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Hiring Independent Contractors vs Employees: A Guide for Overseas Employers

Multinational companies with business activity in foreign markets need to assess how to efficiently hire and manage staff in other jurisdictions.  For companies that are considering outsourcing the employment of these foreign workers, there are two primary choices available: hiring independent contractors or hiring employees administered by a GEO. 

Each has advantages and disadvantages that can influence this decision, depending on the kind of relationship that is most beneficial to meet business objectives while reducing compliance risks. Additionally, the regulations of the host and home country need to be considered as they may approach employee classification differently.

Advantages & Disadvantages of Hiring an Independent Contractor

If a company hires independent contractors there are certain advantages: 

Reducing the risk of permanent establishment: Since an independent contractor is not strictly under the control of the company, there is less chance of establishing a ‘business presence’ through their activities.  Otherwise, certain tax liabilities could be triggered through the local rules on permanent establishment. 

Reduces compliance problems with local employment laws:  If the independent contractor uses a management firm or umbrella company, the company is insulated if there are any issues that arise with compliance. 

Low administrative burden:  The company does not have to use its own resources for understanding and meeting local requirements, such as payroll, tax withholding, and statutory benefits.

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The disadvantages of using independent contractors include: 

No employee relationship:  The worker has no rights or duties as with a formal employee and is only required to fulfill the terms of the independent contractor contract.  There is less control over the daily activities of an IC, so contract deliverables must be clearly specified.  When the contract is concluded, the work relationship ends. 

Risk that an employee relationship might be established:  Every country’s tax authorities have their own definition of the employee relationship, and an independent contractor might be found to have employee status regardless of steps taken to create separation. 

If the independent contractor is classified as an employee, there is a risk of unexpected liabilities:  There are tax liabilities and payroll compliance requirements for employees, so if the independent contractor is misclassified the company could face paying unexpected tax and benefit amounts.  For this reason, it is recommended to pay an independent contractor through a third party intermediary, to reduce the risk of tax and business non-compliance.  Even if the independent contractor is self-employed, their failure to comply with these rules could create delays or unexpected costs. 

Given these points, the independent contractor relationship might be preferable for a company that has a need for temporary skilled workers and does not want to use any in house resources for running payroll abroad.  The only caveats are to ensure that they are engaged in a true independent contractor relationship and the independent contractor has adequate self-employment compliance documentation.

Advantages & Disadvantages of Hiring an Employee Through a GEO 

When a company uses a Global Employment Organization (GEO) to provide outsourced employment services, the GEO is responsible for all aspects of employment and payroll administration.  There are obvious advantages for the expanding multinational company in utilizing a GEO: 

Assurance of compliance with local laws and regulations:  Because the GEO uses experienced local partners to meet all compliance requirements, there is never a question of whether any steps or procedures have been overlooked. 

The employee maintains their substantive employment relationship:  Although the GEO is the employer of record for the employee, the work activity, salary and benefits are all at the discretion of the company.  This allows human resources departments to focus on the employee management and performance criteria, while the GEO handles the complex administrative processes. 

Withholdings for taxes and social security are taken care of:  The GEO will administer the payroll for the employee, including withholding of all taxes and statutory payments such as social security.  The GEO can stay abreast of any regulatory changes and respond quickly to ensure that the employee is in full local compliance. 

Offers a cost-efficient and rapid deployment of employees into a new market:  The GEO employee can enter a new market quickly and efficiently while maintaining the work relationship with the company.  This is in contrast to the independent contractor solution, which offers no continuity of service from the worker and is contracted for a finite time frame or work deliverable.

There are some disadvantages of outsourcing employment with a GEO including: 

Risk of permanent establishment:  Although the GEO is the legal employer of record, in some foreign countries there may still be a risk of triggering permanent establishment, and the accompanying tax liability.  This is especially true in host countries that do not have tax treaties with the company’s home country, and can use strict local tax laws to define PE.  There is an expansion of PE definitions in many global markets to include agency relationships, and each country should be researched thoroughly to learn their specific criteria for PE. 

Human resources still need to manage and administer some employment aspects:  Issues such as salary, raises, requests for leave, and performance reviews will still be handled by the company’s HR department, as the GEO is only responsible for payroll and local employment compliance tasks. 

Depending on the exact nature of the GEO employee solution used, there can be advantages for both employee and employer under this approach.  The obvious positive element is the continuity of the employee relationship with the company, which offers the employee job security and benefits even while on foreign assignment.  The fact that the GEO handles the primary local employment and payroll issues relieves HR of this burden, which can have compounded value when a company is expanding into multiple markets.

Hiring Employees vs Independent Contractors: Which is best?

The decision to staff a foreign office with either independent contractors or GEO employees will depend on many factors including the scope of business activities, availability of current employees, confidence in outsourced employment tasks, and future expansion plans.  However, using either independent contractors or GEO employees offers a unique solution to the full office approach that requires significant company resources to initiate and manage in the host country. 

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