Companies who want to outsource their employment-related activities globally can choose to hire employees in other countries or contract with independent contractors who would not be on the company’s payroll but would rather invoice the company for their labor hours.
Global contractors are individuals who companies may hire to do work for them remotely but would not join the company’s staff with benefits and perks. Instead, contractors run their own businesses and work independently.
Working with contractors is an option for companies that may not want to expend the time and resources to establish legal entities in the various countries where they intend to hire. It can also be cheaper than hiring employees. If you were to use a contractor pay vs employee pay calculator, you would likely see that you can save money because you won't pay any benefits, overtime, and a minimum wage to the contractors.
Because contractors typically don’t have the same legal protections and benefits that payroll employees are entitled to, choosing to contract with contractors can be a cheaper way to get work done, but also be potentially risky.
Independent Contractors Versus Full-time Employees
Having a contract that states that a worker is a contractor is not sufficient for the government authorities when it comes to classification. The relationship between worker and company would be scrutinized to see if there is a de facto employment relationship.
Since companies can save money by omitting statutory benefits from the payments of their workers, as well as overtime, paid time off, insurance contributions, severance payments, and other benefits, government authorities may look into whether the worker is truly an independent contractor or if they are actually employees. If that is true, the government may make the company pay unpaid salaries, overtime payments, severance payments, and other fines and penalties. The following aspects of an employment relationship may be scrutinized.
Risks of the Business
Businesses run business risks. Will you be responsible for the losses if a company's venture fails? Will you get a cut of the profits if the business succeeds? The risks that an employer faces are not shared by employees.
Employers typically give their staff the tools and resources they need to complete a task. For the job at hand, contractors bring their equipment and supplies.
A person is more likely to be classified as an employee of the business rather than a contractor if they are limited to working for that one company and cannot provide services for any other clients.
Control Over Scope and Price
The majority of the time, employees do not determine the specifics of the nature and pay of their jobs. Presenting a contract that can be discussed and negotiated with a business is available to contractors. The likelihood of a worker being considered an employee increases if they have no control over their employment or the compensation due for completed work.
Integration With the Organization
Is there complete integration between an individual's and an organization's activities? An employer-employee relationship is more likely to exist the higher the degree of integration.
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The Dangers of Misclassification
Companies must be careful about misclassifying workers. Since employees must receive benefits and are protected by employment laws generally, companies must be sure not to create an employment relationship where they act as the contractor’s boss and require them to be at work at set times and other requirements. That would likely be legally considered an employment relationship and the individual would be entitled to statutory benefits.
The intent to misclassify is not considered by government authorities, nor is ignorance of the law. If a company made a mistake or if they purposely avoided paying benefits by misclassifying employees as contractors, they still could face fines, penalties, and liabilities, and might even be banned from doing business in the country.
Employees can receive more benefits than independent contractors, such as:
- A nationally mandated minimum wage
- Overtime rules and overtime compensation
- Leave entitlements, such as annual leave, maternity leave, and sick leave
- Social security contributions paid by the employer
- Unemployment insurance contributions
- Health insurance paid for, in part, by the employer
- Anti-discrimination protections in labor laws
- Termination protections, such as a notice period and severance payments
Contributions based on the employee’s earnings, such as social security and pension contributions, are also paid by employers. Self-employed contractors are responsible for their part of the social security contributions without any other company paying for their part of the payments.
Companies that are considered to have been in employment relationships but who haven’t paid contributions for social security may be forced to pay those payments. They may need to pay social security, salary payments, and vacation pay, in addition to possible criminal prosecution for breaking labor laws.
How to Pay Global Contractors
Companies have several different options for paying foreign independent contractors. Since contractors are not on your payroll, paying them could be easier and simpler. You wouldn’t have to deduct payroll taxes or contributions to social security or other taxpayer-funded programs.
The personal income taxes of the worker is the responsibility of the contractor and will not be withheld by the company. Companies will not make employer portions of social security, pensions, and insurances such as health insurance, unemployment insurance
Methods To Make Payments To Contractors
It's crucial to follow the law and treat all of your workers fairly, including when it comes to paying independent contractors. Compared to hiring employees, hiring independent contractors carries some risks, such as the possibility of misclassifying the workers as independent contractors if they are, in fact, considered employees by law. You might still decide to hire independent contractors despite the potential risks. There are a few options available to your business when it comes to paying the contractors' invoices.
Sending paper checks through the mail is an archaic and out-of-date way to make payments. Due to exchange rates, deposit fees, the need to physically deposit the check, and escrow holding until the check clears, this is not regarded as a common way to pay contractors.
International Money Orders
Western Union was once a common way to send money, but it is now just as antiquated and unpopular as paper checks because of deposit fees and the need to make a deposit in person. If digital payment is not an option where the employee lives, this might be their only choice in some nations.
Wise has recently gained popularity as a platform for sending digital payments to independent contractors and remote workers abroad. With just one click, you can send 1,000 digital payments all at once. In 70 nations, you'll pay the real exchange rate. There won't be any additional costs, and the employee may receive your payment in as little as 30 minutes.
When paying remote contractors digitally, PayPal is a common option. Up to a few thousand recipients can receive the payment at once from your business in a variety of currencies. Payments made via PayPal incur a 4% fee. The requirement that the employee has a PayPal account can be a drawback.
Traditional methods of paying a remote worker include having your bank send out international transfers as direct deposits. This is frequently the most expensive way to pay foreign independent contractors. Exchange rates might be expensive, and there might be charges like intermediary fees or receiving bank charges.
Payroll and Payment Service
Finally, a method to pay international contractors is to partner with a payroll and payment service such as Skuad.
How Do You Pay Contractors Compliantly?
As outlined above, there are many options for contractor payments. The best way to pay international contractors is dependent on the company’s budget and accounts with access to the various payment methods. Direct deposit may be the best way to pay contractors for its simplicity but it may come with expenses.
Independent contractor compliance is mostly about correctly classifying contractors. If the worker would be considered an employee, then you would need to do certain things to ensure compliance, such as withholding taxes, making social security contributions, and paying payroll taxes. If you make sure not to misclassify your contractors, then you should avoid the risk of non-compliance. In that case, payments to contractors can be made when they send you invoices. It is important to know that the guidelines for employee classification may vary by country or state and legal advice should be sought.
Choose Skuad For Compliant Contractor Payments
If your company is considering employing payroll employees, there are several options for compensating the employee and paying any payroll taxes and social security contributions. If your company is going to establish a legal entity in the countries where you’re hiring, then you can pay your workers in-house or you can outsource payroll services to a global payroll service such as Skuad.
Skuad is a global employment and payroll platform that handles all the hiring, onboarding, benefits, and compliance for organizations, without having to establish a local entity or a subsidiary.
No matter which method you choose to pay international contractors or employees, make sure to partner with an organization that is going to take care of making payments compliantly, following all labor laws and tax laws. For compliance, simplicity, and flexibility, Skuad can help with your contractor payment solutions.
To see how Skuad can help your company pay employees or independent contractors, book a demo today.