Beware of the Top 7 Mistakes European Companies Make when Hiring Americans

How to Avoid the Top 7 Staffing Mistakes European Companies make in U.S. Expansion

Let’s have a look at seven ways retaining contractors and hiring employees can go wrong in US expansion and what you can do to circumvent these pitfalls. Note, this article is for educational purposes only and should not be a substitute for legal services.

1.????? Hiring U.S. Contractors but Mistakenly Creating an Employment Setup

2.???? Mistakenly Creating a Permanent Establishment in the U.S.

3.????? Hiring the Wrong U.S. Persons for the Job

4.????? Failing to Conduct Background Checks

5.??????Asking Questions Prohibited by U.S. Law

6.??????Sending too many European Transplants

7.???? Accounting Oversights

1. Hiring U.S. Contractors but Mistakenly Creating an Employment Setup

The terms “Independent contractor” and “employee” are more than just job titles—they’re important worker classifications that come with different rights and responsibilities, both on the worker’s side and the employer’s side. Improperly managing these distinctions is known as worker misclassification, which puts your company at risk for various fines, penalties, and tax sanctions.

As of 2023, the Internal Revenue Service (“IRS”) defines an ‘employee’ as essentially “anyone who performs services, if the business can control what will be done and how it will be done.” By contrast, the IRS defines ‘independent contractors’ as “people in an independent trade, business or profession in which they offer their services to the public.”

The key difference? Businesses have the right to control the details of how their employees work—and must train and compensate the employees accordingly—but independent contractors have more latitude and assume responsibility for their own training, equipment, benefits, and tax obligations.

Checklist for determining employees vs. independent contractors:

With the above definitions in mind, answering these questions will help you determine whether you’re at risk of misclassifying employees (however, note that it is important to evaluate this matter on a federal (i.e., IRS) and state level):

(i) Is the person's work an integral part of your company?

If so, it’s more likely that the person will be classified as an employee. The person may have a range of duties that pertain to the individual's role and will be trained and supervised to ensure the work is done to the company’s standard. An independent contractor provides a service to your company; however, the scope is narrower and focused on a single project. An independent contractor also has a greater level of autonomy when working.

(ii) Does the work require a special skill set?

If the worker provides a special or unique skill set, it’s often easier to classify the person as an independent contractor. If the necessary skills should be taught in-house, the worker is more likely to be classified as an employee because the individual will need access to company resources, like equipment and education programs.

(iii) What level of control do you have over where and when the individual works?

A worker is classified as a contractor if the person can decide when to work, where to work, and how to work. If you’re okay with this, it’s possible to hire the person as a contractor. If the project requires more training and oversight, or if it needs to be done in a specific sequence and time frame, then the person may be more likely deemed an employee.

(iv) Does the person work for anybody else?

An employee will work for your company and your company alone. A contractor can work for several clients at once.

What are the risks of misclassification in the U.S.?

No matter the reason, employee misclassification can lead to a variety of negative (and potentially costly) consequences, including:

Back-taxes and Social Security

Tax and social security authorities may require retroactive payment of unpaid taxes and the social security contributions.

Employees initiating litigation or administrative procedures

Misclassified workers may pursue legal recourse or file complaints with the labor authorities seeking compensation for unpaid wages, benefits, and any other entitlements they were deprived of due to the misclassification. Such claims can lead to expenses for the company, including damages and attorneys' fees.

Additionally, misclassification can potentially give rise to class action lawsuits, further increasing the company's legal and financial liabilities. Moreover, when a contractor files a complaint with the labor authority, it can trigger audits or investigations by labor authorities, leading to business disruptions, increased scrutiny of payroll and wage practices, and potential additional penalties. For example, drivers in California and Massachusetts who were misclassified as independent contractors sued Uber in 2016, and won $100 million in damages and owed wages.

Financial penalties and criminal liability

A company found to have deliberately misclassified its workers as contractors may face increased financial penalties or fines imposed by tax authorities and local government regulators. The severity of penalties varies across jurisdictions and can include criminal liability.

2. Hiring U.S. Contractors or Employees and Creating a Permanent Establishment

Generally speaking, a foreign company doing business on the U.S. market desires to insulate itself as much as reasonably / lawfully possible from U.S. (i) tax exposure and (ii) litigation risks. A common way of mitigating such risks are to ensure the foreign entity does not itself directly have a U.S. business presence. There are two distinct ways a foreign company typically structures its business to circumvent the finding of a U.S. business presence (and this is, admittedly, an oversimplification, as permanent establishment assessments in the U.S. are very nuanced).

To mitigate U.S. tax and legal exposure, a foreign company may either (i) hire an independent contractor to assist the foreign company in sales and marketing support in the USA or (ii) form a U.S. subsidiary to perform services and/or provide products to U.S. customers.

In each scenario, the foreign company’s exertion of too much control over the independent contractor or even a wholly owned subsidiary can be legal cause for the foreign company itself to be deemed as directly doing business on the U.S. market. Additionally, if the local person is given the authority to negotiate and/or sign contracts on behalf of the foreign entity, this can create an agency type of relationship whereby the foreign company is itself deemed to be active on the U.S. market through such agent representative. The risks can be that the foreign company becomes a direct tax subject of the IRS and one or more relevant state(s) within the United States and such foreign company can even be held accountable directly on the U.S. market for the acts of its U.S. representatives before a U.S. court.

To address this risk, the following guidelines are key considerations:

When hiring independent contractors, ensure that such contracts are, indeed, “independent.” Do not create an employee or agency setup whereby your foreign company may be deemed directly operational on the U.S. market. When forming a U.S. subsidiary, ensure the board of directors for the parent company and the U.S. subsidiary are materially different and, further, that there is critical decision making for the U.S. subsidiary transpiring on the U.S. market. Again, the U.S. subsidiary should be operating at an arm’s length (i.e., independent) from the parent company.

3. Hiring the Wrong U.S. Persons for the Job

Europeans often create fact-based resumes or CVs which trend toward modesty and humility. Americans, on the contrary, frequently do the opposite. In the US, resume embellishment is commonplace. If your company fails to understand this, there can be unfavorable (if not disastrous) consequences.

European companies can sift through the exaggerations by, among other things, using behavioral interviewing techniques when?assessing U.S. candidates. Further, by focusing on experiences, e.g., “tell me about a time when you did X or Y” that are relevant to the candidate’s expected future duties, your company can better ascertain what the candidate actually did and how the candidate behaved in various situations.?Furthermore, case-study exercises under time pressure can be revealing in terms of the candidate's process, results, and stress management.

Here is what you can do to avoid hiring?a prospect who overstates qualifications:

(i)???? Bear in mind US resumes are, by European standards, exaggerated. Drill into the candidate’s experiences and ask about the candidate’s actual prior responsibilities and accomplishments.

(ii)??? Hire an individual with multiple years of experience at known, well-respected companies.

(iii)?? Define a clear checklist of requirements?for a position and interview candidates using behavioral interviewing techniques and case studies with questions (under some time pressure) to ascertain whether individuals have the requisite skills and experience.

(iv)?? Do not seek to save money unreasonably but rather find the right person (i.e., behaviorally and with the right qualifications) and pay such candidate a reasonable U.S. market salary, even though such a salary in the U.S. is generally considerably higher than the salary for a commensurate position in Europe.

(v)??? Use a skilled recruitment firm to assist you. For executive and board roles, I can recommend www.gethunted.com. For specialists and mid-managers as well as volume recruitments, I can recommend www.awayketalentsolutions.com. Both companies regularly assist clients with strategic international recruitments and have representatives in the United States.

4. Failing to Conduct Background Checks

Americans are notoriously good at selling, i.e., not only goods and services but even their own capabilities. It is critical when evaluating whether to do business with U.S. persons, companies or partners, that non-U.S. companies put forth reasonable efforts to not only conduct a due diligence of the companies in question but also any critical U.S. persons. A good start is to ask for actual business references which you can contact directly.

Otherwise, U.S. business attorneys (such as I) can generally obtain, through third party investigatory service providers, valuable information through publicly available sources with the assistance of various search firms. In some instances, a more expansive background check may be appropriate.

5. Asking Questions Prohibited by U.S. Law

The U.S. Equal Employment Opportunity Commission (“EEOC”) recommends you avoid asking applicants about personal characteristics protected under U.S. federal and state laws, such as race, color, religion, sex, national origin, age, disability, and/or physical health or mental health. These types of questions may be considered evidence of intent to discriminate by the EEOC and thus be legally actionable as claims against your company. If you do not have this information (e.g., recorded or otherwise stored) when you decide who to hire, it may be easier for you to defend your business against a hiring discrimination complaint.

For example, it is recommended to avoid:

• Questions about race, religion or ethnicity, such as: Are you biracial? Which church do you attend? What language(s) do you speak at home?
• Questions about age, unless used to verify that applicants meet any age-related legal requirements for the job.
• Questions about an applicant's pregnancy or plans to start a family, such as: Are you pregnant? Do you plan to have children within the next year?
• Questions about disability. You can’t ask questions?about an applicant's disability or questions?that are likely to reveal whether an applicant has a disability. This is true even if the disability is apparent. Examples of problematic questions: Do you have a disability? What medications are you currently taking? Have you filed any workers' compensation claims?
• You can’t ask questions?about an applicant's genetic information, such as the applicant's family medical history or receipt of genetic tests or genetic counseling. For example, you can't ask an applicant: Have any of your close relatives had a heart attack or been diagnosed with a heart condition? Do mental health conditions such as bipolar disorder, depression or schizophrenia run in your family? Have you had genetic tests to determine whether you are at risk for cancer.

6. Sending too many European Transplants

European companies have the inclination to staff U.S. affiliates with too many expatriates from their home country. Non-U.S. companies might relocate a handful of Europeans to the U.S. headquarters and then compound that by hiring home-country expatriates who are already resident in the United States.

This can feel familiar and safe; however, when you do this, you’re not creating a U.S. operation which is essential for thriving on the U.S. market.

The problems with staffing up the U.S. operations with too many countryfolk from back home is:

·?????? You’re failing to leverage the networks, experience, and cultural sensitivity of local people who have worked within the U.S. market for years.

·?????? You’re giving the impression the U.S. affiliate is a European company. If you want to be a true insider in the United States, you often need to be from the U.S. and speak American English.

·?????? You’re potentially scaring off both potential employees and customers. To a buyer, “European” frequently means increased risk profile. Why over-emphasize this?

·?????? You’re investing in a model that will not likely scale. Your company will run out of qualified expats at some point (often sooner than later).

·?????? You’re likely compromising on relevant quality and experience in order to hire people who feel safe.

·?????? You’re potentially building a revolving-door operation. Generally speaking, expats often last only 2-4 years and then return to their home country, so it’s hard to build a scaling U.S. business for the long term when expat retention is all too often short term.

The better approach:

·?????? Relocate a very limited number of European staff members.

·?????? Hire local for the rest of your U.S. employee base and ensure U.S. employees have key executive functions to counterbalance the European complexion of the transplants. Remember, the point of hiring local is to gain local talent with local expertise and networks.

·?????? Avoid hiring home-country expatriates who have only been in the US for a year or two. In such instances, you won’t generally reap the benefits of local knowledge and relationships.

·?????? Never drop the quality and experience bar to hire a home-country person. In fact, as a check on yourself, you should raise the job requirements. Also, ask trusted and qualified Americans (or a recruiter) to assess the potential hire from your own country.

7. Accounting Oversights

From an accounting perspective, hiring an employee versus an independent contractor carries significant financial and regulatory implications. Companies hiring employees must withhold income taxes, social security, and medicare taxes from employee wages. Additionally, they are required to match social security and medicare contributions and incur other mandatory costs such as workers’ compensation and unemployment insurance. Employers are also obligated to provide statutory benefits, including vacation pay, statutory holidays, and overtime pay. These payroll taxes and benefits create direct costs and payables for the company, which must be accurately accounted for and recorded in the financial statements.?

In contrast, independent contractors are responsible for their own income tax and self-employment taxes. Companies engaging contractors are not required to withhold payroll taxes or pay employer payroll taxes. Furthermore, contractors are not entitled to statutory benefits or protections, such as vacation or paid time off, overtime pay or severance. Consequently, companies are relieved from the record keeping and compliance obligations associated with these benefits. This distinction can result in significant administrative and cost savings for companies, making the choice between hiring employees or contractors is a strategic decision with substantial accounting and legal implications.

If you need U.S. accounting support, I can recommend Arch Atlantic. Arch Atlantic is a Corporate Service firm founded by Max ?vall and Roman Reyes. With presence in both the U.S. (Chicago) and Sweden (Stockholm), the firm has 20+ years of combined local experience of helping Swedish, Nordic, and European companies enter and expand in the United States. Arch Atlantic offers a range of market entry and expansion services pertaining to finance and accounting, HR & Payroll, and virtual addresses and offices.

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Gary Guttenberg, Attorney, Deal Maker, Negotiator

+46(0)752 16 80

[email protected]

www.b2world.com