When companies have short-term projects and temporary assignments, they often turn to independent contractors instead of putting more on their employees’ plates. Hiring a remote contractor is a cost-effective and efficient way to run a business because bringing in contractors is often cheaper than hiring new employees, especially when there’s a clear end date for the project.
Independent contractors often receive a fixed fee and are generally not eligible for benefits, so it’s easier to budget for the hire. Contractors also bring their own expertise and resources, saving you the time and expense of training and investing in equipment for a short-term project. For these reasons, more and more companies are sourcing contractors from across the globe to work on specific tasks or projects. According to a study by Deloitte, up to 33% of organizations rely on freelancers, contractors, and other forms of alternative labor.
If you’re looking at alternative forms of labor, you may also want to expand your search to include foreign, independent contractors. Not only do you gain access to an even larger talent pool, but you may even find that onboarding them is faster and more affordable than committing to a full-time permanent hire. Depending on the project, hiring someone in another time zone can increase coverage and shorten turnaround times, giving you more budget flexibility. If your company is planning on bringing contractors on board, it’s important to understand the intricacies of the employer-contractor relationship to ensure that all workers are treated fairly within the legal boundaries of their designated role.
Independent contractors vs. employees
A contractor is a self-employed worker who operates independently on a contract basis. The contract relationship can be short-term or long-term. Sometimes called a contract worker, independent contractor, or freelancer, a contractor is not an employee. While they may perform work for a company, they are vendors paid through invoices rather than employees paid through a company’s payroll.
The benefits of hiring a contractor are centered around the fact that they are their own business. You’re paying for a product or service they provide, and you’re bypassing many of the administrative hassles and expenses associated with employment. There’s no need to withhold the appropriate taxes, pay employee benefits, offer paid vacation, or provide equipment or other assets you’d typically give to employees to perform their duties. Add to those benefits the deep talent pool accessible by remote work, and hiring a contractor makes good business sense for many organizational needs.
Although independent contractors serve a vital function within an organization, there are some key differences between these workers and employees. While each country has its own rules around worker classification, generally there are three categories that differentiate these two relationships:
- Behavioral control: A contractor retains the right to decide how to complete the agreed-upon work. An employee takes direction from their employer.
- Financial control: A contractor assumes the financial aspects of a project, including tools, relevant expenses, and ownership of profits or losses. An employee is provided set wages and the tools required to do the work, and any ancillary expenses are borne by the employer, not the employee.
- Relationship of the parties: A contractor’s scope of work is governed by the contract negotiated with the organization, the presumption being that both parties have equal power. An employee’s work is governed by both an employment contract, as well as applicable laws and regulations which protect workers, as the presumption is that a worker has less power to negotiate terms that protect their interests.
Independent contractors have a level of autonomy that employees don’t, since employees must abide by company policies, including work standards, meeting attendance, and mandatory training. Additionally, independent contractors can work with multiple organizations as clients, while employees typically work for one company at a time.
Understanding these differences is more than a matter of semantics—getting them wrong can also be a significant liability. An employer will be found liable for underpaid taxes, wages, and social contributions if they’re misclassifying workers as contractors. Misclassified workers are also directly affected by taxation issues—misclassified contractors might end up paying more than they owe, and misclassified employees might not be paying enough. To help businesses avoid costly mistakes that can tarnish their reputation among current workers and potential hires, Oyster offers a worker misclassification tool to help you make compliant decisions about how to engage workers.
Critical considerations when hiring international contractors
While hiring contractors offers tangible benefits, there are some issues you need to take into consideration—especially when working with international contractors.
Misclassification risks
Governments all around the world pay close attention to the differences between employees and contractors. They don’t want organizations using contractors to get around paying healthcare, employment taxes, unemployment issuance, or other critical benefits. Governments also have a vested interest in workers having the traditional safeguards of permanent employment, which would reduce the use of social welfare programs. For these reasons, among others, governments and regulatory agencies strive to ensure that workers aren’t fulfilling the role of an employee while being classified and paid as a contractor.
Worker misclassification can lead to audits, fines, penalties, and even lawsuits. So you want to be certain that you’re compliant with the local laws in any country where you hire contractors. Let’s look next at some key components to consider when determining if your candidate is properly classified as a contractor.
The nature of the jobs to be done
Contractors typically don’t perform services central to the core mission and operation of the company. Hiring a contractor to create an ad for a food purveyor is entirely different from hiring one to create an ad for an advertising agency. Is the service the worker will provide ancillary to the company’s purpose? Contractors also typically work at their own initiative instead of being managed by the company. Ask yourself who is directing the work. Is it the worker creating her own project plan and executing it, or is she primarily taking direction from a company manager? If the latter, then she might actually be an employee.
It’s beneficial to think through the scope of the work and decide if the job in question would be better served by an employee or a contractor.
Country-of-origin limitations
Every country has unique rules and regulations around contract work. Not only do countries have their own standards for determining whether someone is operating as an employee or a contractor, but they also have their own laws around contract work. A country might have rules around the length of time someone can operate as a contractor. Or you might be dealing with a nation that dictates that any worker who signs a non-disclosure agreement is operating as an employee because it’s evidence of the employer’s control over the relationship. Or you may have a country that, due to the rise of remote work, encourages contracting as a way of keeping talented freelancers in-country and preventing brain drain.
When you start your worker hiring journey, consider where your candidates are located and what jurisdiction-specific considerations impact your hiring model.
Paying contractors and handling taxes
If you’re contracting someone in your own country, dealing with invoices and payments is pretty straightforward. It gets a little stickier when you’re juggling international invoices and paying contractors in their own currency.
You should be mindful of who is responsible for withholding and paying taxes and social contributions in the contractor relationship. Typically, one of the positives in hiring a contractor is that the business is only responsible for signing a contract and paying the contractor. Since the contractor operates as their own business, they’re responsible for dealing with taxes. But some countries require the hiring party, generally a larger and more sophisticated company, to manage withholding and paying taxes on behalf of the contractor to ensure that taxes and social contributions are actually paid. So if you’re leaning towards contracting to avoid this type of administrative burden, you’ll need to familiarize yourself with local regulations.
When you’re ready to make payments, make sure you know what your options are for paying international contractors. While fintech and digital banking has made cross-border payments easier, don’t assume your bank can do it all. Unlike in an employment relationship, contractors can dictate how they are paid. Currency devaluation and inflation have led to interesting developments, like requests to be paid in Bitcoin or through nontraditional bank accounts. In talking to candidates, make sure to also survey your financial setup to understand what is reliably possible in the way of currency exchange and payment processing.
Finding support hiring remote contractors
If you’ve read this far, you’re probably considering whether it makes more sense to hire a remote employee or a contractor. You can start by evaluating the misclassification risk for each intended hire. Just answer a few questions, and Oyster’s employee analyzer will give you a risk score: low, moderate, or high. If a profile is at moderate or high risk of misclassification as a contractor, it’s recommended that you hire them as an employee.
If your scope of work is perfect for a contractor, and you’re ready to move forward with a candidate, but need help to hire, pay, and manage them, you may want to consider partnering with a global workforce platform, like Oyster, to ensure that it’s done easily and compliantly.
With Oyster, you can reduce the time it takes to get started by creating and sending a contract to your candidate instantly within the platform. You can manage invoices and payments for contractors around the world in one location, making it easy to receive, approve, or even dispute an invoice. When it comes time to take care of payments, you pay Oyster in your preferred currency, and the contractor receives payment in theirs. No hassles.
Oyster simplifies hiring in more than 180 countries, equipping you to instantly generate contracts that are 100% compliant with local regulations. Hiring and onboarding a contractor in another country doesn’t need to take weeks—we can help you get it done in minutes so you can focus on establishing a productive working relationship.
Disclaimer: This blog and all information in it is provided for general informational purposes only. It does not, and is not intended to, constitute legal or tax advice. You should consult with a qualified legal or tax professional for advice regarding any legal or tax matter and prior to acting (or refraining from acting) on the basis of any information provided on this website.
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