Should nonprofits hire contractors or employees?

December 8, 2022

Whether the mission is wildlife conservation in areas impacted by ecological change, or providing medical services in countries facing health crises, international nonprofits and non-governmental organizations (NGOs) impact millions of lives around the world every day.  

Besides funding, the engine behind most of the work these organizations conduct is the staff. The people who have passion for this work, who sometimes come from other countries to do it, and who apply their knowledge and skills to further the cause are the heart and soul of accomplishing a nonprofit or an NGO’s goals.  

That’s why it’s crucial for NGOs and nonprofits to protect their employees, including volunteers, full-time employees, and independent contractors, by ensuring compliance with local labor laws and regulations, no matter where in the world they may be located. Failure to do so can have serious consequences for the organization, including hefty fines and legal penalties. In some cases, it could even prevent the organization from conducting work in that country, which could be detrimental to the organization’s mission, as well as their bottom line.   

In this article, we’ll explain the primary differences between employees and independent contractors so you can confidently and compliantly hire the right talent for your organization.  

Key differences between employees and contractors 

Noncompliance with labor regulations can be a costly error for international nonprofits and NGOs, especially those working in multiple locations where laws may vary from country to country.  

In most countries, employees are classified differently from independent contractors, which is why it’s important to understand what each classification entails and what you need to do to comply. 

This chart highlights the key differences between independent contractors and employees: 

When determining how to properly classify an employee, consider the following three factors:  

  • Behavioral control: When hiring full- or part-time employees, the employer has the right to specify what work the employee should do, how it should be done, and what supplies, equipment, or other support will be necessary to carry it out. When hiring independent contractors, employers lose this element of control and do not have the right to specify what work the contractor should do, how it should be done, and what supplies, equipment, or other support will be used to carry it out; the contractor carries out the agreed-upon duties.  
  • Financial control: Independent contractors typically invest in the tools and equipment needed to perform the work and are not reimbursed for things like software, office equipment, transportation or furniture. Contractors are typically paid a flat fee rather than an on-going salary. Employees are paid a regular wage from your payroll and are provided with the tools and equipment needed to complete their work, as well as benefits like health insurance, retirement, vacation pay, and sick pay.  
  • Relationship of parties: The arrangement with an independent contractor is spelled out in a written contract that specifies the scope of the work, term agreement, agreed-upon payment and benefits offered, if any. If the service provided is a core activity for the organization’s business to be carried out, it may be harder to convince labor law authorities that this worker’s role is that of a contractor, and not an employee. Make sure your contracts are as clear as possible in accordance with local labor laws. If the classification is challenged in court, an organization would need to justify the classification, as well as pay legal fines. 

As you hire workers to carry out your mission, consider carefully whether you need an employee or an independent contractor. 

Related: 1099 for international contractors? Requirements for hiring and paying foreign workers 

When to hire an employee or independent contractor  

Employees are a core part of your organization. They use your resources and follow your direction for how to get things done. You may want to hire an employee when you: 

  • Need to fill a position that is an essential part of your organization 
  • Want to retain copyright over intellectual property that is being worked on 
  • Plan to offer training to the worker 
  • Want to retain the workers services exclusively for your organization 
  • Want to add a long-term member to your team 

Contractors are very helpful to nonprofit and NGO work in that they bring a specific skill to the table for a prescribed amount of time, and they use tools that they’ve amassed over the course of their experience doing this job. You may want to hire a contractor when you: 

  • Need specific skills quickly 
  • Have a time-bound project 
  • Anticipate a busy period during the year 
  • Have planned or unplanned absences from other workers 
  • Have specialty work to get done, such as bookkeeping or grant writing 
  • Want to add expertise that you can’t afford on a full-time basis 

Related: NGOs, nonprofits and independent contractors 

Risks involved with employee/contractor misclassification 

When misclassification happens, it is usually due to: 

  1. Lack of awareness: the organization was not aware of the specifics of the labor laws with which they must comply in order to conduct work in the specified country 
  2. Accidental fraud: the organization may be attempting to lower overhead costs like salaries, insurance and equipment 

In either instance, if the regulating body in that country finds out, the penalties for misclassification could be detrimental to your organization.

For example, one Australian employer was fined over $250,000 for incorrectly classifying seven employees as contractors.

In Brazil, employers can be fined up to BRL 3,000 per worker misclassified. International nonprofits and NGOS do not want to – nor can many afford to – fold those kinds of fines into their budgets.  

Another risk to be aware of comes from the workers themselves. There may be times where a contractor is aware of their country’s labor laws and keeps an eye on whether their relationship with the organization has become noncompliant. There have been cases of a contractor reporting the organization to the authorities, which may result in not only adjustments to the pay they receive, but also fines and penalties to the organization.  

Related: When international independent contractors go bad 

Luckily, these types of problems are relatively easy to avoid, assuming you have the right support in place to guide you through the necessary steps you’ll need to take to protect your organization and its people.  

An employer of record can help nonprofits and NGOs hire the right workers 

Protect your organization from potential liability by ensuring that all workers are classified properly. One easy way to accomplish this (and so much more) is to enlist the services of an employer of record (EOR). An EOR enables you to compliantly hire, onboard and pay workers anywhere in the world.  

With local market expertise from Safeguard Global, your workers are classified according to your needs as well as the labor laws of the country of operation. Not only that, but an employer of record enables you to: 

  • Get up and running quickly in whatever country the mission requires, without needing an entity first 
  • Create employment contracts that comply with regulation and eliminate the risk of misclassification  
  • Budget your funds better and manage predictable costs 

An employer of record from Safeguard Global can help your international nonprofit or NGO stay nimble with its operations and steer clear of any risk of noncompliance. Find out if the GEO employer of record service is right for you by speaking with one of our global solutions advisors today

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