When starting a relationship between an employee and an employer it is very important that the employer sets proper expectations regarding hiring, contract terms, payment details, employee benefits, etc. It is also important for the employee to be educated on what to expect when first starting with a company and especially when signing an agreement with the company.
Today we will discuss a common miscommunication that happens between employees and employers regarding the employer’s decision to have employees on employment contracts rather than have them set up as contract employees. What both parties may not fully realise is that there are definite differences between being set up as a contract employee, and being a contractor.
To start with, if an individual is established as a contractor they are eligible for their set wage for each term, whether it be per hour, per pay period, or per month, that of which is defined in their contract. They would not be eligible for any benefits that a regular employee employed by the employer would be entitled to.
When some employers choose to place contractors on employee agreements, this can cause confusion. This is the employer’s prerogative to do, but the employer needs to understand that it does change what benefits the employee is entitled to receive. By establishing a legal employment agreement, in the eyes of the law the contractor then becomes an employee. Because the contractor is now viewed as an employee, they become eligible for statutory requirements available in many countries that the employer is obligated to provide by law. If a country has statutory requirements, it does not matter how the employee is used, or how time is billed, by placing the contractor on an employment agreement, the employee automatically becomes entitled to these benefits.
Statutory requirements are laws (statutes) covering certain entitlements. Aside from everyday statutory requirements like traffic laws and speed limits, there are statutes that apply to the business world. Most countries have statutory requirements protecting the employee. These vary greatly depending on which country the individual is employed in. For example, Italy has a statutory requirement to pay out severance, even if an employee is only employed for 1 month. Additionally, the employer is legally required to pay out accrued vacation, as well as accruals for the 13th and 14th month payments.
When an employer is hiring, as a standard practice they might come up with a budgeted amount that they, as the business, can afford to pay to have the employee working for them. A problem arises when they factor a budgeted amount for a contract employee, when the employer, by placing the contract employee on an employee agreement, has essentially added another employee that is eligible for all statutory requirements to their ranks.
The budgeted amount obviously includes the employee’s wages, but in cases like this it is also very important to include all statutory requirements as well as the employee and employer taxes associated with having a standard employee on their payroll when making the calculation for a total budgeted amount.
A miscommunication can occur when the employer advises the employee that the budgeted amount is the total amount that the employee will be paid. This then causes a problem, because the end gross/net salary for the employee after these statutory requirement deductions is a decidedly lower amount. It is advisable that budgeted amount should be more of an internal amount used for accounting and business use only, not communicated to the employee directly as a rate of pay.
Setting the proper expectation with the employee, and communicating with the employee what their actual gross/net salary is after the correct and anticipated deductions will lead to a better working relationship with the client. It will also prevent confusion from the employee during the on-boarding process.
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