Contracts are a matter of contract law, but your relationship with the revenue agency is not bound by that contract.
I am not a lawyer but I do have some experience in this. So, as I understand it if one or both country's agencies decide it is actually an employer/employment relationship they may decide withholding was done/not done in the wrong place, or invalid tax credits etc. were claimed and may assess penalties for that on top of wanting the amounts back. It can also complicate things like VAT collection, etc.
In many jurisdictions, the US included, whether or not you are a contractor is not up to you and the company you do the work for. E.g. even if both parties think it’s a contracting relationship, the IRS can decide otherwise.
The nature of the relationship, and the work you are doing determines whether your employer is a regular employer and what taxes they have to pay. In Canada, for example, certain taxes (GST) are applied to the contractor relationship based on whether the product the company sells is available within the country, and the distinction between contractor and employee is much less fuzzy than it is in the US (if you have to ask, the person is almost certainly an employee).
I don't know how it works in the US. In Canada, if a business hires someone on contract but they are not in an "arms-length" transaction (ie. the 'contractor' is working in their office, using their equipment for more than a 'temporary' period of time), then the Canadian Revenue Agency can force the business to re-classify them as an "employee" causing both the person and company to pay back-taxes and any penalties.
how does that work? does your remote employer pay their part of the taxes for you as employee? do they honor your local employment laws with regards to holidays, and what not? can you sue them if they violate your countries labor laws?
what is the company reporting about you in their country?
i'd really be curious to learn more details about the arrangement. my guess is that it looked like employment but legally it was contracting.
For example, in the USA, "You generally must withhold federal income tax from your employees' wages. You withhold part of Social Security and Medicare taxes from your employees' wages and you pay a matching amount yourself." - http://www.irs.gov/businesses/small/article/0,,id=172179,00....
I assume that the US law allows "contracts" that are "signed" or agreed with one click on the "I agree with the terms and conditions" checkbox, and this contract would establish the paid individual as an independent contractor, and then the paying business has no burden of tax payment on behalf of the individual.
Do you have any information about the legal framework for similar issues in UK or Ireland?
In Romania ar least, the equivalent of the IRS doesn't like the disguised employment, because it leads to much lower taxes (8% vs 35%). There are around 7 criteria which are used to determine if a relationship is of employment or not. If they say you fulfil enough of those criteria, even if your contract is a freelance contract, you/the employer will have to pay the extra taxes.
Tax isn't the only issue. The parent poster already mentioned another one: employment contracts generally have some provisions against competing with your employer that require you to get clearance for other jobs. Another is a payment is never without strings attached and those strings might not be something you want to deal with unless you can live off of the project.
If you wrongly classify an employee as a contractor the IRS will go after you for back payroll taxes. It's not extortion, its collecting taxes you illegally avoided.
IANAL, but AFAIU this will violate labor laws in many countries. For example in the UK, if you are a contractor that only works for one employer all year, you are considered an employee. And if the company does not pay tax to the UK it is in violation of labor law.
Most places they don't prevent what you describe. There are usually just some extra hoops to jump through and/or some tax implications.
E.g. I'm in the UK. I've been a contractor with multiple contracts as well as with a single employer both in situations where they are obviously acting as an employer, and in situations where they were genuinely not.
Here there's specific legislation to handle this now - "IR35", which ensures that if your contract is equivalent to employment you'll be taxed accordingly, with an "umbrella company" acting as an employer on behalf of the company that you're contracting with if that is the case to prevent there from being a tax advantage from pretending to be freelance if you're in effect an employee. It doesn't stop you from doing it - it just takes away the tax advantage and creates some bureaucratic hurdles.
But it's easy to avoid as long as you're not trying to avoid taxes, by setting terms that ensures it doesn't match the criteria. Employers are often keen to do this, and it gives you extra negotiating power.
E.g. when I was doing this, key points involved the fact I had a small marketing budget to bring in additional work, I didn't usually work out of their office, I controlled my own hours, I determined how to carry out the work, I negotiated my day rate, the contract had a defined end-date (we could renew, but there are pitfalls there), and so on. Another strong sign you're genuinely not an employee is a right to substitution (e.g. if you can provide someone else to do the work, when you're not available and that right is genuine). UK tax authorities (HMRC) has a checklist as to what they consider "deemed employment" and or that falls under IR35 (it's not an absolute set of criteria, but basically the more you look like a business, the more likely you are to be considered one).
So for high earners like software consultants with an actual reasonable power balance vs. the other side, this is rarely a problem. It cost me a tiny proportion of my revenues to make sure that I met more than enough criteria to be able to do as I pleased.
But most of the people these regulations are there for are in a substantially weaker position. If you're a low enough earner to not be in a position to work around this, then you're not likely to have the power to genuinely negotiate either.
Just wow. This is terrible. You don't understand the difference between a statutory employee and independant contractor.
If you are an employee, the company is required by law to withhold taxes and pay you regularly. Every state in the U.S. has an agency that will take and prosecute wage claims. People have gone to jail for messing with witholding taxes.
If you just invoice, you are effectively an independant contract, they might not pay you, and you are on the hook for paying your taxes. A big difference.
> If he's an employee there ought to be an employee contract somewhere
The existence of an employment contract, in many jurisdictions, doesn't require that contract to have been reduced to writing or other physical form. Contracts exist in law, documents just provide evidence of the existence of contracts and their specific terms.
> and employer taxes paid.
Once the employment contract exists, wages are due on the terms in the contract and employer taxes are due under the conditions set in law (often, based on wages paid), and failure to pay those things may be (in the first case) a breach of contract and (in both cases) a violation of the law for which state action is warranted, but is probably irrelevant to whether a contract exists in the first place.
> Since he's not being paid, a contract never got signed
Contracts often, as noted previously, don't need to be either reduced to writing or signed to exist, and, in any case, its quite possible for one to exist (and even be in writing and signed) without required payment under the contract taking place (that's a breach of contract, of course, but the main point of contract law is to deal with breaches.)
> and likely the taxes did not get paid OP can either go and enforce his position as an employee or opt to be treated as a freelancer
I am aware of no jurisdiction where failure to pay required wages or employer taxes would give a worker to option to elect to be treated as an employee or a contractor (and certainly, if, as you suggest, no contract for their work exists, then they don't have that option as they are neither an employee nor a freelancer.)
You wrote that you "joined" the company, not clear what relationship you had.
If you got hired as a W-2 employee (usually called full-time) you should contact the California Labor Commissioner's Office. Employers must pay wages in a timely manner, and they must also pay their portion of your tax withholding. By law, so the state has enforcement procedures.
If you got hired as a contractor/freelancer/1099 then you will have to file a lawsuit for breach of contract. You can hire an attorney if you think you need to. You will need to get the contract and all evidence of work you did and payments received (emails, etc.). Such cases usually go to mandatory arbitration, the process can take a long time. Depending on the amount and some other details you may be able to sue in small claims court. Keep in mind that if you win your case you will just have a judgment, not payment, and enforcing the judgment can take a long time and more legal fees. If the company doesn't have the money you probably won't get anything no matter what.
In the meantime I suggest you stop delivering anything to the employer/client and find work that pays. And try not to put yourself in the position of an employer or client owing you a lot of money, or you owing them a lot of work.
Do note that it the responsibility of the employer to report who is employed, so if anything is missing, then it will generally be the company that is the one in the wrong. Especially as the company also pay employer fees for employees, so it would be a flagrant case for the tax agency anyhow.
> It's also unclear to me why somebody would do that,
Because if you "contract" someone and they are later found to not qualify as that you can be forced to retroactively treat them as employees (e.g. pay their health/social insurance, fix your tax reporting about them, ...), it might be counted as tax evasion, ... Details about what exactly the rules are that need to be met vary by jurisdiction obviously.
That's my point: it seems to be so routine and yet ostensibly illegal. But if their situation was anything like mine, they did have an employment relationship (with taxes etc paid), but it was with the contracting agency.
It's certainly not illegal. But it can be identified by government agencies as an employer/employee relationship. The IRS is very likely to treat you as an employee and tax you, and your "employer" as such, for example.
I am not a lawyer but I do have some experience in this. So, as I understand it if one or both country's agencies decide it is actually an employer/employment relationship they may decide withholding was done/not done in the wrong place, or invalid tax credits etc. were claimed and may assess penalties for that on top of wanting the amounts back. It can also complicate things like VAT collection, etc.
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