Hire International Contractors vs. Employees - Pros & Cons

Introduction

Hiring international talent poses challenges for global expansion companies. Candidates can fill remote roles as employees who can join a company payroll. Independent contractors can also perform an invoice and help fill talent gaps. Each of these options has pros and cons for companies.

There are several differences between employees and independent contractors, which can create complexities when hiring talent for your team — especially when that talent is located in other countries. For organizations to stay compliant with country-specific employment laws, it is essential to know the differences between employees and contractors. There are also benefits and drawbacks to each, as explained in this article.

Keep reading to learn about the complexities of contractors vs. employees and when each may be right for your team.

Contractors

Independent contractors run their businesses for clients. Companies can contract international contractors and pay invoices for service hours. This is a business relationship between one entity, the company, and the contractor. It is not an employer-and-employee relationship.

Contractors are not on another entity’s payroll and do not receive most government-mandated benefits from an employer. Contractors do not have any income tax withheld and do not have social security contributions paid on their behalf. They are responsible for filing and paying their income taxes and do not have an employer contributing to government programs such as social security and pensions. They also do not receive insurance, such as worker’s compensation, work injury insurance, or unemployment insurance.

Therefore, contractors are not entitled to the same statutory benefits as payroll employees.

What Are the Pros and Cons of Using a Contractor?

There are several reasons your company may hire international contractors instead of forming a team of employees. If the job is temporary, it may be easier, quicker, and cheaper to have a contractor perform it. Then the invoice will be paid, and the contract can end. This allows your company to pay for the work hours without worrying about statutory benefits or taxes.

However, if it needs to be done correctly, one significant drawback with hiring contractors is misclassification.

Employee Misclassification

Misclassification happens when a company pays for contractors' work when an employment relationship exists.

Laws differ by country, but there are certain general characteristics of an employment relationship:

An employee:

• Is subordinate and reports to a manager or supervisor
• Is provided tools for the job
• Does not take financial risks for the business
• Works in one place for one entity
• Cannot decide the place of work
• Does not decide the price of their service

Considering the above characteristics of an employee, companies that treat their contractors similarly are at risk of misclassification and may be liable for fines, penalties, unpaid overtime, unpaid leave entitlements, or severance payments.

Employees

Employees are onboarded into an organization, are entitled to benefits, perform work for companies, and are paid on a payroll. Their employers withhold their income taxes and pay the government contributions for social security or pensions and insurance.

Employees are your workforce, which could be divided into your local staff in your home country and your globally dispersed teams. Even though they may be remote and have been hired with the help of an employment outsourcing service, your company is still in charge of your day-to-day operations, and your remote staff still reports to your company’s management.

An “employee” is sometimes explicitly defined in a country’s employment laws. However, sometimes the definition is not always as clear, and the legal definition of an employee is more clearly spelled out in case laws. Each country has laws, including those governing employment and the relationships between employers and employees. It is important to continually learn and understand the employment laws in every country, region, territory, state, or city where you hire employees.

What Are the Pros and Cons of Using an Employee?

There are a few reasons it can be beneficial to your organization to hire employees and put them on the payroll with full statutory and supplemental benefits.

• It can ensure full compliance with employment laws.
• You can offer a comprehensive benefits package with competitive compensation to attract and retain the best employees. A good benefits package can provide the best employee experience, keep your workforce happier, and ultimately lead to increased productivity and profit.

For those reasons, your company may be better off offering contractors a contractor-to-employee conversion. That way, the individual can get more benefits and increased job security as an employee on your remote team. Changing from contractor to employee can provide a better experience, give the individual a more significant role in the organization, and offer them benefits they wouldn’t have as a contractor.

One downside of paying employees is the costs of payroll and providing potentially expensive statutory benefits, depending on the location. The added costs may be worth it if the larger benefits package attracts the best and most talented employees.

Hiring Employees or Contractors

There are different scenarios when it may be beneficial to hire employees vs. contractors. Depending on their goals and budgets, organizations can plan to hire employees to put on their payroll or contract with independent contractors.

Hiring Contractors: Contractors may be the best choice if your company needs temporary or quick work done.

Hiring Employees: If your company is doing business for a lengthy time and it would be beneficial to keep the same people working on your projects, offering remote roles for payroll employees who receive benefits may be the better option.

Employers would need to set up a local subsidiary to hire employees and contractors in many countries legally. This is a legal entity such as a corporation or a limited liability company. Each country will have its rules and regulations on entities and their requirements, such as tax registrations, bank accounts, and a minimal amount of funding for establishing an entity.

Employers of Record and Professional Employer Organizations

Suppose your company creates a legal entity in a country. In that case, your company can outsource some human resources duties such as payroll processing, taxes, and benefits with an HR outsourcing service such as a professional employer organization (PEO). The PEO would then be your staff’s co-employer along with your company.

Another option for hiring employees would be to partner with an employer of record (EOR), which can handle almost all aspects of human resources, such as hiring and paying employees, giving them benefits, and taking care of compliance.

When contracting with independent contractors, you are not required to establish entities. Your company would contract for the services with the contractor and then pay an invoice for the service. This arrangement is essentially two entities doing business with each other: a client paying for a service provided by a contractor. Organizations could also use an employer of record for contracting with contractors. The EOR can ensure that legally compliant contracts are used, and that invoice payments are accurate and timely. Your company can use the EOR as a contractor management system.

How To Hire Contractors and Employees Compliantly?

One of the most critical steps a company can take to stay compliant with the global market is to partner with an international employer of record service. Whether you are looking for an employee or an independent contractor, each country where you are hiring will have different laws. These laws — specifically service laws — can be complex and ever-changing.

Compliance can be easy and inexpensive with a local legal team in each country. There are solutions in the form of global outsourcing services such as employers of record, with owned entities and local legal teams who know the details of the local laws and customs. These teams can keep your company legally compliant and make hiring and paying global talent a breeze.

Using an Employer of Record Such as Skuad

Employers of record can ensure not just compliance with local employment laws but also compliance with laws regarding the classification of employees. Your company may still wish to contract with independent contractors, despite the risk of misclassification. An employer of record can handle contractor invoice management and ensure no employment arrangement might trigger the risk of misclassification.

If your company intends to hire international employees, an employer of record can handle many more human resources activities besides ensuring compliance.

Skuad's employer of record services:

• Hire and onboard remote employees in over 160 countries
• Pay employees and contractors in over 100 currencies
• Be the legal employer of your employees
• Accurately process payroll and pay payroll taxes with global payroll services
• Administer statutory and supplemental benefits and perks
• Take on the legal risks and responsibilities of remote hiring
• Ensure compliance with local employment laws

Get a demo of the best employer of record services for your internationally expanding company today.