International Contractors: Pros and Cons

The demand for independent contractors, also know as the gig economy has grown substantially in the past few years; the global market size of freelance platforms was worth $4.43 billion in 2022 – up from $3.81 billion in 2020 – and is expected to reach $12.01 billion by 2028. In the United States, for example, the number of independent contractors grew from 57.3 million in 2017 to 73.3 million in 2023. By 2028, 86.5 million people will be freelancing in the US, making up 50.9% of the workforce in the country.

The rise of remote work and the availability of advanced communication technologies have contributed to the growing popularity of international contractors. These individuals offer unique advantages, such as specialized expertise, flexibility, and cost-effectiveness. However, relying primarily on global contractors creates challenges, such as contractor misclassification, proficiency in multiple regulations, and cultural differences. This article will explore the challenges and benefits of hiring international contractors.

What is an international contractor?

An international contractor is an individual hired by a business to provide services or perform work in a foreign country. Unlike traditional employees, international contractors are typically hired on a temporary or project basis.

An international contractor, also referred to as a global contractor or a foreign independent contractor, is an independent contractor who offers professional services to a company in a foreign country. They are often sought after when a company requires specialized skills, expertise, or resources that are not readily available locally.

Unlike regular employees, international contractors are typically hired for a specific project or a temporary period. The hiring company and contractor sign a contract outlining the work scope, timelines, deliverables, and compensation terms. This arrangement allows businesses to tap into global talent without establishing a permanent presence in a foreign market, providing flexibility and cost-effectiveness.

Foreign independent contractors can fulfill a range of roles across various industries. Over the past year, according to Payoneer’s latest global freelancer income report, roles in programming, marketing, project management, and web design saw the most growth in demand. Other popular fields of work for international contractors include graphic design, content writing, and translation.

What is the difference between local and international contractors?

There are clear differences between hiring local and international contractors, especially from the company’s point of view. In the US, for instance, hiring local independent contractors has tax reporting implications: you must file IRS Form 1099-NEC if your company hired local contractors who earned more than $600 within a year. Working with international contractors, on the other hand, doesn’t require filing a 1099-NEC. In addition, US companies hiring local contractors must collect tax information from their contractors via IRS Form W-9, whereas international contractors fill out IRS Form W-8 BEN.

Another difference is payments. While compensating local contractors is a seamless process – domestic payments are efficient, inexpensive, and inclusive – paying international contractors requires getting into uncharted waters: payment arrangements for international contractors may involve considerations such as currency exchange rates, international wire transfers, and potential additional fees associated with cross-border transactions.

Benefits and challenges of hiring an international contractor

Hiring international contractors has emerged as a practical and beneficial option for companies seeking to grow globally. The numbers don’t lie: the gig economy currently accounts for a third of the world’s working population and is projected to reach $500 billion in gross volume in the next five years.

Pros

Here are the key benefits of hiring international contractors:

• Access to a global talent pool: by hiring international contractors, you can tap into a vast talent pool that spans the globe. This allows you to find individuals with specialized skills and expertise that may not be readily available in your local market. Whether it’s a niche technical skill or proficiency in a specific language, international contractors bring a diverse range of talents that can contribute to your company’s success.
• Diversity: collaboration with international contractors fosters cultural diversity within your organization. Different perspectives, experiences, and problem-solving approaches can empower innovation and creativity. Cross-cultural exchange can also help your company adapt and cater to a broader audience, making it more competitive in the global market.
• Rapid market entry: If you’re considering expanding your business to a foreign market, hiring local contractors can provide you with invaluable insights and connections. International contractors bring an in-depth understanding of their local markets, consumer behavior, and business practices, giving you a head start and increasing your chances of successful market entry.
• No training required: unlike employees, who 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. In addition, international contractors don’t require tools and equipment – such as office space, computers, different types of software, and work supplies – to perform their tasks.
• Independent work: international contractors are typically autonomous, self-sufficient, and their ability to work efficiently can improve overall performance. Plus, since they require minimal supervision, hiring international contractors allows your team to focus on its core tasks and strategic initiatives rather than constantly overseeing day-to-day activities.
• No ongoing commitments: working with international contractors allows you to allocate resources efficiently, as they are typically hired on a temporary or project basis. You can bring in additional contractors when needed and reduce the workforce when the project concludes or if the workload decreases.
• Reduced overhead costs: international contractors are not subject to minimum wage laws, overtime pay, or employee benefits. In addition, hiring international contractors means avoiding payroll taxes, social security contributions, and other employment-related taxes.

Cons

While hiring international contractors offers many benefits, it’s not always smooth sailing. Here are the main challenges of working with international contractors:

• Lack of dedication to the company: since international contractors typically work on a project-by-project basis, they may have other clients or commitments. As a result, they might not be as dedicated or invested in your business as full-time employees.
• Lack of control over schedule and results: when hiring international contractors, you have limited control over their work schedules and how they perform their tasks. The lack of direct supervision can sometimes lead to concerns about meeting deadlines and the quality of work.
• Misclassification Risks: misclassifying international contractors as independent contractors when they should be considered employees can lead to legal and financial consequences. Each country has its own rules and regulations regarding worker classification, and missteps in this area can result in fines and penalties.
• Knowledge of local laws and regulations: hiring international contractors requires a comprehensive understanding of labor and tax laws in the contractor’s country. Compliance with laws regarding workers’ rights and tax withholdings is crucial to avoid legal issues.
• Country-specific contract compliance: contractor agreements must be tailored to comply with the specific laws and regulations of the contractor’s country. This means navigating different legal systems and ensuring that all contractual terms are legally binding in the contractor’s jurisdiction.
• Converting contractors to employees: if the need arises to convert an international contractor into a full-time employee, it often involves setting up a local entity in the contractor’s country. This process can be time-consuming, costly, and subject to additional legal and administrative complexities.
• Protecting intellectual property: engaging international contractors can increase the risk of unauthorized use or disclosure of your company’s intellectual property, as they are typically not under the same level of supervision and control as employees.
• Managing contractors in multiple countries: working with contractors in several countries means dealing with different time zones, cultural differences, and legal requirements – all of which add complexity to the contractor management process.

Main differences between international contractors and employees

International contractors and employees are two distinct types of workers. There are several key differences between them, with the main ones being:

• Autonomy
  International contractors have a high level of autonomy, as they are responsible for managing their work schedules, methods, and deliverables. Contractors are generally hired for specific projects or tasks and can choose how to work, as long as they meet the agreed-upon outcomes.
  Employees, on the other hand, are subject to the employer’s supervision and direction. They have less autonomy over their work and must adhere to company policies, procedures, and guidelines when performing their tasks.
• Control
  International contractors determine their work process. They are accountable for the results and are generally subject to minimal supervision. The client typically focuses on the end product rather than dictating the steps taken to achieve it.
  Employees are under the direct control of the employer. The company has the authority to oversee and manage the employees’ work, provide guidance, and set expectations for their performance.
• Supplies
  International contractors use their own tools and equipment and are not entitled to reimbursements for expenses such as phone and internet costs, software licensing fees, and so on.
  Employees, by contrast, typically receive the necessary tools and supplies to perform their job duties from the employer. The company provides the required resources and equipment for the employees’ work.
• Benefits
  Contractors are generally not entitled to employee benefits such as health insurance, retirement plans, paid time off, or other perks that employees may receive. They are responsible for managing their benefits independently.
  Employees are entitled to statutory benefits and often receive a benefits package, which can include allowances, paid vacation and sick leave, bonuses, and other benefits.
• Payment Process
  International contractors are usually paid based on the terms of their contracts. They receive payment per project, milestone, or hourly rate, depending on the agreement. Contractors typically invoice the company for their services, and the payment process is governed by the terms outlined in the contract.
  On the contrary, employees receive a regular salary or wage on a fixed schedule, such as bi-weekly or monthly. Their payment is usually stable and consistent, and they may also be eligible for overtime pay if they work beyond regular hours.

How to choose from the different types of international contractors

Choosing the right type of international contractor requires careful consideration of the specific requirements and nature of the work. There are three primary types of international contractors: independent contractors, subcontractors, and agency contractors. These are the main differences between them:

• Independent contractors and freelancers
  Independent contractors and freelancers are self-employed individuals hired to provide specific services as non-employees. They determine how to accomplish their tasks, handle their own taxes, and do not receive employee benefits from the hiring company. Independent contractors and freelancers often have specialized skills or expertise in a particular field, making them suitable for specific tasks or projects.
• Subcontractors
  Subcontractors are also independent contractors, but they are engaged by a primary contractor to perform a specific part of a larger project. Subcontractors typically have separate contracts with the primary contractor rather than the hiring company directly and should have expertise in the particular aspect of the project they are assigned to.
• Agency contractors
  Agency contractors are individuals who are employed by a staffing agency but work on assignments for other companies. Staffing agencies handle the recruitment of agency contractors, saving time and effort for the hiring company. The agency is the formal employer of the contractor, handling payroll, taxes, and benefits, while the hiring company manages the contractor’s work.

How to hire an international contractor abroad

Hiring an international contractor overseas requires careful attention to compliance and legal considerations to avoid risks and penalties associated with employee misclassification.

Employee misclassification is the illegal practice of labeling workers as independent contractors – usually to reduce labor costs – when they should be classified as employees. Misclassifying employees as contractors can expose employers to investigations, sanctions, and compensation lawsuits.

With more and more companies relying on independent contractors, worker misclassification has become a serious issue globally. Food delivery company Foodora, for example, was charged with misclassifying its rider in Australia 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.

To evade compensation lawsuits and penalties, companies should do their due diligence regarding compliance with local labor laws. If your company has a local entity in the contractor’s country, The due diligence process should focus on understanding the criteria used to distinguish between employees and independent contractors in the contractor’s country.

Conducting this research will allow you to prepare a detailed contract outlining the terms and conditions of the engagement with the independent contractor, including the scope of work, deliverables, payment terms, and termination clauses. Make sure the agreement clearly defines the contractor’s status and that they are not considered employees of the hiring company.

What are the risks of employee misclassification?

Employee misclassification can have severe consequences for businesses, impacting several aspects of their operations. Here are the risks associated with misclassifying employees as independent contractors:

Legal Liabilities

Misclassifying employees as contractors can lead to legal liabilities, including unpaid wages and benefits, back taxes that should have been withheld from employees’ wages, fines from regulatory bodies, compensation lawsuits, and even – in cases of intentional or repeated misclassification – criminal charges.

Reputational damage

Reputation is critical for any business – and labeling workers as contractors when they should be classified as employees will hurt your company’s good name. Reputational damage from employee misclassification can result in customer loss, potentially affecting sales and revenue. In addition, employee misclassification often generates negative media coverage and social media backlash, which can cause investors to lose confidence in the company.

Financial Losses

There are significant monetary costs to employee misclassification, including fines, legal fees incurred fighting compensation lawsuits, and payment of back wages and benefits to misclassified employees.

Loss of intellectual property

Independent contractors typically have greater autonomy over their work and may not be under the same level of supervision and control as employees. As a result, companies may have less oversight over how contractors handle their intellectual property, increasing the risk of its unauthorized use or disclosure.

Talent loss

Employee misclassification can negatively impact relationships with contractors, who may feel exploited or undervalued if they believe they should be classified as employees but are treated as independent contractors. This can deter qualified contractors from working with the company in the future, making it harder to find and retain top talent.

How to hire compliantly overseas

While finding and hiring international contractors abroad is easier than ever, doing it compliantly remains challenging. For one thing, compliance encompasses many elements: contracts, benefits, taxation, reporting, training, and more. In addition, companies that hire abroad must navigate labor laws country by country; local regulations always take precedence, and to make matters more complex, they vary in strictness or leniency across countries.

The repercussions of non-compliance can be daunting. Employee misclassification, for example, can result in back payments to employees and tax authorities, investigations by regulatory bodies, sanctions, fines, litigation costs, reputational damage, and in some cases even criminal prosecution.

Therefore, companies that hire abroad must be clear about the terms of the engagement, especially when working with international contractors. And the best way to do that is to sign an airtight independent contractor agreement.

How to create an international contractor agreement

An international contractor agreement is a legally binding document that lays out the terms of an international contractor’s work. It covers the scope of the work, obligations, deadlines, payment terms and, most importantly, should establish that the hiring company and contractor are not in an employer-employee relationship.

Since the main objective of an international contractor agreement is to clarify that the worker is not an employee of the hiring company, it must state that the worker is not entitled to employee benefits such as health insurance, compensation insurance, unemployment compensation, insurance coverage, and paid time off.

In addition, an international contractor agreement should include the following clauses:

• General information about the parties. The introductory paragraph of the agreement should list the client company, the service provider, the physical addresses of both parties, and the agreement’s effective date.
• Scope of work and deliverables. A detailed description of the services the independent contractor is expected to provide, including a timeline for the deliverables.
• Compensation. The compensation section defines the payment terms for the services rendered: whether the contractor is paid an hourly rate or a flat fee, payment frequency, invoicing, and other payment logistics.
• Intellectual property protection. An independent contractor agreement should outline ownership over any intellectual property created by the contractor during the relationship.
• Confidentiality (an NDA clause). A confidentiality clause, or an NDA, states the terms under which the contractor will keep the client’s business information confidential. Confidential information could include trade secrets, business strategies, trademarks, marketing plans, customer databases, etc.
• Termination. Usually, the termination of the agreement will depend on the duration agreed on by both parties. If you are hiring an independent contractor for a long-term project, the agreement should stipulate the conditions for termination, including terms such as the number of days’ notice.
• Dispute resolution. This clause states which court will have jurisdiction in a legal dispute.

It’s important to note that since every country’s legal system is different, international contractor agreements must be tailored to comply with the specific laws and regulations of the contractor’s country.

How to pay an international contractor

Companies have various methods for paying international contractors, depending on factors such as the contractor’s location, the company’s preferences, and the payment options available. It’s essential to communicate with the contractor to choose the method that works best for both parties. Some common methods include:

Bank Transfer

Bank transfers are a standard way to pay international contractors. The company sends the funds directly to the contractor’s bank account using SWIFT (Society for Worldwide Interbank Financial Telecommunication) or wire transfer services. This method is widely used but may involve additional fees and longer processing times.

Credit card payments

Paying an international contractor with a credit card can be a straightforward option, but it depends on the contractor’s willingness to accept credit card payments. Not all contractors are willing to receive payments this way due to potential fees and currency conversion issues.

Freelance platforms

If you hire a contractor through a freelance platform like Upwork or Fiverr, payments are typically made through the platform. The company funds its account on the platform and releases payments to the contractor when the work is completed. The freelance platform usually handles currency conversions and charges a fee for its services.

Cryptocurrency payments

With more and more people adopting cryptocurrencies, some companies opt to pay international contractors using currencies like Bitcoin, Ethereum, or others. This method ensures faster transfers and is suitable if both parties are comfortable with crypto transactions.

Dedicated money transfer providers

Dedicated international payment providers allow companies to pay international contractors efficiently and securely. The provider will handle the currency conversion, and fees may apply for the transaction. Both the company and the contractor will need accounts with the chosen provider.

Tax implications of hiring international contractors

Understanding the tax implications of hiring international contractors is crucial to ensure compliance with relevant tax laws and regulations.

For example, international contractors are not considered 1099 workers in the US. Unlike US-based independent contractors, international contractors pay taxes in their home country, including on payments received for work performed for a US company.

However, US companies working with international contractors are required to collect their tax information via IRS form W-8 BEN. The W-8 BEN form is used to certify the contractor’s foreign status and to claim tax treaty benefits, if applicable.

In addition, US businesses must maintain accurate records of all payments made to foreign independent contractors. This includes keeping track of payment amounts, dates, and the specific work or services provided. Keeping thorough records helps companies comply with tax regulations and can be useful during tax audits.

International contractor or employee: which is preferable?

Deciding between hiring an international contractor or an international employee depends on several factors, including the nature of the work, the duration of the engagement, legal and tax considerations, and the company’s long-term strategy.

Each option has advantages and disadvantages, and the best choice will vary based on individual business needs. Here are the main options:

Hiring international contractors

Hiring international contractors allows businesses to access specialized skills for specific projects or temporary periods without committing long-term. In addition, contractors are responsible for their own taxes and benefits, reducing the employer’s administrative and financial burdens, and they are not subject to the same employment laws and regulations as employees, making it easier to engage them in different countries.

Of course, there are also disadvantages to working with international contractors, including limited control over their work schedule and methods, potential unavailability, and legal complexity, especially regarding employee misclassification.

Hiring an international employee via a local entity or an Employer of Record

If having dedicated team members committed to the company’s goals and culture is a priority – hiring international employees is your best option. Plus, as an employer, you have more control over employees’ training, work schedule, and performance.

Employing workers abroad entails adhering to local labor laws, taxes, and contracts. In order to streamline the process and alleviate some of the burdens, many businesses opt to work with an employer of record (EOR). By engaging an EOR, the company can delegate responsibilities such as payroll taxes, benefits administration, and other employment-related bureaucracy. This arrangement allows the company to focus on its core operations while relying on the expertise of the EOR to manage the intricate HR tasks.

Hiring both international employees and contractors

A hybrid approach can be a flexible solution that allows businesses to tailor their workforce to specific needs. Companies can hire international employees for core roles requiring long-term commitment and consistency while utilizing international contractors for specialized projects or tasks with limited durations. This approach allows businesses to optimize their workforce and adapt to changing demands.

Contractors management made simple

Papaya Global, the world’s leading payroll and payments platform, offers an end-to-end solution for workforce management, including onboarding, managing, and paying international contractors. Our cloud-based platform ensures compliance with labor laws and tax regulations in more than 160 countries and allows clients to make payments in multiple currencies while providing bank-level security. Schedule a demo to learn more.