International Contractor or Employee? How to Make the Right Decision.

January 31, 2018

As your company expands internationally, you’ll be confronted with the same dilemma that many businesses face: how to the hire the best talent in a foreign market. This will, in turn, bring up a number of related questions.

Is it best to hire a candidate as a contractor or as a full-time employee? What are the payroll and tax implications for  these options? Which choice will be easier to navigate without establishing a foreign business entity? Which might serve my company better overall in the long run?

Before wading into these waters, it is worth defining when a worker is considered a contractor vs. an employee. The categories are typically broken down as follows.

Contractors:

  • Hired on a short-term basis, often less than six months
  • Work on a project-to-project timeline
  • Often manage their own portfolio of clients, your company being one of them
  • Don’t receive benefits and are responsible for filing their own taxes

Employees:

  • Hired on a permanent or long-term basis of more than six months
  • Work full-time (or sometimes part-time) exclusively for one company
  • Follow closer managerial direction from the employer
  • Receive social benefits, with the employer being responsible for withholding taxes

As you move forward in this international hiring process, keeping these distinctions in mind will be crucial. Different jurisdictions around the globe have a range of legal protections in place for workers, and some are much more stringent than the US in the how workers are classified.  It’s possible to run afoul with local labor compliance regulations if you aren’t careful.

Let’s say that you’ve found a candidate who is and ideal fit in the country you’re hoping to do business in. You might not want to establish a business entity in that country, or at least not yet, so it might seem like the obvious next step would be to set them up as a self-employed contractor.

There are a number reasons why hiring a worker as a contractor might be the best choice:

  • It can be easier to hire an international worker as a contractor because you may be able bring them aboard more quickly than a full-time employee. This can be especially beneficial in shorter-term projects, when wading through local labor bureaucracy may not worth the time or effort.
  • Payments to contractors are simpler as they are responsible for paying their own income taxes.
  • You often may not need to establish a business entity in the foreign country, thus avoiding months of expensive lawyers, tax accountants, and business filings.
  • Contractor agreements can be set for a short duration so if the person doesn’t turn out to be a good fit, there is no expensive or time consuming termination process.
  • Hiring contractors can save you money in many ways. Though they may charge more on an hourly basis, companies can look forward to cutting overall costs by taking this route, as they aren’t responsible for paying into a worker’s pension, healthcare, social security or other entitlements.
  • Many contractors tend to be highly qualified in their fields, too, with years of experience already under their belts, so there may not be a need for an intensive training process. Tangible expenses like office space or equipment can also be avoided.

However, as expected, there are many risks to hiring a contractor if done incorrectly:

  • If you classify a work as a contractor inappropriately, you may be at risk of unwittingly evading local labor compliance regulations and payroll taxes, which can set off a chain of fines and penalties.
  • Due to the fact that contractors are much more autonomous than traditional employees, even if they are operating through a third-party agency, there is generally less direct oversight and possibly less control over the standards of work quality.
  • The very best candidates for a new hire are often in a position of choosing between leaving the significant security and benefits of a full-time position at another company and becoming a self-employed contractor with yours. Even if they are excited about your project and the new freedoms that becoming a contractor might provide, there are definite drawbacks for them joining your team in this way.
  • In many jurisdictions, the only thing that matters is the work being performed, not what is stipulated in a written contract. A 2007 case in the U.K. (Ministry of Defense v. Kettle) ruled that employment tribunals must examine the realities of a given job and look beyond the boundaries of any written agreement. That same year, in both Peru and Spain, court rulings determined that contractors working for only one employer will be automatically deemed employees. In many countries, if a worker is indeed proven to be misclassified in court, the employer will then be responsible for paying all income withholdings, payroll back taxes and employee benefits, as well as any potential related fees or penalties.

Without appropriate guidance, the risks of hiring a worker as a contractor can outweigh the potential benefits. Clearfront HR can help guide your business through the international contractor vs. employee classification process.  We can manage the complexities of international HR for you. Get in touch and let us know more about your international hiring needs.