With the rise of the “gig economy” – in the US alone, 36% of all employees (59 million people!) were gig workers in 2021 – and the proliferation of remote work, independent contractors represent an ever-growing portion of the workforce.
On one hand, hiring independent contractors – especially abroad – has never been easier, with job boards like Indeed and LinkedIn giving businesses access to the best talent in the world. On the other hand, many companies don’t realize the complexities and risks of hiring freelancers overseas.
This article details the pros and cons of hiring independent contractors worldwide, which steps need to be taken to hire independent contractors, the legal aspects of hiring freelancers in different countries, how to classify independent contractors correctly, and more.
Why do companies hire contractors instead of employees?
An independent contractor is a self-employed individual hired to provide specific services as a non-employee. Hiring independent contractors can be a fast, economical, and effective option, especially nowadays, when companies can tap into an international talent pool.
While some of the differences between independent contractors and employees are stark, others are quite subtle – which means that, at times, determining whether someone should be classified as a freelancer might be challenging.
When in doubt, these factors will help you determine if a worker qualifies as an independent contractor:
- Equipment and tools. Employees receive everything they need (office space, computer, different types of software, work supplies) to do their job; contractors use their tools and equipment and are not entitled to reimbursements for expenses such as phone and internet costs, software licensing fees, and so on.
- Schedules. While employees work according to the company schedule, which often includes mandatory meetings and extracurricular activities, independent freelancers control their schedules and set their hours.
- Training. Employees receive onboarding and necessary training from the employer; contractors possess the skills and expertise needed to complete their tasks and usually only need to be briefed.
- Supervision. While employees are supervised by managers, independent contractors determine their work process and are subject to minimal supervision.
What are the pros and cons of hiring independent contractors?
The main benefits of hiring an independent contractor are:
- Hiring contractors is more cost-effective, as they are not entitled to employee benefits such as health insurance, compensation insurance, unemployment compensation, insurance coverage, and paid time off.
- With fewer legal hurdles to overcome, hiring an independent contractor is quicker and easier than onboarding a new employee.
- Greater staffing flexibility: you can end the relationship with an independent contractor quickly, without the paperwork and legal ramifications of firing an employee. Since contractors usually work on projects, they typically have deadlines that are agreed upon by both sides.
- Increased productivity: independent contractors are usually very skilled and don’t require training or resources to perform their tasks.
- Access to the world’s best talent pool.
The main drawbacks of hiring an independent contractor are:
- Lack of Control. While employees’ work can be closely supervised, hiring contractors means relinquishing control over how the job is done.
- Availability issues. As independent freelancers often work with several companies, they won’t always be available when you need them.
- Worker misclassification. Laws regarding contractor classification vary among countries, and misclassifying employees as independent contractors can expose employers to investigations, sanctions, and compensation lawsuits.
How to hire independent contractors
The following steps will ensure a smooth hiring process:
- Evaluate your business needs. The first step is deciding whether your business needs will be best met by hiring an independent contractor or onboarding an employee. If the best option is hiring an independent contractor, you’ll need to list the requirements the freelancer will need and calculate the cost to the company.
- Recruit the contractor. After writing a detailed job description based on the requirements, you’ll need to find the right contractor. One option is to use headhunters or recruitment agencies, which source talent and earn a commission on what companies pay contractors in the first year.
Another option would be to hire contractors via freelancing websites such as Upwork, Fiverr, Freelancer.com, and Toptal. An increasing number of companies prefer this method, which is generally the cheapest and quickest.
Some fields are more suitable than others for independent contractors; web designers, web developers, graphic designers, and copywriters are always in demand, as there is no shortage of projects for workers in these fields.
The toughest fields to hire in, according to Upwork’s latest Future Workforce Report, a representative survey of 1,000 US hiring managers, are Data Science and Analytics, Architecture and Engineering, and IT & Networking.
- Create an independent contractor agreement. An independent contractor agreement is a legally binding document that lays out the terms of an independent contractor’s work. It establishes clear expectations by covering the scope of the work, obligations, deadlines, and payment. In addition, it affirms that the client and contractor are not in an employer-employee relationship.
- Ensure compliance with local laws. Depending on where the independent contractor is based, your independent contractor agreement must adhere to local employment laws. Note that these laws are updated regularly in many countries, so you’ll have to stay on top of them.
- File the correct tax forms. In the US, for example, you’ll need to file IRS Form 1099-NEC if your company hired local contractors (also known as a 1099 employee) who earned more than $600 within a year. This form must be filled out for each contractor and filed by January 31 (for the previous tax year).
In addition, you’ll need to collect tax information – name, address, and social security number or tax identification number – from US-based contractors via IRS Form W-9. Since Form W-9 is only a prerequisite for filling out Form 1099-NEC, it doesn’t need to be submitted to the IRS.
If a US company uses the services of foreign contractors, it doesn’t need to issue them a 1099-NEC form, as they don’t pay taxes to the US. However, the company does need to collect Form W-8 BEN – the equivalent of Form W-9 for foreign contractors – from each international contractor. Form W-8 BEN certifies that the contractor is not a US citizen and doesn’t need to be submitted to the IRS.
Also, note that submitting form 1099 might require also submitting form 1096. This is because it serves as a cover sheet for all the information returns they are filing with the IRS. It summarizes the total number of returns and the total amount reported. Information returns are processed more efficiently this way, and the company is able to keep records more efficiently.
- Manage the work and paperwork of the contractor. While the department that recruited the independent contractor is responsible for managing the contracted deliverables, it’s the finance team’s job to manage the administration of the contract. This includes gathering the necessary personal information and ensuring that the contractor is paid according to the specified terms.
What are the legal aspects of hiring contractors in different countries?
Finding and hiring independent contractors abroad is easier than ever, but being legally compliant globally is not, as every country has its employment rules and regulations. Here are some of the legal aspects of hiring freelancers in different countries:
- National labor laws. Companies that hire independent contractors abroad must navigate local labor laws country by country. In the UK, for example, companies that hire contractors must follow off-payroll working rules (IR35). You may also be required to pay a consumption tax (e.g., sales tax, goods and services tax, and value-added tax) on the contractor’s invoices.
It’s important to remember that labor laws differ between states or provinces in some countries. In Canada, for instance, all labor legislation comes under provincial law.
- Employment protection legislation. While there are common areas to consider (race, age, religion, sexual orientation, gender expression), every country emphasizes different protections. In Australia, for example, independent contractors are protected from adverse action, which means a business cannot terminate a contract with an independent contractor because they complain to a regulator about their workplace rights.
- Public holidays. Independent contractors are not entitled to statutory holiday pay. Still, local holidays must be considered if the independent contractor agreement states, for instance, that the services will be delivered within X working days.
- Personal time off (PTO). In most countries, independent contractors are not eligible for PTO. But there are some exceptions. In Spain, for example, an independent contractor who devotes 75% of his working hours to one client is entitled to 18 days of annual leave.
- Minimum wage. Independent contractors are not subject to minimum wage laws.
- Overtime pay. Independent contractors do not receive overtime pay. However, it is recommended to address the maximum number of hours in a working day in the independent contractor agreement.
- Employee benefits. Independent contractors are not entitled to employee benefits such as health insurance, a pension plan, insurance coverage, or any other perks the employer provides.
- Compliance with local tax authorities. Countries choose different date ranges to determine their tax years. Companies that hire independent contractors abroad must be aware of that when they report annual earnings for their contractors. For example: while in the US, the tax year runs from January 1 to December 31, in the UK, it runs from April 6 to April 5, and in Australia from July 1 to June 30.
- Currency. An independent contractor agreement needs to specify in what currency the contractor will be paid.
- Types of leave. Businesses that hire independent contractors abroad may need to comply with national policies on maternity/paternity leave, medical leave, bereavement leave, and so on.
- Contract deliverable. The definition of contract deliverables, and their relation to the issue of subordination, might be reflected in the local labor law. South Africa’s common law, for instance, states that independent contractors are answerable only to the contracted deliverables – and not to the employer.
- Length of contract. Contracts exceeding a certain length of time may be classified as employment contracts. In the US, for example, the duration of an independent contractor agreement is usually limited and defined by the length of the specific project for which the contractor is hired.
- Working hours. Local labor laws might not allow companies to dictate working hours for a contractor.
- Firing contractors. While independent contractors cannot be fired – they are self-employed – the hiring company can terminate their work due to issues with the quality of the work, a change in the company’s needs, or a reduced budget for outsourced services.
Example: hiring a Ukrainian contractor
A US company looking to hire an independent contractor in Ukraine needs to take the following steps:
- Familiarize yourself with legal requirements. Independent contractors in Ukraine – commonly registered as private entrepreneurs – are governed by civil law, which means they are not protected under employment law.
Under civil law agreements, contractors perform tasks or provide services according to the hiring company’s wishes but are not subordinate to it. They assume all the risks involved in working on a project-by-project basis, e.g., damage to their tools or termination of their work on short notice.
Another critical area to familiarize yourself with is tax obligations. In Ukraine, hiring clients are not responsible for withholding taxes on an independent contractor’s wages. Instead, independent contractors must submit 18% income tax and 1.5% military tax every time they receive a client.
- Write a detailed job description. In addition to the English version of the job description, you may want to translate it into Ukrainian – which means hiring a translation service or a Ukrainian translator who is an independent contractor.
- Find the right job posting board. Most global job board sites have a local version in Ukraine. Other popular job posting sites in Ukraine are: Work.ua, Robota.ua, Jobs.ua, Eurabota, and Head Hunter.
- Interview the candidates. Keep in mind that Ukraine has two different time zones: Eastern European Time is 10 hours ahead of US Pacific Standard Time or seven hours ahead of US Eastern Time. Moscow Standard time is 11 hours ahead of PST or 8 hours ahead of EST.
- Sign an independent contractor agreement. According to the Civil Code of Ukraine, an independent contractor agreement must be signed in writing.
- Collect Form W-8 BEN. Other than providing personal information about foreign contractors, Form W-8 BEN certifies that they are not US citizens.
- Pay the contractor. Here are some options for paying workers in Ukraine: Bank transfers using SWIFT, traditional money transfer services (e.g., Western Union and MoneyGram), Money transfer companies (e.g., Wise, Xoom, and Remitly), and cryptocurrencies.
What are the risks of not classifying an employee correctly?
With more and more companies relying on independent contractors, worker misclassification has become a serious issue globally. Independent contractor misclassification is the illegal practice of labeling workers as independent contractors – usually to reduce labor costs – when they should be classified as employees.
Worker misclassification can have harsh consequences. Food delivery company Foodora Australia, for example, was charged with misclassifying its rider as independent contractors. The company admitted that their riders were more likely to be employees, and were entitled to more than $5 million in unpaid wages.
In another example, a federal investigation in the US has yielded $700,000 in back wages, damages, penalties, and other guarantees for more than 1,000 construction workers who were wrongly classified as independent contractors.
Hiring via an Employer of Record (EoR)
One of the most effective ways to eliminate the risk of contractor misclassification is to hire via an Employer of Record (EoR).
An EoR is a third-party organization that serves as the legal employer of workers in a particular country. As such, the EoR ensures that the workers are employed compliantly – assuming responsibility for employment contracts, mandatory benefits, taxes, and more.
Companies looking to open several locations abroad would benefit from working with an EoR aggregator, like Papaya Global. In the aggregator model, an EoR provider works with in-country partners (ICPs), allowing it to keep up with changes in employment laws and regulations worldwide to make sure its clients remain compliant.
Hire independent contractors worldwide with Papaya Global
Hiring and managing independent contractors worldwide can be time-consuming, prone to error, and a constant concern for compliance. Papaya Global’s contractor management solution helps you overcome these challenges and takes the risk out of engaging contractors.
Our network of local experts, which covers more than 160 countries, ensures that misclassification never takes place. Papaya signs the agreements with your contractors (accepting total legal liability), collects all the invoices and manages cross-border payments with one click. Book a demo to see how it works.
FAQs
Can an independent contractor work for more than one company?
Yes. Independent contractors have the right to work with multiple clients at once.
How can I convert an independent contractor to a payroll employee?
Converting an independent contractor to an employee within your country requires offering them an employment contract and terminating the independent contractor agreement. Converting a contractor to an employee overseas requires registering a business in the relevant location or using an Employer of Record.
How can I legally hire independent contractors?
To legally hire independent contractors, you’ll need to have an independent contractor agreement that covers the scope of the work, deadlines, and payment – and clearly states that your company and the contractor are not in an employer-employee relationship.
When is it a good idea to hire an independent contractor?
When you want to save costs and maintain staffing flexibility.
Can I fire a contractor?
As independent contractors are self-employed, they cannot be fired. However, you can terminate their work due to issues with the quality of the work, a change in the company’s needs, or a reduced budget for outsourced services.
Can a US company hire contractors overseas?
Yes, as long as the international contractors are classified correctly, and the company collects a W-8BEN form from each contractor.
How can I pay foreign contractors?
Here are some standard methods to pay international contractors: bank transfers, credit card payments, a dedicated money transfer provider, and cryptocurrencies.
Are there any countries where US companies can't hire contractors?
American companies are prohibited from doing business with countries subject to US sanctions. You can find more details on the US treasury department’s sanctions page.
