Avoiding International Worker Misclassification: What the IRS & Vietnam Law Say

Admin Team September 13, 2024

The hidden legal (and financial) risk for U.S. companies hiring remote talent overseas — and how to stay compliant. In today’s remote-first world, many employers unknowingly treat long-term international workers as “contractors.” That can trigger fines, back taxes, and legal exposure on both sides of the ocean. Here’s what to know—and how to stay safe when hiring in Vietnam.

What You’ll Learn

What the IRS and Vietnamese labor laws say about worker classification
The risks of misclassification for U.S. companies
How to hire remote Vietnamese talent legally
Why using an Employer of Record (EOR) is the smart alternative

🧾 What Is Worker Misclassification?

Misclassification happens when a business treats someone as an independent contractor even though, legally, they function as an employee. Contractors don’t receive benefits, tax withholding, or employment protections, while employees do. Governments care because misclassification reduces tax revenue and can harm workers.

🇺🇸 What the IRS Looks At

The IRS applies a common-law control test that focuses on three buckets:

Behavioral control: Do you direct how, when, and where work is performed?
Financial control: Do you reimburse expenses, supply tools, or pay a steady wage?
Relationship type: Is the engagement ongoing, exclusive, or benefit-eligible?

If several answers are “yes,” the person likely qualifies as an employee — even if they live and work in Vietnam.

🇻🇳 What Vietnam Labor Law Says

Under Vietnamese law, a worker is generally considered an employee if you:

Set consistent working hours or require daily availability
Supervise tasks directly and integrate them into your team
Expect ongoing work (not a finite, project-based scope)
Pay on a recurring schedule

Misclassification can lead to back payment of social insurance, administrative penalties, and restrictions on future hiring.

⚠️ Why This Is Risky for U.S. Companies

IRS audits and back taxes (plus interest and penalties)
State-level enforcement (e.g., CA, NY) for worker misclassification
Weaker IP protection if contracts aren’t locally enforceable
Administrative action under Vietnamese labor regulations

Cross-border enforcement cooperation is growing — don’t assume overseas arrangements fly under the radar.

💡 Real-World Example: A U.S. startup hired a Vietnamese engineer as a “contractor,” but required fixed hours, issued a company email and Slack, held weekly team meetings, and paid every two weeks. Authorities deemed the relationship employment — triggering retroactive taxes and IP uncertainty due to non-compliant paperwork.

✅ The Smart Way to Hire: Use an Employer of Record (EOR)

An EOR legally employs your talent in Vietnam, handling payroll, taxes, social insurance, compliant contracts, benefits, and termination support. You direct the work; the EOR manages the local employment relationship.

With an EOR like VietAssist, you get:

Compliance with U.S. and Vietnam employment rules
Clear, enforceable IP and confidentiality agreements
Reduced misclassification risk and administrative burden
Fast hiring without opening a Vietnamese entity

🛡️ Already Working with a VN Contractor? Do This Next

Assess whether the relationship looks like employment in practice
Consult cross-border employment experts or an EOR
Convert high-risk contractors to compliant employment where needed
Use localized contracts aligned with Vietnamese labor law
Avoid direct individual payments without proper tax/benefit reporting

Final Thought: Compliance Is a Competitive Advantage

Getting classification right protects your IP, builds trust, and creates a scalable foundation for global growth. Treat compliance as part of your talent strategy — not a paperwork chore — and your Vietnam team will become a long-term asset, not a liability.

👉 Want a worry-free way to hire in Vietnam? Book a free consultation.