Misclassification of Contractors 2025

Compliance is more crucial than it has ever been, as misclassification of contractors causes unseen risks.

In the context of foreign employment, compliance is really crucial. Companies that operate in overseas countries must be aware of the complexity of labor laws to help to prevent possible legal and financial issues. However, some participants in the Employer of Record (EOR) and contractor management sectors appear to be engaging in risky practices that could unintentionally expose companies to dire consequences.

Misclassification Risk: The Actual Situation

Compliance is the cornerstone of what we do here at Agility EOR. Not a risk that should be disregarded is misclassification, the practice of labelling an employee as a contractor whereas, legally, they should be categorized as an employee. Unfortunately, we are aware of some providers in our space who encourage companies to engage workers as independent contractors, even if it is clear that they should be regarded as employees.

Sam, our Sales Director, had a recent case with an inquiry from a company looking to expand into a European country. When assessing the client’s needs and whether our EOR solution would be a good fit for them, it was clear that the company’s relationship with that worker meant that they would need to be classified as an employee. Deel, however, suggested that the person should be categorized as a contractor even though the labor laws in that country unambiguously labelled them as an employee.

They suggested a “misclassification insurance” coverage costing $6,000 a year as a supposed safety net, therefore making issues even more challenging. It is noteworthy, nevertheless, that insurance coverage will not cover nor stop the requirement for you to set up an entity and any potential criminal charges, should the authorities find that their classification has been erroneous.

How the Authorities Are Pursuing a Misclassification Crackdown

Misclassification is starting to take centre stage for government officials all throughout the world. Rules like the IR35 in the United Kingdom and the strict employment protections in Spain are in place for a specific use. These rules are meant to stop companies from falsely classifying their employees as independent contractors in order to avoid labour laws. When the government calls, the assertion that “we have misclassification insurance” will not be able to survive investigation.

Regardless of what the contract says, if the worker in issue is regarded as an employee in the case that the authorities find direction and control exist, governments have the power to impose penalties, retroactive taxes, and even criminal charges against the end user, at their will. Should the classification be erroneous from the start, no amount of insurance can guard against legal accountability liability.

The Fallacy About “Free Contractor Hiring”

Some platforms promote themselves as a way for “hiring contractors for free” in marketing. What is the drawback? The only way to get that “free” service is to get misclassification insurance, which is similar to the monthly cost of using an EOR solution. Apart from being dishonest, this action is quite immoral.

Businesses like Deel really help risky misclassification strategies to be implemented. It is even alleged their own CEO is employed as a contractor! The consequences could be fairly serious even if it would seem to be a less sophisticated approach to evade a correct employee classification. Should a government decide to act (which they already are), they will not waste time or money looking through one-by-one individual contractor agreements. To go through each contractor and individual company would be unlikely to recover the cost of the time and effort of doing so.

Rather, they would now go straight to the organisations helping misclassification to take place and demand documents of their clients and contractors as well as of their own. By consolidating a large number of contractors in one place, those companies enabling misclassification have made it much easier and cost-effective for governments to target them, and in turn, the clients that use them!

An Intelligent and Safe Approach

For companies looking to grow abroad without falling into the misclassification trap, ensuring compliance from the very start of the company is the way forward rather than shortcuts. Unlike just moving risk from one place to another, a reliable EOR supplier removes danger completely by using people in absolute compliance with the local laws controlling labour.

At Agility EOR, we do not believe that “misclassification insurance” is a means of escape from jail. Instead, we provide companies compliant employment solutions and ensure proper worker classification right from the start of their employment. This is the only way that any company can be safe from the risks of misclassification.