What is a pay-as-you-go (PAYG) contractor?

Pay-as-you-go (PAYG) contractors are businesses or individuals who provide services to clients on a pay-as-you-go basis. This means that the contractor charges for their services according to the number of hours worked, rather than in advance or after the work is completed.

Not sure if you should bring on your next all-star as a contractor or employee? Wondering if you need to convert an existing contractor to full-time employment? Find out using our Contractor vs. Full-Time Analyzer.

PAYG contractors are typically used for short-term projects or one-time tasks, as they offer flexibility and can be more cost-effective than hiring a full-time employee.

How PAYG contractor arrangements work

A pay-as-you-go (PAYG) contractor charges clients based on actual hours worked rather than fixed fees or retainers.

Here's how the process works:

• Time tracking: The contractor logs hours worked (daily or weekly)

• Invoice submission: Regular invoices are sent based on tracked time

• Payment processing: You pay only for work actually performed

This model offers great flexibility for scaling contractor hours up or down based on your needs.

What are the benefits of PAYG contractors?

So, what makes PAYG arrangements appealing for both sides?

For employers:

• Cost control: Pay only for work completed, not idle time

• Flexibility: Scale team capacity up or down as needed

• Lower overhead: No benefits, equipment, or office space costs

For contractors:

• Work autonomy: Choose projects and working hours

• Rate transparency: Clear hourly compensation

• Multiple income streams: Work with several clients simultaneously

Keep in mind that PAYG arrangements don't provide the job security or benefits of full-time employment.

PAYG contractor requirements and setup

Setting up a compliant PAYG arrangement starts with a solid contract that protects your business.

Essential contract elements:

• Scope of work: Specific deliverables and project boundaries

• Payment terms: Hourly rate and invoicing schedule

• Intellectual property: Ownership and usage rights

• Timeline: Project duration and key milestones

Contractor independence requirements:

• Use their own tools and equipment

• Control how and when work gets done

• Maintain multiple client relationships

Tax and compliance considerations for PAYG contractors

What are the main compliance risks with PAYG contractors? The biggest concern is worker misclassification.

Misclassification consequences:

• Financial penalties and fines

• Back taxes and benefit liabilities

• Legal exposure and audits

Key compliance principle: The less control you exert over how, when, and where work gets done, the stronger your contractor classification.

Tax responsibilities:

• Contractors: Handle their own tax withholding and payments

• Employers: Report payments over $600 (in the US) but don't withhold taxes

Converting PAYG contractors to full-time employees

Hiring contractors may seem like a simple way to scale your team quickly. But if a contractor actually operates like an employee, your company could be exposed to various legal, financial, and operational risks.

Not to worry. Oyster's contractor conversion solution can help you assess your risks in different countries, weigh the costs and benefits of both employment models, and compliantly transition contractors to full-time employment.

Simplify global contractor management with Oyster

Pay-as-you-go contractors offer a flexible way to access specialized talent and scale your team. But managing contracts, payments, and compliance across different countries can quickly become complex. You need a system that simplifies operations while protecting your business from risk.

Oyster's Contractor Management platform helps you create locally compliant contracts, streamline invoices, and pay contractors on time in over 120 currencies—all from one dashboard. We give you the tools to engage global talent with confidence, so you can focus on building your business. Ready to see how it works? Start hiring globally.

FAQs

How much can I pay a contractor without filing a 1099?

In the US, you must file Form 1099-NEC for contractors paid $600 or more annually. Consult a tax professional for specific compliance guidance.

What do most PAYG contractors charge per hour?

PAYG contractor rates typically range from $50-$150+ per hour, depending on industry, experience, and skill complexity. Research local market rates for your specific role requirements.

How does a PAYG contract work in practice?

The contractor tracks hours worked, submits invoices based on agreed scheduling (weekly/monthly), and receives payment for actual time spent. All terms are defined upfront in the contract.