Proving the Employer-Employee Relationship

Employers who want to hire foreign workers or transfer current foreign workers to the U.S. must prove an Employer-Employee relationship and should be aware of several issues that may arise if not addressed at the beginning of the hiring or transfer process.

There are three main strategic factors to take into consideration when hiring or transferring a foreign worker to the U.S. These include:

Whether overseas operations are required
The nature of ownership of the U.S. and foreign entities
The type of position offered, the length of time an employee will be in the U.S. and the company’s compensation model
In addition, how a company and a position are structured will determine the type of work permit for which an employee is eligible. For example:

Corporate structure will determine whether an L-1A Intra-Company transfer can be obtained
Corporate ownership will determine whether an E-2 Investor or E-1 Trader Visa can be obtained
The employee’s position will determine whether an individual is eligible for an L-1, E-2 or H-1B
Employee compensation must be detailed for the H-1B, B-1 and E visa
Employment and duration spent abroad must be outlined for an L-1 and B-1
Employer-employee relationship must be defined for all of the above
In dealing with the employer-employee relationship, oftentimes employers choose to classify employees as “Independent Contractors,” mostly to take advantage of tax and labor laws. However, this classification can trigger major issues for employers, not only when dealing with immigration, but also on state and federal levels.

For example, if the employer-employee relationship is not clearly demonstrated when requested by U.S. Immigration, the employer may face issues with:

Unemployment insurance
Workers’ Compensation
Social Security
Tax withholding
Temporary disability
Minimum wage and overtime laws
Denial of immigration petitions and applications
Individual states recognize this misclassification tactic and attempt to prevent it by focusing on the “economic reality” of the relationship rather than the method of compensation. This means they measure the position based on the degree of supervision, direction and control exercised over the employee and the services rendered instead.

While there is no established definition for the employer-employee relationship in immigration law, the government requires that an employer-employee relationship exist in order for an employer to hire or transfer a foreign worker to the U.S. An employer-employee relationship may exist if the employer:

Chooses when, where and how an employee performs services,
Provides facilities, equipment, tools and supplies to the employee,
Directly supervises the services provided by an employee,
Sets the hours of work for an employee,
Requires exclusive services (an individual cannot work for a competitor while working for the employer),
Sets the employee’s rate of pay,
Requires the employee’s attendance at meetings and/or training sessions,
Asks for oral or written reports from an employee,
Reserves the right to review and approves the work product,
Evaluates the job performance of an employee,
Requires prior permission for absences from work,
Has the right to hire and fire,
Controls and supervises the employee’s client contact and relationships with customers, or
Controls billing rates and collection from clients.
This employment relationship can also be proven through the method of compensation as outlined below or by incorporating the above mentioned factors in the employment agreement. The employee’s method of compensation may differ based on the type of work permit the foreign worker is applying for as follows:

1. TN (NAFTA):

The foreign worker can be classified as an employee or an Independent Contractor and can be paid either by a foreign or a U.S. company.

2. L-1A:

The foreign worker can be paid directly as an employee of the foreign company, or through their own company. The employee can be paid by a foreign company while in the U.S.

3. H-1B:

The foreign worker must be paid by a U.S. company and in accordance with the prevailing wage approved by the government for each specific occupation.

4. E-2:

The foreign worker must be paid directly as an employee by a U.S. company as long as they are working in the U.S. under E status.

5. B-1/2

The employee must continue to be paid by a foreign entity for the duration of his B-1/2 visitor’s status in the U.S.

Compensation may be paid either through a salary or sales commission. The key is to prove an employer/employee relationship through the presence of the factors mentioned above.

Additionally, any one of the following may be used to prove the employer-employee relationship.

1. Employment Agreement:

An employment agreement needs to be drafted to incorporate the majority of the above mentioned factors. The language specified in the contract will act as proof for the employer-employee relationship even if the employee is getting paid a commission and not a salary.

2. Service Contract:

A service contract needs to specify the relationship between the employer and employee as exclusive for the duration of the contract whereby the employer is able to exercise control over the employee’s services and scope of work for the whole duration of the project. Exclusivity can be proven through the incorporation of the above-mentioned factors into the contract.

3. Compensation Package:

Unemployment Insurance and taxes should be taken out from the commission or salary as additional proof of employer-employee relationship in the absence of an Employment Agreement or Service Contract.

4. CFO Memo:

A memo drafted by the employer’s CFO stating the company’s business practice in compensating its foreign workers as employees and not as independent contractors. It should be stated that all employees will be compensated directly and not through third party entities.

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