A gradual shift is occurring in the business world where companies are choosing to access skilled talent in other countries. Instead, they hire them either as regular employees or remote independent contractors. There are obvious benefits when a company engages an independent contractor. It saves them the time and expense of hiring overseas workers as formal employees.
The independent contractor is technically self-employed, and usually responsible for all of their local tax withholding, social contributions and other business registration steps. This is fairly straightforward when hiring a contractor in your home country as the rules will be well known. However, a few hurdles may be encountered when hiring contractors overseas.
If your company is considering hiring remote contractors, it may not be as simple as it first appears. While the talent search and recruitment process can be conducted with no complications, once a remote contractor is engaged there are local compliance issues in their country to overcome. This is true whether the contractor is a resident of a foreign country or an ex-pat choosing to work abroad.
4 Things to Consider Before Hiring and Paying Remote Contractors
Before a company takes the step of hiring a remote contractor, there are a few primary concerns to address. These factors could affect the outcome and success of the engagement. They include:
1. Contractor vs. Employee Definition
Every country sets its guidelines on worker classification, either as an employee or contractor. These rules often revolve around control of the worker’s schedule and methods, as well as how payment is structured. If you treat a contractor just like another employee, there is a risk of misclassification in a foreign location.
2. Contracts, Non-disclosure Agreements, Service Agreements
The written contract between your company and the contractor will determine how projects and payments are carried out. In general, contracts will be interpreted and enforced according to the laws of the worker’s home country. This applies to NDAs and non-competes, which may not afford the same IP or data protection as your home country, and are often not subject to cross-border enforcement.
3. Currency and Exchange Rates
It is crucial to arrive at an agreement on which currency will be used for contractor payment. This is because fluctuations in rates can affect the overall payout. One good practice is to include a percentage cap on rate fluctuations if the contract currency is different from your home currency.
4. Local Regulations
Some countries have restrictions on contractors, for example in China, independent contractors are not allowed at all. Also, contractors should meet local self-employment standards and filing requirements. Expats should have some type of work/stay permission according to immigration rules.
How to Employ and Pay a Contractor
There are a few options when it comes to hiring and paying remote contractors. The choice will depend on how a company evaluates the risk of non-performance or non-compliance, and whether the contractor prefers to use a third party to handle their invoicing and payment tasks.
Direct Contractor – Client Engagement
If your company has an existing relationship with a contractor, then a direct engagement is possible with no third-party involvement. This method is going to require some measure of trust and goodwill to avoid disagreements overpayment and performance. Simply, a contract is signed, the contractor invoices the company and payments are remitted to platforms like Paypal or Wise with no additional cost (save transfer fees).
The downside is any failure in payment/performance could lead to conflict or termination of the engagement, with no third party to mediate.
Payment and Invoice (P&I) Services
P&I services handle the invoicing and payment process for the company and contractor, and at least offer some oversight and confirmation steps that a direct engagement can lack. They can also provide sample contracts, tax forms and automated payment channels. There is a fee for the service, but it does relieve some of the payment/contract risks without acting as a true legal intermediary.
A more complete third-party solution is the use of an umbrella company, and a contractor may even suggest this to you before engagement. The umbrella company is an intermediary between the company and the contractor (or their agency). They ensure the following are met
- Performance satisfaction
- Timely payments
- Local compliance for the contractor, such as tax withholding or work permits when required.
The umbrella company fills most administrative roles like an ‘employer’ while still allowing the contractor their independence.
This is an excellent solution for new contractor relationships, or where the contractor does not want to handle their own invoicing and local compliance tasks. It does fall short of an employment relationship but offers contract assurance to both parties for a nominal fee.
Global Employment Organization (GEO) Service Provider
To completely minimize cross-border hiring risk, some companies choose to forego the contractor option altogether. In this case, they will hire the worker as an employee using a GEO provider. The worker is hired as an employee in their own country using a local employer of record. The EOR will handle all aspects of payroll, compliance and employment regulations on behalf of the hiring company for a fee. This fee is usually based on a percentage of the employee’s compensation.
This is a viable alternative to assuming the risk of directly hiring a contractor or the expense of setting up a full local entity solely for employment purposes. Some contractors, however, may resist being hired as an employee if they are more comfortable with the autonomy and potential tax advantages of self-employment.
Risks to Assess When Hiring and Paying Remote Contractors
Although most companies consider a contract or arrangement to be an arms-length service agreement, that may not always be the case depending on the contractor’s work location, worker misclassification rules and the duration of service. Many of these risks can be mitigated by using one of the third-party solutions mentioned above.
Non-tax Compliance if the Contractor Doesn’t Pay Their Taxes
A contractor may avoid filing and paying taxes, especially if payment is occurring outside normal banking channels. This can come back on the employer if the contractor is reclassified as an employee at some point, or if the country has rules about withholding for local contractors.
Local Authorities Deem the Contractor as an Employee
If the contractor is deemed an employee by their own country’s labour laws (or unqualified to be self-employed), there are implications for the company that hired them. Among those required are employer social security contributions, failure to comply with local HR benefits and employee rights, and an increased risk of permanent establishment and corporate taxation.
Length of Contract
The length of a contractor engagement is also a factor for ex-pats, like any contract/stay in a foreign country could lead to tax residency for the worker (usually 183 days in a year). This in turn leads to a filing and withholding requirement in addition to obligations in the expat’s home country.
In general, the longer an engagement and the more regular the payments (e.g. monthly like a salary), the greater likelihood that any worker could be viewed as an employee or at the very least subject to local tax liability.
How a company engages and manages a remote independent contractor does carry implications for the hiring company. Because of this, options and solutions should be carefully reviewed ahead of time. A contractor may be willing to operate somewhat outside of compliance boundaries as long as they get paid. However, the company has to consider how to minimize any risk involved with hiring foreign talent.
If you have questions about hiring and paying remote contractors or concerns outlined in this guide, please contact Contractor Taxation for further guidance.