International contractor vs. employee: Understanding the difference

May 21, 2020

International contractor vs. employee

International independent contractors can provide your company with a diverse range of skills and experience, especially when you’re looking to move into a new market overseas. But there are some key considerations you should keep in mind when engaging with international independent contractors. 

To help you decide the right type of worker for your needs, here are some important independent contractor vs. employee differentiators to consider.

What differentiates an international contractor vs. employee?

Contrary to employees, independent contractors do not work regularly for an employer but work as required and are typically paid on a freelance basis. Contractors will not rely on you as their sole source of income, and they often work at their own pace, as defined by an agreement. 

 

International contractors
 
Employees

Work is temporary and not an integral part of business operation

Work

Work is a key aspect of business operation

Paid by project

Pay

Paid for time worked

No income taxes are withheld. Responsible for self-employment tax

Some countries may require payroll withholding

Taxes

Employer must pay and withhold relevant taxes, including income, social and unemployment tax

Pay for their own benefits like health care and retirement

Some countries may require benefits like paid leave

Benefits

Most employers pay for and provide benefits like health care, disability, paid leave and retirement

Personal resources and tools are used to complete work

Resources

Company resources are used to complete work

Only the result of work is managed, not what work is done or how it's done

Management Oversight

Day-to-day work is managed by the employer

Service is often provided to multiple clients

Service Loyalty

Service is provided to one company for an extended period of time

Self-responsible for work expenses and may not receive reimbursement from the company

Expenses

Employer is responsible for reimbursing work expenses incurred

Can often be terminated at any time

Some countries may require a brief notice period or severance payments

Termination

Severance pay and a termination notice are often required; regulations vary by country

Among the most significant differences between an international contractor vs. employee is that contractors retain a degree of control and independence in their work and are not eligible for employer-provided benefits. 

Why use an international contractor vs. employee?

International independent contractors are generally people who have diverse experience with clients in your host country. By definition, contractors work with a variety of companies, more than most full-time employees. This depth of experience provides advantages that your company might not get with an employee.

They work independently

Contractors don’t need or expect a lot of oversight in their work for you. This frees up your management and administration teams to focus their time elsewhere, like on further developing company strategy.

They are flexible and easily scalable

Independent contractors can be brought in and let go as your business needs change and you’re not obligated to provide company benefits.

They may save you money

Because your company is not required to make employer tax liability payments, you may find it’s more cost-effective to work with an international contractor vs. employee.

Why use an employee instead of a contractor?

The other side of the equation is the benefit employees bring to your company. An employee typically works with your company for a longer period of time than an independent contractor. This provides a continuity of experience that you simply won’t get from contractors. You also protect your workforce when you secure employment and provide much needed benefits like paid leave and health coverage. There are other advantages as well.

No risk of misclassification

Working with employees significantly protects your organization from the compliance risks that independent contractors can expose you to, especially as you grow to new international markets. Unlike employees, international contractors generally may only be paid on a per-project basis, can’t use company equipment and aren’t managed by you directly. If they don’t meet the qualifications of an independent contractor and the local government finds that they should have been classified as employees, your company may face very stiff penalties. In Australia, for example, corporations can be fined 63,000 (AUD) per misclassification violation. 

Better copyright protection 

With employees, you have control over your intellectual property. However, with independent contractors, your company may not hold the copyright to the work they produce, even if it’s produced specifically for your company. In France, copyright protection rests exclusively with the original creator, and can’t be transferred if there is no employment relationship.

More company loyalty

When an employee works for your company, they have a vested interest in seeing your company do well. A large part of that interest comes from the fact that you have invested time and money to help them develop and grow professionally, whether through company training programs or other continuing education opportunities.

Which is the better choice for your international business, contractor or employee?

Hiring international independent contractors can be a simple solution for meeting your global staffing needs, but only if you thoroughly understand how to work with contractors in their host country in order to minimize the risk of employee misclassification. 

For example, France, Australia and the Netherlands all require that an independent contractor file certain documents with the government, and the client company is required to verify that the correct documents have been filed and approved. In Brazil, an independent contractor can only work on a project basis rather than under an on-going agreement. In India, the company may be responsible for withholding taxes on service fees paid to an independent contractor. 

The bottom line is, if you’re going to use an independent contractor vs. employee, you must make sure you’re aware of and compliant with all local laws governing employment.

How to ensure compliance when hiring abroad

Here are a few steps you can take to ensure compliance and protect your company from risk of employee misclassification:

  • Thoroughly evaluate how your company plans to work with contractors in each location
  • Consult with local HR experts where you are looking to hire international contractors
  • Create a thorough and standardized process for managing your contractor agreements
  • Ensure hiring managers and HR teams are informed of the risks contractors may pose and adhere to clearly defined company guidelines
  • Maintain comprehensive records of contractor agreements and payment transactions in the case of an audit
  • Explore alternative employment options for your global hiring needs

After taking these steps, you may find that working with an independent contractor vs. employee isn’t the best option for your company. An employer of record service, like Global Employment Outsourcing (GEO), can help you meet your employment needs while minimizing your risk of employee misclassification. 

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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