What Happens When Your Independent Contractor's Contract Isn't Legal?

1. Introduction

Imagine this: you hire a freelance designer in the US as an independent contractor. They join your regular team meetings, shift their working hours to match your schedules, and report progress to one of your managers. You treat it as a standard contractor arrangement: you pay by the hour, approve monthly invoices, and keep them off payroll. One day, you receive an email from the designer — after consulting with a local employment lawyer, they’re concerned that the independent contractor setup may not be legal. What do you do? 

This article breaks down what actually goes wrong when an independent contractor agreement fails to meet local rules, why this isn’t just a US problem, and what HR leaders can do to address issues before penalties are incurred. It also shows how using international payroll and compliance outsourcing solutions like Slasify can significantly reduce your compliance risk.

2. Independent Contractor Misclassification Risks: Why Generic Contracts Fail in the US

When a US-based designer says the contractor agreement doesn’t match US labor rules, the problem usually isn’t one bad clause. Under the Fair Labor Standards Act (FLSA), the US Department of Labor focuses on the economic reality of the relationship: the degree of control, the permanence of the work, each party’s investment, and how integral the work is to the business.

Fixed hours

Expecting an independent contractor to keep strict 9–5 hours and tracking their time like any other employee is a strong signal of employee-style control, especially when pay simply increases with more hours worked.

Reporting to a manager

When a contractor has a direct manager, joins regular team meetings, and receives performance feedback through your HR processes, regulators are likely to see a supervised worker who’s economically dependent on your business, rather than a separate business in control of its own work.

Using a standard template

A one-size-fits-all contractor agreement written for global use rarely reflects US-specific rules or how the work actually happens. This can leave out critical terms on control, scope, and tax status, and make it easier for an auditor or a court to treat the relationship as an employer-employee relationship.

The Economic Policy Institute estimates that around 10–20% of audited employers misclassify at least some workers as independent contractors. That’s why, when you hire a remote contractor, you need to understand and follow the local rules on what counts as employment to avoid monetary and legal risks.

“Too often, businesses rely on a worker’s title, a contract label, or the fact that they are paid by a 1099, rather than the actual nature of the relationship. Simply calling a worker an independent contractor in a contract or compensating a worker with a 1099 does not necessarily make them a contractor.”

Haley A. Harrigan, Shareholder & Co-chair, Gallagher & Kennedy, P.A.

 

3. It's Not Just The US: Where Else are Businesses Getting This Wrong?

Once you start hiring beyond your home country, the classification of independent contractor can become more than just a general concept. Although the basic principles of subordinate employee vs. independent contractor are similar everywhere, each country’s labor law operates differently and could trap you with penalties. Here are a few examples outside the US: 

• Spain: According to the Self-Employed status (Estatuto del Trabajo Autónomo), workers who earn 75% of their income primarily from a single client may be treated as TRADE (economically dependent self-employed) or even “falsos autónomos” (false self-employed), regardless of what the contract says. This allows labor authorities to reclassify them as employees and claim back social security contributions plus fines.
  
  
• Brazil: Under Brazil’s labor law, the Consolidação das Leis do Trabalho (CLT), anyone who personally provides ongoing services under the employer’s direction in exchange for a salary is an employee, even if they invoice through a one-person company.
  
  
• Australia: The Australian Taxation Office says that if you pay an independent contractor mainly for their labor and they must do the work personally (not outsourcing to others), they’re treated as an employee for Superannuation Guarantee purposes, and you must pay the Superannuation Guarantee contribution.

Global Contractor Misclassification Risks: Key Red Flags & Penalties

Case study: Spain’s Glovo fined €79 million for employee misclassification

Glovo, a Spanish delivery platform owned by Germany’s Delivery Hero, operated for years using riders classified as self-employed, even though courts later found that the company controlled the riders’ schedules, pay, and working conditions as if they were employees.

After multiple investigations, Spain’s labour inspectorate imposed a series of sanctions worth almost €79 million in 2022 for employing more than 10,000 “false self-employed” riders in Barcelona and Valencia, followed by further fines that have pushed the company’s total penalties above €200 million and forced it to put about 14,000 riders on payroll.

4. Who's Responsible When Things Go Sideways?

A common instinct is to assume that if a contractor signed the agreement, they share the risk. However, employers are almost always liable and bear the responsibility for determining whether a worker is a contractor or an employee, as reflected in the U.S. Fair Labor Standards Act (FLSA) rules on misclassification. The consequences of being found liable for misclassification can be severe for employers:

• Back taxes and social contributions: Authorities can retroactively treat the person as an employee and bill the company for unpaid payroll taxes and social security, plus interest and penalties.
  
  
• Fines and penalties: Misclassifying workers can lead to violations on multiple fronts, including taxes, wages, and social security contributions. For example, under the FLSA in the U.S., the Department of Labor can seek up to three years of back wages, plus fines in the range of roughly USD 2,500 to 10,000 per violation, and even imprisonment in willful cases.
  
  
• Reclassification and benefits costs: Once workers are reclassified as employees, you may owe back pay for minimum wage or overtime, statutory leave, severance, and other entitled benefits. This also creates a heavy administrative burden on top of potential fines and audits.
  
  
• Reputational damage: Public enforcement notices and lawsuits can damage your brand and further affect retention, employee morale, and future hiring.

“Misclassifying workers as independent contractors rather than as employees could result in an employer being held liable for withheld taxes, penalties, and interest.”

John Montgomery, 2022 Payroll Insights Report, KPMG

5. Red Flags Your Contractor Agreement Might Not Hold Up

As the hiring company, you’re responsible for understanding local employee classification rules and the work behaviors that can push a contractor over the employee line. Use this quick checklist to see whether your current setup is drifting into employment.

Employee vs. Contractor Checklist 

If you’re answering “yes” to more than one of these questions, it’s a strong signal to review the relationship and your contractor contract with local counsel or an EOR partner.

6. How Do You Fix This Before It Becomes Expensive?

Once you’ve spotted the red flags, the goal is to put a better framework in place, instead of just tweaking one problematic contractor contract. Most companies end up choosing one of three routes:

• DIY route: You can hire local employment counsel in each market to draft and review agreements for contractors and employees and advise your in-house HR and finance teams. However, you still have to handle payroll, filings, and ongoing administration yourself, so this route is usually best for one-off projects rather than day-to-day remote contractor management.
  
  
• Contractor platforms: These tools make it easier to onboard, collect invoices, and pay global contractors in multiple currencies, which simplifies remote contractor hiring. But they typically don’t take on legal responsibility for misclassification, so the contractor compliance risk still sits with you.
  
  
• EOR services: An Employer of Record (EOR) becomes the legal employer on your behalf, issues locally compliant contracts, oversees classification, and manages payroll, taxes, social contributions, and benefits under local law. Slasify supports 150+ countries to help with your global expansion.
  
  

For companies that want to scale global hiring and international payroll without building an in-house legal and HR team in every country, Slasify’s EOR solution handles local contracts, classification, and compliance outsourcing, so you can focus on finding the right people and growing the business.

7. What to Do If You're Already in The Grey Area

If you suspect your independent contractor setup is already in the grey area or close to crossing the employee line, use this five-step playbook:

1. Don’t panic (yet): Acknowledge the issue and pause any big changes new contractors, markets, or expanding the work scope) until you can assess the problems properly.
   
   
2. Get local legal advice quickly: Loop in employment counsel in the contractor’s country to check your current arrangement against local labor laws and classification tests.
   
   
3. Review the working relationship honestly: Include work hours, control, tools, exclusivity, how embedded they are in your team, and how you actually pay them in practice.
   
   
4. Decide whether to reclassify or restructure: With legal and HR advice, either convert the contractor to an employee (with proper international payroll and benefits) or redesign the role so it truly works as an independent contractor with their own control and autonomy.
   
   
5. Switch to compliant contracts with Slasify going forward: Use Slasify’s EOR and global contractor solution to handle local contracts, classification, payroll, and compliance outsourcing in each of your operating markets.

 How Slasify Helps You Convert Risky Contractors to Compliant Employees in 48 Hours

Hiring contractors remotely shouldn’t be a headache. However, every country draws the line between an employee and an independent contractor differently, and a contractor contract that looks fine at home can fall apart once you start hiring and structuring work across borders.

For HR leaders managing a global workforce, leveraging HR solutions like Slasify’s EOR and remote contractor management platform makes it much easier to stay compliant while building a reliable, future-proof HR and legal structure. Talk to our global hiring and contractor expert today to learn how you can start building a reliable, future-proof HR and legal structure going forward. 

FAQ: Quick Answers for Busy HR Leaders

Q1: Can I ask the contractor to sign a waiver saying they’re responsible for local compliance?

Most regulators say it’s the employer’s job to classify workers correctly, so a waiver doesn’t stop authorities from auditing your company for back wages, taxes, and penalties.

Q2: What’s the difference between a contractor and an employee in most countries?

The main difference lies in control and independence. The line is usually drawn by economic reality tests that look at who controls the work (hours, methods), whether the person can work for others, who provides tools and bears business risk, and how embedded they are in your core business. 

Q3: If my contractor hasn’t complained, am I in the clear?

No. Many workers don’t know the rules or prefer not to bring up the issue and risk losing their contractor job. Misclassification often surfaces later through tax, social security or labor audits. Sometimes, when workers apply for unemployment benefits, they can also alert the authorities.

Q4: How much does it cost if you get caught misclassifying someone?

Most countries will require multiple years of back pay, back employment taxes and interest, and state fines that can reach USD 5,000–25,000 per worker in places like California. Recent EU fines and penalties against Uber for misclassification have been extensive, reaching £1.73 billion in minimum wage, paid holidays and other benefits.

Q5: Does using an EOR mean I can’t work directly with my contractor?

Not necessarily. The EOR becomes the legal employer for contracts, compliance, payroll, and benefits on paper, while you still have the flexibility to negotiate project scope and expectations with your contractors.

Q6: Can I convert an independent contractor to an employee easily? 

Yes. Using an Employer of Record (EOR) like Slasify allows you to transition a contractor to a full-time employee compliantly without setting up a local entity, ensuring they receive statutory benefits, and you avoid misclassification fines.