Is My Overseas Hire Actually an Employee?
My best engineer lives in Portugal. I pay her monthly against an invoice, she works my hours, she is in my standups, and she has been doing it for two years.
I call her a contractor. I have no idea whether her own country agrees, and I have never checked what happens the day it does not.
Why Does the US Analysis Not Transfer?
US founders tend to reason from a familiar framework. California applies the ABC test, and Misclassification Liability typically means back taxes, penalties, and wage claims. That intuition travels badly.
Most jurisdictions apply some version of a substance-over-form analysis, but the specific factors and their weight vary considerably. Common threads include control over how and when work is performed, integration into the organization, economic dependence, exclusivity, duration, and who supplies the tools.
What differs more than the test is the remedy. Many countries attach employment protections that have no direct US analogue: statutory notice periods, severance calculated on tenure, paid leave accrual, and mandatory social contributions. A reclassification can therefore reach backwards across the whole relationship.
Who Decides, and When?
Rarely you. The determination usually comes from a labor authority, a tax authority, or a court in the worker’s country, and it is frequently triggered by the worker themselves, often at the moment the relationship ends.
That timing is the uncomfortable part. A contractor relationship can run for years without anyone questioning it, and the question arrives precisely when goodwill has run out and the worker has an incentive to raise it.
A written agreement calling someone a contractor is evidence, not an answer. Where the facts show an employment relationship, most systems will treat it as one regardless of what the parties wrote.
What Are the Alternatives?
Three structures come up. You can open a local entity, which is the most robust and by far the most expensive and slow. You can engage an Employer of Record (EOR), a service that employs the person locally on your behalf and takes on the employment obligations. Or you can keep a genuine contractor relationship, which requires that it actually be one.
The third option is viable and often appropriate. It is not viable when the day-to-day facts describe an employee, and no clause fixes that.
Common Mistakes Founders Make
- Reusing the US contractor agreement. A template drafted against US tests, with US governing law and US-style IP assignment, may not do what you need in another jurisdiction and can look like evidence of an employment relationship rather than a defense against one.
- Treating a long-running exclusive contractor as low risk. Duration, exclusivity, and economic dependence are among the factors most systems weigh heavily. The longest-standing arrangement is often the most exposed.
- Not confirming IP assignment works locally. Some jurisdictions restrict assignment of future works or require specific formalities. An overseas contractor building your core product under an unenforceable assignment is a diligence problem waiting to surface.
A Quick Founder Check
- Which countries do our contractors actually live and work in?
- How long has each relationship run, and is it exclusive?
- Do we set their hours, assign their daily work, or include them in internal performance processes?
- Do they use our equipment, our email domain, and our internal systems?
- Does each agreement address IP assignment in a way that works under local law?
- If a contractor ended the relationship tomorrow and filed a claim locally, what would our exposure look like?
- Have we compared the cost of an EOR against what a reclassification would cost us?
The Bottom Line
The right structure depends on the country and on the facts of the particular relationship, which means this is a question to ask per person and per jurisdiction rather than once for the whole team. The answer is usually cheap to act on early and expensive to discover late.
Building a team across borders and unsure whether your contractor arrangements hold up locally?
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