liberal view of IC status. Despite challenges in the courts of Texas, the DoL has sought to implement an entirely new process to determine status (in some limited circumstances) and on October 11th 2022, issued a proposal for the six-factor test:

For the six-factor test, courts will use slightly varied formulations of the following factors, give or take a factor or two:

1) the alleged employer's control

2) the worker's opportunity for profit or financial loss depending on their skill

3) the worker's investment in the job

4) the amount of skill required to perform the engagement

5) the work arrangement's permanence; and finally,

6) whether the service is integral to the business.

This six-factor test is broadly consistent with UK employment status tests, give or take a couple of tests. And it represents a movement from US federal officials to tighten the classification of independent contractors under the Fair Labor Standards Act.

While the new tests would not remove/replace the ABC test for employment rights in US states which have adopted them; throw in narrower tests for tax purposes and it is clear that we have greater confusion for businesses across the US -- but a clear steer from the Department of Labor that it is seeking to tighten up regulation and make it harder to engage workers as anything other than employees.

IR35 across Europe

Workers considering taking assignments across Europe in light of the UK’s recent IR35 changes, should also tread carefully.

Many contractors took to EU states such as Germany for work. However, their contract system is very strict and well-defined. Navigating it could be the problem when not in-country. The Netherlands? You might find more similarities with the UK IR35 than you thought! In fact, the UK framework appears to have been based on Dutch legislation.

Then, there is Brexit to consider. Visas are now a requirement across all of EU Member States for UK Nationals looking to live and work there. 

But what about working from home in the UK, while being engaged with a business in an EU member state? This working arrangement is disincentivised by the EU, as it often requires businesses to have a UK presence, or to engage workers as employees; which defeats the object of being in business of your own account.

The fundamentals are the same

UK contractors looking to freelance overseas need to consider whether their working practices truly reflect those of an independent contractor on multiple fronts. 

The fundamental basis of this consideration is consistent with those they have to have for the UK – maintain an arms-length relationship from clients; retain autonomy in the way the work is carried out and independently set out how you run your business on a day-to-day basis.

At the time of writing and with Spring Budget 2023 looming, the UK employment status system is widely regarded as broken, difficult to navigate, and inconsistently applied by workers, end-hirers, tax officials and courts.  But if you're looking to avoid the IR35 legislation in the UK, be very aware you’ll likely find working abroad can be just as challenging. The grass isn’t always greener, but if you set yourself up to operate correctly in the UK, then you might find that the world can be your oyster too.