That last point is the one most people learn too late. Across the United States, the United Kingdom, and the European Union, authorities assess the reality of the working relationship rather than the label on the agreement.
This piece explains the three arrangements, how classification is tested in different jurisdictions, what each means for you in practice, and the signals that suggest you have been misclassified.
A note on scope: this is an explanation of how these arrangements work, not legal or tax advice. Classification rules vary by country and change over time. For your own situation, consult a qualified professional in your jurisdiction.
The three arrangements
Independent contractor. You are self-employed. You invoice the company for services, handle your own tax filing and social contributions, supply your own equipment, and generally control how the work gets done. You typically receive no paid leave, no employer pension or health contributions, and limited or no dismissal protection.
Employee of an Employer of Record. An EOR is a third-party company that legally employs you on the client company's behalf in your country. The EOR signs your employment contract, runs payroll, withholds local taxes, and provides statutory benefits, while the client company directs your day-to-day work. As ADP describes the model, the EOR handles employment administration while the client business maintains managerial control of its employees and their assignments. You are a full employee under local law, with the protections that carries. Your employer on paper is simply not the company whose product you build.
Direct employee. The company has a legal entity in your country and employs you through it. This is the arrangement most people assume they are getting, and for cross-border remote work it is the least common, because establishing a foreign entity is expensive and slow.
Why Europeans working for US companies rarely get a direct offer
There is a structural reason a US company hiring a developer in Berlin or Madrid does not simply put them on the US payroll. Most European countries do not permit a foreign company without a local presence to directly employ residents, and establishing a legal entity is a complex and expensive process. European employment law is also generally more protective than US law, with distinct rules on contracts, working hours, leave, and dismissal.
Faced with that, a US company has two realistic options. It can engage you as an independent contractor, which is administratively simple and shifts most obligations onto you. Or it can hire you through an EOR, which becomes your legal employer locally. Oyster describes exactly this case: a US company that wants to hire a developer in Spain works with a Spanish EOR, which becomes the legal employer, handling the employment contract, local taxes, and compliance with Spanish labor laws, while you work day-to-day for the US business.
Understanding which of these you have been offered is the single most consequential thing to establish before you accept.
How classification is actually tested
The tests differ by jurisdiction, but they share a principle: substance over form. The contract does not decide the question.
United States.The IRS applies a three-factor common-law test. It weighs behavioral control (does the company control what the worker does and how), financial control (are the business aspects of the job controlled by the payer), and the type of relationship (written contracts, employee-type benefits, permanence, and whether the work is a key aspect of the business). No single factor is decisive; the whole relationship is considered. The IRS is explicit that remote work does not change this: an individual performing services from a location other than the company's office is still an employee under common-law rules if the company controls the work. If status is unclear, either party can file Form SS-8 for an official determination. Some states apply stricter standards, notably the ABC test used in California, Massachusetts, and New Jersey, under which a worker can be a contractor federally and an employee under state law.
United Kingdom. HMRC administers the off-payroll rules known as IR35. A significant practical detail: under IR35, the hiring business, not the contractor, is responsible for determining employment status, with retroactive tax, interest, and penalties following an incorrect determination.
European Union. There is no single European test. Each country applies its own framework, though authorities consistently assess the practical reality of the relationship rather than the contract's wording. Some examples of how much they differ:
- Germany: labor and administrative courts define the distinction. Companies can be liable for up to four years of retroactive social security contributions covering both employer and employee shares.
- Spain: labor authorities apply a five-part test to identify a "falso autónomo" (false self-employed), examining dependence, alienation, and integration into the company's core business. Spain also recognizes TRADE status for contractors who earn 75% of annual income from a single client, granting protections including annual leave and severance for unjustified termination.
- Poland: labor inspectors check for supervision, set work location and time, fixed pay, and absence of financial risk, and can recommend reclassifying a civil contract as employment.
- Norway: the company must prove it is "highly probable" that a person is a contractor. If it cannot, the worker is legally an employee with full dismissal protection.
- Netherlands: enforcement against false self-employment has intensified in recent years, raising compliance risk for companies using contractors.
As one European compliance analysis puts it, a contractor model that appears workable in one country may be high-risk in another. There is no pan-European shortcut.
What each arrangement means for you in practice
The distinction is not academic. It determines concrete things.
Pay structure. Contractors invoice per project or per hour and bear the risk of profit and loss. Employees, whether direct or through an EOR, receive a salary on a payroll cycle.
Taxes. Contractors handle their own income tax and social contributions, typically through self-assessment or quarterly payments. Employees have tax withheld at source by the employer or EOR.
Benefits. Employees receive statutory benefits under local law: paid leave, sick pay, pension or social insurance contributions, and, depending on the country, health coverage. Contractors are generally entitled to none of these by default.
Protections. Employees have dismissal protection, notice periods, and access to labor courts. Contractors have contractual remedies only. In Europe this gap is wide, since employee dismissal protections are substantial.
Equipment and control. Contractors supply their own tools and control their methods. If the company dictates your schedule, supplies your equipment, and directs how you do the work, you are behaving as an employee regardless of your contract.
Signals that you may be misclassified
Misclassification usually develops gradually rather than being imposed at the start. The pattern is familiar: a company hires a contractor to test demand, the contractor performs well and becomes increasingly integrated into operations, and the engagement continues without reassessment until the relationship plainly resembles employment.
Watch for these signals:
- You work fixed hours set by the company rather than delivering agreed outcomes on your own schedule.
- The company supplies your laptop and tools, or reimburses your expenses like an employee.
- You have one client, or one client provides the large majority of your income.
- You are integrated into the company's core operations, attend internal meetings, and appear on the org chart.
- You are subject to supervision and performance evaluation on how you work, not just what you deliver.
- The relationship has run for years with no end date, on rolling renewals.
None of these alone is decisive, but together they describe employment. If they describe your situation while your contract says "independent contractor," the classification may not hold up under the tests above.
What to establish before you accept
Ask directly which of the three arrangements is being offered, and get it in writing. If it is contractor, confirm that you will control your methods and schedule, and price the work accounting for the tax and benefit costs you will carry yourself. If it is EOR, ask which provider, because they will be your legal employer and the counterpart for any payroll or employment dispute. If it is direct employment, confirm the company has an entity in your country.
Then check the terms against how the work will actually run. If a company wants to pay you as a contractor but manage you as an employee, that mismatch is not a technicality. It is the exact condition that classification tests are designed to detect, and in most jurisdictions the exposure sits with the company, not with you.
Frequently asked questions
Does my contract determine whether I am an employee or a contractor? No. Across the US, UK, and EU, authorities assess the practical reality of the working relationship rather than the contractual label. A contract calling you an independent contractor does not make you one if the company controls how, when, and where you work.
Can a US company employ me directly if I live in Europe? Usually not without a local entity. Most European countries do not permit a foreign company without a local presence to directly employ residents. In practice, US companies engage Europeans either as independent contractors or as employees through an Employer of Record.
What is an Employer of Record, and am I a real employee? An EOR is a third party that legally employs you in your country on behalf of the client company. You are a full employee under local law, with statutory benefits and protections. The EOR handles your contract, payroll, and tax withholding, while the client company directs your work.
Does working remotely make me a contractor? No. The IRS states explicitly that an individual performing services remotely is still an employee under common-law rules if the company controls the work. Location does not determine classification; control does.
What happens if I am misclassified? Liability generally falls on the company, which may owe back taxes, retroactive social contributions, and penalties, with amounts and criminal exposure varying by country. For you, the practical consequence is that you may have been denied benefits and protections you were legally entitled to, and in some jurisdictions you can claim them.
References
- Internal Revenue Service, Independent contractor (self-employed) or employee?
- ADP, What is an Employer of Record? Services & Benefits.
- Oyster, What is an Employer of Record (EOR)? A full guide.
- Parakar, Employer of Record in Europe for US Companies.
- Parakar, Contractor Misclassification in Europe: Red Flags, Country Tests and Compliance Solutions.
- Globalization Partners, Contractor Misclassification in Europe: 2026 Compliance Guide.
- Multiplier, Test for contractor vs employee: Global classification guide.