How to manage international contractors
Managing contractors is vastly different to managing employees. If we examine the processes of onboarding, payments, and legal aspects with regards to contractors they are all handled with different tools and procedures.
In order to get more value from your contractors you need to understand how to more effectively manage them. This is especially the case if you are managing contractors in different countries.
Contractor management vs employee management
Since employees are a part of your company’s workforce, you can establish a long-term work relationship with them. Even though it is possible to have such relationships with independent contractors there are limitations. One such limitation is accessibility. Contractors of course may have other customers making requirements and demanding their time
In contrast to employees, the working relationship with contractors is narrowed to the value you gain from the contractor’s work usually based on a specific project, over a specific period of time.
Let’s go through the differences:
- Tax forms Individuals or businesses send 1099 forms to the IRS (Internal Revenue Service) stating how much they paid a contractor, freelancer, or non-employee. It includes any compensation paid during a given tax year and any federal, state, and local taxes withheld—though it is likely there will not be any withheld taxes. The W-2 form is for full or part-time employees. All businesses need to fill out this record of employee compensation, benefits, and taxes withheld during a single tax year for each full and part-time employee.
- Work schedules Though your company may have its own unique policies, contractors often keep their own hours and do not need to abide by any company code of conduct or holiday schedules. Typically, contractors work on a project basis with a clear start and end date. They are paid per project and not hours worked, so overtime isn’t a factor. Full-time workers on the other hand (whether they are international employees or not) sign contracts agreeing to abide by all company rules, codes of conduct, and a set number of hours worked per day or per week.
- Benefits and perks Full-time employment benefits include but are not limited to benefits such as health insurance, education or training needed for the role, union rights, workplace safety, discrimination laws, unemployment eligibility, and more. As contractors work for themselves, they are required to pay for and arrange their own health insurance, social security, and any equipment needed for the job. Additionally, as they are considered independent, they aren’t protected by labor or union laws.
- Tools and equipment Contractors need to provide any tools necessary for the job. This may include a computer, essential software, platforms, tools, or any equipment.
- Training and onboarding The main purpose of hiring contractors is that they come with specialized skill set, education, and background needed to complete the job or project. There is no need for extensive training or courses to help them meet the needs of the role. When hiring employees, there may be an expectation that your company will need to spend time and resources onboarding them. This onboarding process allows new hires to understand company culture, brings them up to speed on their role, and provides training or educational resources that can help the employee excel in the position.
Best practices for contractor management
Managing your independent contractors, especially in multi countries, can be a challenge, that is why we gathered some main practices you should consider while working with contractors.
- Independent contractors’ agreement
An independent contractor agreement provides legal protection for both the independent contractor and the hiring company. The purpose of the agreement is to define the working relationship between the two parties. This includes establishing the contractor’s status, the scope of the work, exclusion from providing equipment, and defining terms such as rates, payments, reimbursement, benefits, and more.
It is important to remember that local employment laws can outweigh your local contractor agreement, therefore you must make sure the agreement requirements are consistent with the labor laws of the country you are hiring in.
- Compliance with local regulations
Labor laws differ between different countries, and it is essential to understand these regulations while managing your independent contractors across borders. Having an internal expert that understands the local labor laws can be extremely helpful, but this might get complicated if you hire contractors from various countries. An outsourced global payroll company can give you the expertise, experience, and reassurance that the contractor management process is done according to local labor law.
In Australia for example, the government has laws providing protection against discrimination against contractors, according to the Fair Work Act of 2009. In cases where a contractor does not obtain ABN (Australian Business Number), the company is required to withhold certain benefits.
In Germany the main parameter defining the contractor classification is the agreement between the parties, and whether the contractor can freely determine how, when, and where to provide their services. The government in Germany does not give any emphasis on whether a contractor is registered as a business or submits invoices (though the employment contract should state such). Click here for additional examples
- Proper work relationship
Global businesses must maintain proper work relationships and clear boundaries with their independent contractors. For example, contractors need to be able to set their own schedules and not be confined to work in an office.
Keep in mind, local employment laws may override your contractor agreement. If your foreign contractor claims that you have violated employment laws and the court deems them an employee, you will then have to provide them with all the benefits an employee is entitled to, retroactive to the day they started working for you.
- Intellectual property protection
The law on intellectual property protection varies between countries. If your company’s IP is legislated in your home country, it is not protected in other countries. Not having such protection may expose your IP in the target country. That can be a problem once subjecting your business to outsourced employees such as international contractors.
Protecting your business IP should have priority, and it is recommended to consult with a local legal attorney that will provide you with all the information. According to the local attorney you may choose to register your IP in the target country as well as your home country.
- Project management tools
For the success of your projects, you must establish a healthy and productive process with your independent contractor. By using a proper project management system, you can manage your contractor’s projects in a transparent and accountable manner. This benefits both parties and ensures that you have logged all the steps of your work, for any future references.
3 Tips for Managing Contractors
The following tips can provide you with a better understanding of your contractor’s needs and can result in both sides building a positive long-term work relationship.
- Align expectations, ask them in advance what they are looking for in working with you. It could be to gain experience in certain areas or to expand the portfolio for example.
- Try to get to know them.
- Make them feel that they are contributing to the team with their work by sharing successes and giving valuable feedback when you can.
- Fail to provide them with performance feedback.
- Act as though your project is their sole responsibility.
- Cut back on paying them what they’re worth.
Misclassification: Canada & Japan Examples
In Canada there are a couple of factors that determine if an independent contractor is an employee:
- If they received training
- If they received equipment from the company
- If the contractor performs essential work in the company
- If their work is supervised by the company
- If the company benefits from the profits or losses of the contractor’s work
- If the contractor’s agreement neglects to define the termination notice period. While termination agreements vary between regions, a contracted employee is typically entitled to a common law notice, which is a month per working year.
Note: many employment courts in Canada will recognize independent contractors as an employee in terms of the termination notice in cases where they prove that they are financially dependent on one specific company for the majority of their income.
In Japan, the government focuses on two key factors in determining the status of independent contractors. First that the working relationships are not exclusive or restricted, and second that the company’s internal rules and regulations do not apply to the contractor.
Japan defines a routine work relationship, which consists of an employee from one company giving daily instructions to an employee from another company as “worker supply.” This kind of activity is considered a criminal offense in Japan. Therefore, in cases where the working relationship is established with a company instead of an individual, an additional risk of a “worker supply” might apply.
Outsourced Contractor Management Services
Using a contractor management service can also:
- Help manage hundreds of contractors
If your workforce is all over the world, you can organize all of their details in one place with a contractor management service. You can use a robust platform to make payments to all employees and contractors with just a few clicks.
- Ensure you stay compliant and avoid unnecessary fines
Be sure to choose a platform that specializes in all areas of compliance so you can grow knowing you’re not breaking any laws or subject to expensive fees. The top platforms have experts who eliminate legal risk such as contractor misclassification and connect contractors to payments, so everything is automated and validated in one place.
- Consolidate all of your important data
Save time, and resources, and keep your peace of mind with one platform that can standardize and consolidate all payment data, legal, and terminology data into one source of truth. See trends such as workplace spending, contractor payments, and more in seconds to optimize your operations.
- Transfer contractors to payroll
One of the biggest benefits of contractor management services is that it allows you to easily hire, process, and pay any kind of worker in over 160+ countries. When it comes to transferring a contractor to payroll, leave the complexities to experts so you can focus on your bottom line.
Manage your International contractor with Papaya
Independent contractor business structures require some research and the right resources to make sure it’s the best fit for you. Papaya’s contractor management solution can help you onboard, hire, and pay your global workforce, no matter the kind of worker they are. Stay one step ahead and focus on your bottom line by using an advanced platform with compliance expertise at your fingertips. Schedule a demo today.
Are independent contractors self-employed?
If you legally qualify as an independent contractor, you are self-employed. Independent contractors must pay self-employment tax, provide their own benefits, and healthcare. If you’re working with an independent contractor, you do not need to pay any taxes on their payments.
What taxes does a 1099 employee pay?
All 1099 employees need to pay self-employment taxes and income tax. Unlike with W-2 employees, your company doesn’t need to withhold taxes from their paycheck.
Do independent contractors get health insurance
Independent contractors are not employees and therefore, businesses are not required to provide health insurance. Though perhaps atypical, businesses can opt to include this benefit in the contractor agreement.
Do independent contractors get a W-2 tax form?
A W-2 tax form is for employees. Companies that pay contractors must submit Form 1099 for non-payroll workers. Both forms state how much money a person earned from the company during a given year.
Can you offer an independent contractor a bonus
Yes, you can offer a bonus to independent contractors if you abide by the terms of their contract, tax obligations, and relevant employment laws You may wish to spell out the specifics of the bonus in the written contractor agreement. If providing a bonus, make sure your independent contractor meets all criteria that classifies them as a contractor, and not a full-time employee, otherwise, you could face tax penalties.
Can an employee also be an independent contractor
Employees and contractors are two separate statuses and require different tax forms submitted by businesses. However, according to the IRS guidelines, it is possible for an employee to also be an independent contractor if they perform different duties that qualifies them as an independent contractor. While not illegal, it’s not common for a person to be both an independent contractor and an employee.
Can you tell an independent contractor when to work
Independent contractors follow their own schedule and decide how to deliver the finished product. If a business stipulates when contractors need to work, they could be classified as employees. This could result in a misclassification and result in fees or other legal consequences.
Can an independent contractor quit
It’s common for businesses to create contracts with independent contractors that allow them to quit at any time. As they’re not employees, they may not need to follow commonplace protocols such as providing two weeks or a month’s notice before leaving. Companies will specify any requirements in the contractor agreement.
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