Tech startups have to balance the need for specialized workers with the overall cost of hiring. Initially, using contractors is one way to control costs until the company begins to grow. There are also other advantages to hiring contractors that reside in other countries, and who have the skillset that you need. But that will require more effort than hiring domestic contractors, as you prepare for cross-border hiring.
What are the advantages of hiring contractors abroad?
With the increase in remote work in the tech industry, you may have already been thinking about recruiting abroad. If you find the right person, they may expect to be hired as a remote employee, but that brings complexity to a foreign country. Hiring the worker as a contractor instead has many advantages including:
- Lower cost: No employment-related costs in the host country, such as social contributions and benefits.
- Project-based: Can be hired for one or more projects as your needs fluctuate.
- Can scale up or down easily: If you start to grow you can add more time or contractors for specific positions, or reduce staff if needed.
- No long-term commitment: The contractor is only engaged for the term of the contract or project, with no other obligations.
- A good way to have a trial period before employment: Even if you want to hire an employee, engaging them as a contractor at first will allow you to evaluate performance risk-free.
- Diverse skill sets by region: You are not limited geographically and can hire from countries that emphasise STEM skill training.
These are the reasons that a tech startup would use contractors, and the next question is how to go about it.
What are the necessary steps to hire a contractor?
If you do decide to hire a foreign contractor, there are several steps to follow:
- Recruitment/interview: This is similar to any worker, but time zone differences and connectivity have to be considered for interviews.
- Establish pay levels for the position: Compensation will depend on experience and skill level, but pay levels can be ‘localized’ to consider what is typical in the contractor’s country.
- Setup a contract with clear payment and performance terms: Although contract enforcement is difficult across borders, it is still recommended to avoid misunderstandings and create clarity.
- Use milestones initially to evaluate performance: Because of the contract issue, at first, you will want to set up shorter milestones until goodwill is established.
- Select a payment/remittance system: Finally, you will have to arrive at a payment method that works for the contractor in their own country. There are several good international payment services available at a reasonable cost.
How does a tech startup pay an international contractor?
Self-employed freelancer
Most contractors will be set up as self-employed, so you will contract with them directly. Once you decide upon a payment method, you will remit the amount invoiced when all milestones are reached. It’s very straightforward as long as your contractor delivers as expected.
Very experienced contractors will have their own limited company, which is registered in their country. The invoicing and payment will be with the limited company, which does offer more certainty in the contractor’s viability. The limited company is regulated by the business laws in the host country, with more accountability than a freelancer.
A final option is where the contractor uses an umbrella company in their locale that acts as an intermediary to the contract. The umbrella company will confirm performance, facilitate payment and withhold taxes for the contractor. Your company would remit payment directly to the umbrella company for disbursement upon your approval.
What are the challenges with hiring international contractors for a tech startup?
Hiring contractors overseas does present some challenges for a company including:
Misclassification
Because of the advantages of hiring contractors, companies will opt to not hire full-time employees. However, if the company still treats a contractor like an employee, they run the risk of misclassification. Each country has their criteria for the employee relationship, such as control of time and work schedule or paying a fixed salary with benefits.
If your contractor is misclassified, you would have to give them employee status to retain their services. For this reason, it pays to ensure your contractor is set up as truly self-employed and works independently. If they talk about benefits or job stability during an interview that would be a red flag.
IP risk
Tech companies are especially concerned about security and the use of intellectual property. This risk is magnified when a worker lives abroad and is not subject to the IP laws in your country. Non-disclosure agreements can hedge this risk, but enforcement is highly unlikely if the contractor misuses your IP. This underscores the need for a full vetting of recruits before hiring for roles that handle sensitive IP.
Language and cultural barriers
While some countries have skilled tech workers, you will have to overcome any language or cultural barriers. It is worth considering which countries you will target for recruitment to minimize this issue.
Time zone differences
If your company is not used to navigating time zone differences in a working group, it may require some flexibility on both ends. One option is to hire in your region, for example, Latin America for a US company, or Asia if you are based in Singapore.
How does Contractor Taxation help with hiring contractors for a tech startup?
Contractor Taxation has a global network of umbrella companies that can assist you with hiring and paying contractors in any country. Once recruitment is complete, we can step in and facilitate the onboarding process, contracts and payments. This removes much of the uncertainty with hiring a new contractor abroad and gives both parties peace of mind.
Please contact us for assistance with hiring your new international contractor.
