What is Worker Classification? Why has it become so important?

As the world of work goes truly global, and working itself more fluid and flexible, backburner issues like Worker Classification have become increasingly important. But what exactly is worker classification and why has it become such a critical issue du jour?

The world of work has changed fundamentally in recent years. The change is the result of a combination of factors, including technological advancements, the global pandemic, worker shortages and lifestyle preferences.

The times when a business’s talent amounted to little more than a list of permanent, full-time employees are now behind us. Today’s modern workforce often incorporates a slew of employment types; from foreign/remote workers, agency workers, casuals and contractors, sole-traders and freelancers, and more.

What’s more, this mix’n’match trend is showing no sign of abating. Recent studies reveal that almost seven in 10 workers worldwide are self-employed or in small businesses; whilst self-employed and micro-enterprises account for more than 80 per cent of employment in South Asia.

For businesses, the benefits of utilising flexible talent – particularly during these uncertain times – are many. Tapping into the power of the contingent and contract workforce not only helps get work done, but it can also improve cashflow and efficiencies.

However, keeping abreast of classification and compliance when workers are engaged through so many different models, in so many different countries, can bring its own set of challenges.


What is Worker Classification?

In these times of diffuse global talent pools, worker classification determines the legal rights people enjoy in the workplace. It also frames the obligations of the employer – to its workers and to local Governments. In addition, it mitigates risks for all parties by ensuring workers adhere to local classification guidelines for taxation purposes, and that they are set up properly and working in compliance with local and in-country laws.


Why is Worker Classification so important today?

It’s become increasingly important today because Governments now are seeking to maximise their tax revenue from their employment population, as well as protecting their rights. With the increase of remote workers, contractors and the growth of the Gig Economy worldwide, payments and classification are now also being tracked within the global banking system.

In today’s global work village HR and business teams need to know who is working for their business, how they are engaged, and what their responsibilities are in terms of regulations and tax law, to avoid being tax-targeted and globally identified as an employment tax cheat or a dodgy entity promoting misclassification to avoid tax payments.

However, how workers are employed has become an increasingly complex and intricate issue – and the goal posts are constantly moving from country to country.

You may think there won’t be any consequences to misclassifying your workers, so long as all the tax obligations are satisfied, but this is definitely not the case. A misstep means an employer could be looking at hefty penalties, interest, and tax wrangles if they determine that a contractor(s) who was hired should have been classified as an employee instead. For any business, there’s nothing worse than being ‘in focus’ with the tax department for all the wrong reasons.

Turning a blind eye can also be dangerous. It’s a fact that many business owners will classify a person as an independent contractor when they should really be an employee simply because independent contractors are easier administratively and generally cost less. Big mistake!

Whilst this may be OK in the short-term or for specific project-based assignments, this laissez-faire approach may lead to misclassifications in the long-term if not assessed appropriately initially and reviewed regularly. The costs and penalties involved could be significant.

That’s why it is vital that organizations understand the differences in classifications and ensure the use of contingent and contract workers – in fact all their workers or employees – is rigorously consistent with the country or state legislations they are working within.


Partner with a worker classification expert

So how does a company know whether to classify one of their workers as an independent contractor or employee? Especially in a region where there are multiple jurisdictions and legislations vary considerably, from state to state and from country to country. The ins and outs of different employment rules and regulations can be very complex and challenging, and very risky.

For surety and peace of mind it’s recommended you consult an experienced contractor management and global workforce solutions company with a long track record such as CXC Global, which boasts in-country support and on-the-ground knowledge of employment laws and regulations and worker classification models in virtually all Asian countries, and throughout the world.  Our knowledge, experience and expertise in worker classification is second to none.


To learn more about how we can help you with all your worker classification and compliance requirements, as well as many other aspects of workforce management, don’t hesitate to contact us today.