Hiring independent contractors from different countries has become the norm for companies that are looking to build a presence in other major markets. Engaging a worker as a remote foreign contractor can help you engage with different workers from around the world.
Engaging international independent contractors has several benefits, but there are also several major considerations to be made. For example, if a company misclassifies an employee, they can face some serious penalties, whether the misclassification was done on purpose or not.
Employers will also need to be aware of the specific local labor laws and federal employment taxes within the country of the worker. This can be easier said than done because certain countries afford independent contractors certain benefits and rights that might not be present in the company’s home country. Certain laws can be a barrier for companies that want to build employer-contractor relationships.
This guide will tell you what you need to know about hiring independent contractors abroad. We will also tell you some of the countries that have particularly contractor-friendly employment laws to help keep you compliant when you hire contractors in another country.
What is an Independent Contractor?
Companies that want to hire foreign independent contractors will need to understand what a contractor is, along with the necessary requirements for compliant independent contractor agreements.
An independent contractor is engaged to complete a specific project or for a set duration. Independent contractors are not considered employees and are not entitled to the same benefits. However, independent contractors generally receive greater flexibility over when and where they work.
Independent contractors can be employed within several professions, including as:
- Doctors
- Dentists
- Writers
- Musicians
- Software designers
- Business owners
With the growing popularity of flexible working arrangements and the gig economy, engaging independent contractors abroad has become increasingly vital to international businesses.
What is the Difference Between an Independent Contractor and an Employee?
Companies that are looking to hire independent contractors will also need to make sure they understand the difference between a foreign independent contractor and a regular employee. Failure to classify workers properly can result in significant noncompliance penalties, which can include financial damage, reputational damage, legal trouble, and more.
Generally speaking, an independent contractor is a self-employed individual who is responsible for handling their own employment tax withholdings. These include self-employment taxes such as Social Security and Medicare.
Contractors are also responsible for handling all necessary social security and medicare contributions and usually need to submit an invoice. Companies that are looking to engage foreign contractors are not legally required to provide certain benefits, such as paid time off. Organizations will need to offer a legal independent contractor agreement to the worker.
In contrast, an employee is generally hired to perform labor for a company on a permanent basis. Companies are responsible for all necessary payroll deductions, including the necessary tax amounts and social welfare contributions. Employees are legally entitled to statutory benefits as stated by the local department of labor. Employees also tend to work for someone else’s business and can typically only work for one single employer at a time.
Contractors receive a more limited range of benefits than regular employees but also have much greater flexibility and freedom when it comes to performing work.
Risk of Misclassification
Companies that want to engage independent contractors abroad will also need to understand the risks of misclassifying employees. Treating an employee as an independent contractor can lead to major compliance risks and financial penalties. Additionally, companies may be responsible for back pay depending on the situation, administering benefits for contractors, and more.
Misclassification can be somewhat complicated and appear in various forms. For example, misclassification can include:
- Misclassifying a driver is when the worker performs labor exclusively for a single legal entity while using the company’s tools or equipment.
- Classifying an employee as a student intern.
- Classifying a worker as an officer, director, or associate of the corporation exclusively, or in cases when the worker has invested in the company.
Companies can be liable for misclassification penalties even when entirely accidental. It’s important to keep this in mind when drafting an independent contractor agreement.
Reputational Damage
Companies that misclassify employees can also face significant reputational damage. This can make it much more challenging to hire talented independent contractors and employees in the future, as workers may not want to work for a company with unethical practices.
Engaging an employer of record (EOR) such as Borderless can help ensure that all employees are classified correctly to keep you compliant.
Benefits of Engaging Independent Contractors
In addition to the ability to save on employment-related costs, hiring an independent contractor abroad can provide companies with several additional important benefits.
Flexibility and Agility
Recruiting contractors from around the world can provide businesses a more cost-effective way to grow their business and scale their workforce. Instead of being required to pay for expensive benefits packages, companies can engage an independent contractor on a project-by-project basis, allowing for greater flexibility. After the agreement ends, the company is also not required to provide severance pay.
This increased flexibility is particularly useful for companies building an international presence or operating in less stable markets. Offering independent contractor agreements can also help companies save on overhead costs such as office space or supplies.
Access to Desirable Skill Sets
Companies that are looking to engage independent contractors can access a much wider talent pool. This helps ensure that organizations can recruit the best and most qualified individuals to perform services. Additionally, each independent contractor likely has highly specialized knowledge, which can contribute to significant productivity gains.
Accessing a wider pool of skilled workers can help your company remain competitive. Engaging contractors can also improve your company’s quality of work without the need to set up a foreign entity.
Reduced Liability
Companies that engage with independent contractors are not subject to many of the legal requirements that they are when hiring an employee. For example, the termination procedures for a contractor are significantly different than those for a permanent employee. Additionally, because contractors are responsible for handling their own taxes, companies can benefit from reduced legal liability for employment-related reasons.
The limited employment rights of independent contractors can help prevent any potential lawsuits in the future. All terms should be defined in the independent contractor agreement.
Challenges of Engaging Independent Contractors
Engaging independent contractors can provide businesses with several key benefits, but companies may face some challenges throughout the process of developing a contractor relationship. In addition to the risk of misclassification, companies will need to make several considerations to remain compliant with all relevant labor laws.
Challenges with Retention
Independent contractors are generally engaged for temporary work, which means it can be difficult to retain talent after the project’s completion. Contractors have the flexibility and autonomy to turn down any potential contract renewals and can set their own rates, meaning companies may have to pay more to keep a contractor in their workforce.
Difficulties in retaining talent and high turnover rates can also potentially disrupt a company’s workflow and impact the organization's culture.
Less Control Over Your Staff
Companies that want to engage foreign independent contractors also have less control over their schedules. Contractors have the freedom to choose how, where, and when they work, which can make it more difficult to supervise or manage your remote workforce. Additionally, independent contractors will generally use their own tools or equipment to complete projects.
Employers who want greater control over their staff should consider hiring employees instead of working with contractors. In fact, employers who are too involved in the independent contractor’s work process may be liable for misclassification.
Issues with Intellectual Property
Employers usually own all intellectual property created by their employees. However, companies that engage an independent contractor may lose copyright ownership for certain projects. In some countries, a legal agreement must be made that grants the employer ownership of intellectual property. This can potentially be a significant issue for businesses if the independent contractor produced or had access to sensitive information.
Contractor-Friendly Countries
Certain countries around the world have specific employment rules and regulations that provide additional rights to independent contractors. Companies engaging contractors in these countries will need to understand local labor laws to avoid noncompliance penalties.
This can include factors such as a more streamlined taxation process for contractors, how easy it is to set up an entity like a sole proprietorship, market conditions, and more. These can all make it much easier for an independent contractor to operate in certain countries.
Australia
Australia is one of the countries that have dedicated legislation to help support independent contractors. In December 2022, the government passed new regulations in the Fair Work Act, which governs all aspects of employment in Australia. For example, independent contractors are protected from adverse action, coercion, and abuses of freedom of association under these rules.
Additionally, Australia has strict protections against sham contracting. This is when an employer intentionally misclassifies an employee as an independent contractor to avoid employment-related costs. It is forbidden to:
- Knowingly or recklessly represent an employee as a contractor.
- Knowingly provide misinformation to convince an employee to perform the same duties as a contractor.
- Dismiss or threaten to dismiss an employee to use them as a contractor for similar employment responsibilities.
Companies can face fines up to $93,900 for each instance of sham contracting.
Canada
Canada is another country that has several beneficial regulations that companies must know when engaging independent contractors. The country has a well-defined set of rules for self-employed individuals and clear rules regarding a worker’s employment status. Additionally, individuals can ask the Canada Revenue Agency (CRA) for an official ruling to determine the correct classification.
Canada also recognizes dependent contractors as a type of worker. This means the contractor retains control over their working relationship but is significantly financially dependent on the employer. In this case, the employer owes the contractor reasonable notice upon termination of the working agreement. Failure to do so could result in legal action.
Brazil
In contrast to many other countries, Brazil has a required notice period when terminating an independent contractor. The notice periods are:
- Eight days for monthly remuneration.
- Four days for bi-weekly remuneration.
- One day if the contract is valid for less than seven days.
Misclassification in Brazil can result in significant financial punishments. Noncompliant organizations may risk fines up to BRL 400,000 if the Brazilian Ministry of Labour determines fault on the end of the employer. The fine is also doubled for organizations that continue to misclassify independent contractors and employees. Employers may also be forced to provide back pay or benefits with interest.
United States
The US has several rules and regulations in place that make it easier for independent contractors to operate as self-employed. Under the Fair Labor Standard Act, a worker’s income must meet a minimum weekly or annual amount to be exempt. In this case, non-exempt employees – including both shift and contract workers – are entitled to overtime pay if they work for more than 40 hours per week. Overtime pay in the United States is equal to at least 1.5 times their normal hourly pay rate.
Independent contractors in the United States are also entitled to certain rights depending on the state. For example, companies looking to engage workers in California will be subject to rules such as Proposition 22, which allows rideshare companies like Uber to classify drivers as independent contractors.
Contractors in the United States will need to navigate the various requirements for Form W paperwork when filing taxes. For example, independent contractors will be required to fill out a Form W 9 if they classify themselves as such, are not a full-time employee of the business and will be paid more than $600 for any services. Form W-9s also require certain documentation, such as the worker’s federal tax classification, taxpayer identification number, and more.
Georgia
Georgia is another country that makes it easy to hire independent contractors abroad. In addition, it’s an attractive market for freelancers to operate in due to the more relaxed regulations. In 2021, the country ranked as the seventh easiest country in the world to do business in, and finished second in terms of starting a business. This means that independent contractors can register themselves as a business easily.
Taxation rates are also favorable, and individuals can qualify for full tax residency after operating in the country for 183 consecutive days. Self-employed individuals can register for Small Business Status, which reduces the amount of tax owed to 1% if the business falls under a certain category.
New Zealand
New Zealand also has some important rules and regulations that should be known when engaging foreign independent contractors. Like Georgia, the country has a straightforward process to register your own business. The country also has excellent internet connectivity, facilitating an ideal environment for remote workers.
Companies that misclassify employees as contractors can also face significant fines from the Employment Relations Authority for sham contracting.
How Can Borderless Help?
There are many benefits to engaging independent contractors and building contractor relationships that can help you grow your business and increase productivity. Expanding your hiring pool internationally can also help your company save money by reducing domestic employment-related costs and other expenses. However, there are also key challenges companies will need to know, such as the risk of misclassification.
Borderless is an employer of record that can handle all aspects of the hiring and onboarding process. This includes drafting legal employment contracts for all workers, handling all required payroll deductions, enrolling employees in benefits programs, and more. Your EOR handles all the complicated areas needed to engage contractors, giving you more time to spend on managing your workforce.
An employer of record will also ensure you remain compliant with all local labor laws and properly classify your employees or contracted workers.
Request a demo with us to see how we can help you streamline the onboarding process and legally engage with workers from around the world.
Disclaimer: Borderless does not provide legal services or legal advice to anyone. This includes customers, contractors, employees, partners, and the general public. We are not lawyers or paralegals. Please read our full disclaimer here.
