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Should You Hire an Independent Contractor to Work for Your Company Overseas?

If your company is expanding abroad or you are recruiting skilled talent in other countries, one of your options is to hire independent contractors rather than employees.  This can be an attractive alternative for many reasons, and is a viable way for a company to access the global marketplace.

But there is a difference when hiring in a foreign country, so before you take the step of hiring a contractor instead of an employee, take the time to consider the following questions:

Are you filling a long term position or just need a project completed?

Will the work be ‘hands-on’ in the country, or performed remotely?

Have you hired contractors before and understand how to structure the work to avoid misclassification risks?

Does the worker want to be a contractor, or is this being driven by your company’s preference?

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Deciding Between Full-Time Employees and Independent Contractors

There are two primary areas to evaluate before deciding whether to hire a full-time employee or a contractor:

1. Consider your business needs

Hiring a contractor can be the perfect business solution in certain circumstances.  Short term projects, sales work or remote teams can all be effectively staffed with contractors.  However, trying to fill a typical employee role with a contractor may not be beneficial, especially if you want to gain worker loyalty and retain their skill set long term.

2. Identify the legal differences between contractors and employees

It is essential to know the legal definition and criteria for contractors in the foreign location.  While many countries have similar standards, in some cases classification will vary and the enforcement of these rules may be strict.  In general, classification depends on the allocation of the workers time and methods to determine if they are contractors or employees.

The reason for these rules is that when companies hire contractors instead of employees, they avoid the need to comply with labor laws and provide other employee benefits, which some countries value highly as worker’s rights.  You also have to be careful when hiring local contractors, who may want to be employees and could file a complaint if that does not happen as they expect.

The Benefits of Hiring an Independent Contractor Overseas

There are some real advantages for companies that hire contractors overseas instead of employees.

Flexibility / Low Commitment

You can hire a contractor for a single project or short time period, with no obligation after completion.  They can be re-hired when needed, depending on availability.

Lower Cost

Contractors are paid only for their time and work product, and the company does not provide benefits or other statutory contributions as with employees.

Can Hire Quickly

After recruitment, a contractor can be hired as soon as an agreement is in place, without delays for registration, setting up payroll and other employee onboarding steps.

Access to Skill Sets that Match Specific Projects/Roles

You can find contractors that fill a void in a project or with skills you need, and you don’t have to evaluate their overall value as employees.

No Need to Comply with Local Labor or Employment Laws

An independent contractor is self-employed, and viewed as a business entity.  This means that labor and employment laws do not apply, and your company does not have to worry about compliance, setting up a legal entity or running a local payroll.

The Downsides to Hiring Independent Contractors Overseas

Despite the obvious benefits, there are potential downsides to be aware of when hiring contractors in foreign countries.

Setting Rates: Hourly vs. Project Based

When setting contractor rates, you will have to arrive at some way of verifying time worked or else performance.  Also, there is the issue of whether the rates are set based on the local economy or that of your own country.

Lack of Control and Accountability

Its hard enough to manage employees in foreign locations, and that difficulty is exacerbated with contractors who set their own hours and methods.

Low Company Loyalty

Contractors hired part-time will often have more than one client, and once your project is complete they will move on to the next one and may not be available at a later date.

Misclassification

This is probably the biggest downside when hiring contractors overseas, since you will be subject to the classification laws of that country, as well as enforcement.  Many countries are stepping up their scrutiny of contractors, especially with several high profile legal cases brought by unhappy contractors who claim they are being treated like employees, but without the benefits.

Misclassification of an Independent Contractor

Misclassification is the central risk in hiring a contractor overseas, and there are very real consequences that come into play as a consequence.  The potential costs of misclassification include:

  • Back wages and overtime pay
  • Unemployment insurance contributions
  • Employment taxes and social contributions
  • Penalties and fines in the case of fraud

In addition, if a contractor is reclassified as an employee, your company will need to find a way to run payroll and meet all of the employment regulations around benefits, leave, social contributions and tax withholding. 

Checklist: Before You Hire an Independent Contractor

Here is a quick checklist to use before you hire a contractor:

  1. Know how the contractor’s country defines ‘contractor’ and ‘employee’ and be wary of turning independent contractors into employees by mistake.
  2. Determine whether your business needs to report or withhold tax on payments made to independent contractors, and know the tax implications for the independent contractor.
  3. Learn the nuances of local tax reporting laws related to independent contractors.
  4. Prepare a thorough contractor agreement that meets the legal requirements of the country where the work is being performed.
  5. Consider and identify the best way for you to pay your independent contractor, as well as the currency.

Shield GEO Solution

If you are still wondering how to make the choice between a contractor and employee, there is a third alternative that can eliminate the risk of misclassification and engage the worker more closely with your company.  Shield GEO can offer you the solution of using our employer of record that is already set up in the country.  Our local, corporate entity can employ your worker quickly and legally as well as run payroll, make withholdings and administer the entire scope of employment tasks.

If you are going to the effort of recruiting foreign-based workers, you will want to make sure that you are in full compliance with those local laws, and can avoid any problems with authorities.  We can make the formal employment of your contractors simple and cost-effective, with the flexibility for both short and long term engagements.

 Need more information about employing in a new country? Learn more about:

Looking to Hire an Employee Overseas? Get in Touch.

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