A Guide to Hiring Global Independent Contractors
Global independent contractors allow businesses to access new markets, expand into new territories, and develop new products without the need to hire internally.
A global independent contractor typically resides in a different country from where the business is based. They likely possess local knowledge of the region and can act as a translator or company ambassador for the people hiring them.
Many businesses believe hiring global contractors avoids complex issues around payroll and labor laws that come with hiring employees abroad. However, there are important aspects to consider when engaging with contractors in foreign countries that companies should be aware of such as risks around misclassification.
This guide delves into the pros and cons of hiring independent contractors around the world so that your business can make the right choice.
What is a global independent contractor?
A global independent contractor is someone who works for a business but lives in a country outside of the business base. They can also be known as an international or foreign contractor. The work undertaken by a global independent contractor is controlled and directed by the organization that has paid for the service.
Contractors can be found within most industries and are great for businesses that need to fulfil contracts but don’t have the skillset or budget to do it. For example, a software developer, based in London, could be hired as a global independent contractor by a tech company operating from New York.
Top 5 benefits of hiring a global independent contractor
There are several ways a global independent contractor can benefit a business. Hiring a global independent contractor makes an attractive proposition for organizations as they often bring specific industry knowledge with them that can help with scalability or large-scale contracts where more hands are required. They may also be experts in topics that are unfamiliar to your business, or they could offer support when branching into new geographical markets.
Businesses hire global independent contractors for a variety of reasons including:
1. Greater access to talent
When hiring global independent contractors, you are essentially casting your net further and wider so that you have access to the best global talent available. This will enable you to benefit from their experience of working in other markets and help you tap into new customer bases who may show interest in your products or services.
2. Specific knowledge of new markets
Working with contractors from new countries can help you maximize business opportunities in foreign markets. This can be particularly beneficial to companies looking to take a new or existing product or service into a new market. A contractor based in that country could also be beneficial if there is a language barrier to overcome or knowledge of standard business practices is required.
3. Access to new customer bases
Hiring the right independent contractor could support your expansion plans in a new country by helping to build relationships with foreign customers and suppliers. Their expertise can help businesses better understand how to operate successfully in foreign markets and learn about new products and services. Customers are more likely to engage with a product that is promoted to their cultural expectations, for example. A fresh perspective can be a significant advantage when businesses are developing new ideas and strategies.
4. Increased workforce diversity
By hiring global independent contractors, a business increases diversity in its workforce. Having employees from a variety of countries and cultures will help a business improve its global perspective and knowledge of customers and practices.
This could provide valuable insight into foreign markets ahead of a product launch, for example, and help to build a bond between your business and the local communities they serve. Working with global independent contractors will also increase cultural awareness and understanding among the workforce.
5. More cost-effective
Independent contractors might offer more competitive prices versus fixed employees. A business can also hire an independent contractor for the short term, with their contract expiring upon project completion. For businesses, this offers a more cost-effective solution than hiring employees permanently to oversee a project.
Key considerations when hiring a global independent contractor
A business will expect a global independent contractor to have all the necessary skills, experience, and credentials to do the job expected of them.
However, there are several key considerations for businesses to ensure the hiring process is successful and their needs are met by the contractor. Businesses should review the following considerations and actions:
- Familiarize yourself with the contractor’s insurance and licensing status so your business is protected should the contract end prematurely, or an accident or injury happens.
- Review the contractor’s existing portfolio and compare it against the project you’re looking to hire for.
- Check the contractor has the necessary permits, approvals, and qualifications to legally work in a specific country.
- As with all hiring processes, request and thoroughly check references and seek testimonials from others who may have previously worked with the contractor on various projects.
- Draft a work contract and send it to your legal department for approval before forwarding it to the contractor. The contract should specify the work that’s required, the length of the contract, a payment schedule, any equipment used, and other important details.
- Where possible, meet the contractor in person, or online, to discuss the project you are collaborating on and get to know them better.
Warning signs to look out for
Businesses should always be vigilant when hiring a global independent contractor to protect themselves from potential lawsuits arising from the period of employment and even fraud.
Spotting the warning signs will allow businesses to make informed judgements over whether the contractor is a right fit for them. Red flags to look out for include:
- The request for 100% payments before starting work. A deposit to secure the contractor’s time is common, but the entire payment upfront should be a concern.
- A lack of portfolio representing previous work projects or an unwillingness to provide references.
- References that are too vague and don’t accurately describe the work the contractor is capable of.
- Contractors who begin with a low quote for a project and then attempt to increase the price after starting work.
- Contractors who are not registered with the IRS and do not have legal work permits.
How do you legally hire a global independent contractor?
It is essential to closely follow a country’s labor laws and regulations to ensure compliance is met when legally hiring a global independent contractor. Failure to follow the law could have serious implications for a business including penalties and fines.
You should follow these steps to ensure the process you use for hiring global independent contractors is legal and compliant:
- Be vigilant when checking the contractor is legally allowed to work in the country where they will be performing the work.
- Ensure the contractor fulfils the brief required and has the skills and experience for the role.
- Verify that the contractor has insurance coverage for the specific period that is required.
- Ensure the contractor fully understands the role they are expected to perform, and that communication is open and clear from the outset.
- Keep all records and data of the hiring process of the contractor for at least four years.
What are the misclassification contract risks of hiring global independent contractors?
In the US, hiring a contractor may seem like a quick and easy solution to getting a business representative on the ground in a foreign country. However, it is essential to structure the contract properly and gain legal approval to avoid future ramifications.
A common mistake is a misclassification where a worker is onboarded as a contractor but should have been engaged as an employee under local law. Laws around contractor misclassification are similar all over the world and generally relate to the control a company has over an individual’s performance of the work.
The way a company labels or defines the individual is not relevant, but rather the actual treatment of that individual for work. Therefore, misclassification carries significant repercussions including payment of fees and interest that would have been earned if the individual had been classed as an employee. Other factors such as overtime pay, unemployment insurance contributions and back taxes owed to federal, state, and local authorities could also be relevant.
It is important to note that a written consulting agreement will not necessarily protect a company from a claim for misclassification either. Legal teams will dig deep to understand the nature of the actual working relationship.
When determining whether an individual is an employee or an independent contractor you should ask yourself:
- Is the independent contractor economically dependent on your business?
- Does your company have control over the independent contractor?
If either answer is yes, the following considerations should be factored in:
Is the work specialized?
Independent contractors often provide speciality services for companies who would otherwise have to invest in an employee or employees to carry out the work. In many cases, independent contractors also use their equipment and materials and bear the cost of work-related expenses to save companies from having to make this investment.
What is the length of the project?
Independent contractors are mostly hired for a specific period or until the completion of a project. Unlike employees, independent contractors and the company they were hired by do not have an immediate right to terminate the relationship and sufficient notice must be provided.
Is there flexibility?
Independent contractors mostly work outside the company’s direct control, have flexibility in working hours, and aren’t required to comply with certain company rules that employees must follow. Independent contractors often work outside an organization’s structure and may even have the ability to hire sub-contractors.
How is the contractor paid?
A flat fee based on a project as opposed to an hourly, weekly, or monthly rate is the standard method for compensating independent contractors. This form of payment allows contractors to factor in profits or losses from their work, whereas salaried employees are more protected from these factors.
Paying contractors can be a complex process as different jurisdictions have different tax rules. Many companies turn to a global payment services provider with expertise in multiple countries to ensure they are fully compliant with local payroll and tax requirements.
How independent is the contractor?
As the term suggests, independent contractors are not tied to one business or organization. They are free to work for more than one company at a time and often do. However, you can incorporate language into your contract requiring an independent contractor to comply with your company policies regarding code of conduct, child protection, and other areas of business.
Reach your conclusion
It is important to weigh up the points mentioned above before asking yourself whether an independent contractor will remain outside of your business before you hire them. Where someone is defined as a contractor but treated like an employee your company may be open to a potential misclassification breach.
Employee vs independent contractor distinction
The distinction between employee and contractor differs from country to country. In some countries, a hybrid of the two is in place and US businesses should be aware of these nuances before hiring an independent contractor.
In the UK the hybrid model is called a “worker” and, like contractors, they enjoy flexibility around how they work for a company. The company is not obliged to offer them work and the worker doesn’t have to accept the work, i.e., they work when they so desire. Where the work comes under the supervision of the company, they are likely to be treated as “workers” rather than contractors. Under UK law “workers” are entitled to some but not all employment rights including minimum wage and paid holiday.
Similar hybrid models are active in Canada, Italy, and Spain. In Canada, it is called “dependent contractor” and relates to a worker working for one company only, rather than a contractor who may work for multiple companies. The hybrid status in Italy is co-co-co (continuous and coordinated collaborator) and in Spain, it’s TRADE (Trabajador Autonomo Economicamente Dependiente).
What legal exposure is there for the misclassification of independent contractors?
Misclassifying employees or workers as independent contractors could have severe legal and financial implications for a business. Penalties for independent contractor misclassification include imprisonment, while other companies have been hit with record fines.
The legal exposure for misclassifying employees covers:
Liability relates to the individual’s rights, entitlement, and protection under local employment law. This involves:
- Minimum wage, overtime payments, and other factors such as social security benefits.
- Termination or statutory severance pay which is available to employees in most foreign countries.
In many countries, it is possible to pay for the required or negotiated amount to individuals in exchange for a release of claims.
Liability relating to the government is also a key consideration for businesses hiring independent contractors. This involves:
- Failure to withhold payroll taxes.
- Failure to make necessary social security contributions.
The only way to address liabilities owed to the government is by self-reporting and paying overdue taxes and social contributions. Avoiding government liability is never a good idea. Failure to self-report may provide short-term relief but it may have long-term implications, particularly where these liabilities are highlighted in the process of a company acquisition, for example.
What are the local laws for hiring independent contractors?
A US company that has been thorough in its investigation and fully understands the legalities around hiring independent contractors may be satisfied it is ready to recruit. However, many countries outside the US have unique requirements regarding contractors:
|Contractor registration||Canada, Brazil, France, Israel|
|Tax withholding, social security, VAT||Canada, Japan, European Union|
|Commercial agents’ directive around termination compensation||European Union|
|Zero independent contractor recognition||China|
What tax implications are there for US businesses hiring independent contractors?
US companies that hire non-US contractors should make adjustments to their standard independent contractor agreement process to comply with tax requirements. The contract should account for all the complexities of hiring independent contractors in that location. Failing to do this could result in substantial fines and damages to the hiring company.
These adjustments should include language that addresses the following topics:
Clearly state that the contractor is not authorized to make any representation on behalf of the company so that the risk of corporate tax exposure is minimized. This also includes the drawing up of contracts by the contractor.
Ensure the contractor is responsible for their income tax, social security contributions and tax reporting obligations. This method of tax reporting is standard practice for most US businesses hiring non-US contractors.
Non-US companies should use a local independent contractor agreement to ensure local tax laws are addressed and the company’s interests are protected.
What about independent contractor non-compliance?
Hiring non-US independent contractors offers an attractive shortcut around payroll, benefits, employment laws and tax requirements. This is particularly beneficial when a business has no local entity or corporate presence in a foreign country.
However, there are risks involved around compliance and independent contractor status that often end up in global courts. Penalties for non-compliance and worker misclassifications are stiff in the US and often more severe abroad. To minimize the risk and remain compliant when hiring independent contractors, businesses should adhere to all federal, state, and government agency laws.
Our global experts will support your expansion plans
Do you need support with hiring global independent contractors? At IRIS FMP, we support businesses across the globe when it comes to payroll processes for independent contractors. Speak to one of the team to see how we can help you. Contact us now.