Using independent contractors internationally can be a quick way to add talent in new markets. But it also comes with substantial compliance risk if you’re not familiar with the nuances of the local employment laws.
Here are some frequently asked questions to help you better understand the risks of managing independent contractors internationally:
How should overseas contractors be paid?
Most independent contractors are paid through accounts payable, with the contractor sending an invoice directly to the company. It is the contractor’s responsibility to report all income and manage their own taxes.
Can a paid intern be hired as an independent contractor?
Generally, no. An intern implies someone who is junior in experience and thus requires supervision, guidance and training to perform their work. This requirement removes them from consideration as an independent contractor.
Is a 1099 required when paying contractors located outside the U.S.?
Generally, there is no requirement to file 1099s for contractors working outside the U.S. However, it is a good idea to request that contractor file IRS Form W-8BEN, certifying their foreign status.
Can a U.S. contract be used when managing independent contractors overseas?
It is possible to use a U.S. contract for foreign contractors; however, you should ensure that any country-specific language and clauses are included.
Should contractors be provided paid time off for vacation and sickness?
Generally, no. Providing benefits such as paid time off is considered part of the employer-employee relationship. If contractors are offered benefits, they would likely be considered employees, and therefore misclassified. However, in some countries and under certain circumstances, you may have an obligation to provide some benefits. It’s best to consult local experts be sure your contractor is compliant.
Should any of the contractor’s invoice be withheld for tax purposes?
No. As an independent contractor, the individual is responsible for filing and paying taxes. It’s a good practice to state this requirement explicitly in the contractor agreement to help ensure tax requirements are met.
How long can a foreign contractor be engaged for?
Independent contractors should be engaged for specific projects and for a short term. Specific rules vary by country, so be sure to obtain legal guidance.
How is intellectual property protected when a contractor is involved?
The best way to protect your intellectual property is through a clearly worded clause in a contract that declares any intellectual property developed belongs to your company.
Can an independent contractor own equity or stock options of the company that they are contracted to?
Yes, this is generally permissible, and it does not necessarily interfere with the person’s status as an independent contractor. However, care should be taken to ensure there are no possible conflicts of interest and that are no questions about company ownership.
If a contractor has been misclassified, how many years back can the penalties be applied to?
Rules and penalties vary from country to country, but it is not uncommon to be responsible for several years of back payments, including taxes, insurance payments, pension or retirement plan contributions. This is in addition to any penalties and, in some cases, potential jail time.
What happens if an independent contractor and an employee are working on the same job site in a similar role?
When governments evaluate worker misclassification, one of the areas they assess is how employees are supervised. If you're managing independent contractors under the same supervision and on the same job site as a full-time employee, this will be a red flag during any government audit, and the employer is likely to face consequences for misclassifying the independent contractor.
If your contractor is performing in the same capacity as your employees, it’s a good idea to hire them on as a traditional employee to avoid misclassification.
If a U.S.-based nongovernmental organization hires international independent contractors to work on programs on a temporary basis—for example, a French worker in Bangladesh—is the organization subject to French employment laws?
Assuming the contractor has the correct paperwork and visa to work in Bangladesh, they would be subject to the employment and income tax laws in Bangladesh. However, you should still take into consideration the laws of the home country for income tax purposes. For specific requirements, it’s wise to consult an international tax adviser.
We require our employees to comply with policies such as child protection, code of conduct, protection of sexual exploitation and abuse, etc. These requirements include policy acknowledgement and training. Can we require an independent contractor to comply?
Yes, you can incorporate language into your contractor agreement requiring them to comply with your organization’s specific policies.
What types of assessments would indicate whether an independent contractor is misclassified?
When assessing your contractors, assess how they’re paid, who controls their day-to-day activities, whether they are provided company resources, and whether they are only providing services to your company. Additionally, if you have a high concentration of contractors in one country, you should investigate whether the local government has additional criteria it uses to classify employees.
What are some examples of companies that have been penalized for independent contractor misclassification?
- Egypt: A court convicted 43 NGO employees.
- Australia: A company was hit with record penalties for employee misclassification.
- Europe: An EU court ruled that misclassified self-employed contractors can claim back holiday pay.
What are the risks to an organization if an independent contractor doesn’t file their taxes?
It’s largely dependent on the country where the contractor works, but there may be risk for the organization if the local government finds that the contractor should have been classified as an employee. In the case of employee misclassification, the employer may be liable for unpaid taxes, fines and penalties.
Does using an independent contractor internationally protect an organization from permanent establishment risk?
In many cases, no. It is possible that your foreign contractor creates taxable revenues for your organization that you then need to account for to avoid being classified as a permanent establishment. If they are acting as a representative of your business, then the local government may consider your organization operational in country and therefore liable for taxes.
What impact does GDPR have on my relationship with contractors in the European Union?
Consider the type of work that the contractor will be performing and what type of information they will have access to. If the contractor will need to access, store or otherwise process personal data on behalf of your company, then GDPR and its consequences apply. For example, if the contractor is an IT service provider, they may need to access your company’s systems and devices to provide their services, which means they’d potentially gain access to data about your employees, customers or partners that falls under GDPR purview.
Who is responsible for handling immigration requirements travel into another country is required as part of an assignment?
Independent contractors are responsible for handling their own immigration matters. By getting using company resources to get involved in matters such as immigration, you risk employee misclassification.
What alternative exists to prevent against misclassification when managing independent contractors?
An employer of record, such as Global Employment Outsourcing (GEO), can mitigate your risks of misclassification by converting your independent contractors into full-time employees. The employer of record, sometimes known as an international PEO, hires your contractors for you, in full compliance with local regulations and customs, and you continue to manage independent contractors' day-to-day work. So you can benefit from their services—without the HR risk and responsibility.