The difference between employees and Independent Contractors

An independent contractor is a worker hired to provide a service for which the client company pays. However, there are also legal definitions of which to be aware, such as the legal definition of employee.

Fundamental differences are outlined below, but it is important to note that courts and governments worldwide have differing definitions and rulings. It is, therefore, essential to understand the employment laws and legalities involving the definition of employees as well as the employment laws generally for each country in which you will be hiring.

Control of the Cost of the employment

Independent contractors set their rates. Employers pay employees a wage set by the employer.

Tools and Materials

An employer provides equipment and tools for their workers to use. Contractors bring their tools.

Work Schedule and Workplace

Employers set schedules, work hours, and locations for their workers. Contractors set their hours.

Subordination

Employees answer to a supervisor or boss who can correct and punish the employee. This is not true for contractors.

Benefits of Hiring Independent Contractors

Hiring an independent contractor can benefit your company in a few ways. The first is that it can be easy to get work done and paid for, especially if you use independent contractor management software to track hours and invoice payments.

The other benefit is that it can be cheaper for your company. If you have a limited budget for payroll, paying independent contractors can be a way to get work done without having to provide certain employee benefits that might be costly. For example, in many countries, employers must make some contributions to social security, work injury, and pension fund based on employee monthly earnings. When you pay an invoice for a contractor, it’s just the payment for the hours worked and services rendered.  However, you must check the laws for each country you hire to ensure full independent contractor compliance.

Limitations of Having Independent Contractors

Companies need to be careful not to misclassify employees as contractors. Authorities do not consider the intention, nor is ignorance of laws. Whether a company makes a mistake or purposely avoids paying benefits by misclassifying employees as contractors, they still may need to pay heavy fines and penalties and could even be banned from doing business in the nation.

When contracting with an independent contractor, there is always the risk that the government may consider the contractor an employee entitled to benefits and protections. The consequences may be extreme. Therefore, it is important to classify your employees correctly.

The Risk of Employee Misclassification

In most countries, contractors do not receive protections such as minimum wage and overtime rules or benefits such as paid leave and, in some cases, health insurance. A company that treats and pays a worker as a contractor when instead they should be considered an employee gets out of paying those benefits and saves money. If the government authorities find that a company has done so, whether intentionally or accidentally, the company may be forced to pay back wages with interest, statutory benefits, fines, and, in some cases, face criminal prosecution for fraud.

Independent contractor benefits differ from employee benefits. In some countries, contractors may be entitled to some benefits, such as social security access, but generally do not get the numerous statutory benefits to which employees are entitled. Be sure to research the country's independent contractor tax laws when paying contractors, as they may differ by country.

Generally, employees may get mandatory benefits and labor law protections such as:

• A minimum wage
• Overtime pay
• Annual leave
• Family leaves include maternity, paternity, parental, adoption, and care leave.
• Fully or partially paid sick leave
• Employer social security contributions
• Pension contributions
• Unemployment compensation
• Worker’s compensation or work injury payments
• Health insurance premiums
• Anti-discrimination protections
• Termination protections such as notice periods and severance

Mandatory benefits differ by country, so this list is just by way of example. In some countries, employees have significantly more mandatory benefits than in other countries. In some countries, independent contractors have certain protections in the labor laws and benefits such as access to social security or health insurance.

The Consequences of Misclassification

Companies might face fines or be liable for unpaid wages and statutory benefits, including severance payments, if they misclassified employees as contractors. Some consequences of misclassification, which vary by country, could include criminal investigation and prosecution for fraud and barred from doing business in the country.

To avoid the expensive mistake of misclassification, companies need to classify their workers correctly. If you intend to work with independent contractors, be sure there isn't an actual employment relationship where you would need to pay minimum wage, overtime, and benefits, as outlined in previous sections. If the government finds a miss classification error, you could owe those employees unpaid overtime, severance, vacation pay, and may have to pay other penalties such as fines.

Paying Independent Contractors

Your company has a few options to pay the independent contractors when they invoice you for the hours worked. The method you choose should accurately track the hours worked and timely payments sent out to pay the invoices.

Methods of Payment

PayPal

If the contractor has a PayPal account, employers may send invoices through PayPal.

International Money Orders

Western Union is a way to send payments overseas.

Direct Deposits

Exchange rates and fees may be expensive, but direct bank transfer is a way to pay invoices.

Paper Checks

Checks can be sent in the mail, though this may be a time-consuming and outdated payment method.

Wise

Wise is a platform for sending digital payments to remote contractors or employees. You’ll pay the exchange rate and be able to send payments to over 70 countries.

Payroll Software

One way to accurately pay invoices is to use Skuad’s independent contractor payroll software. With Skuad’s help, you can pay your contractors with no hidden costs or long-term commitments. You can pay contractors worldwide with one unified and secure platform. Approve accurate invoices and pay your team members on time and in their currency. If you need help, online chat support is available for guidance.

Hire Employees and Contractors Globally With Skuad

Skuad is a global employment and payroll platform that offers Employer of Record services to help you quickly hire and pay your independent contractors without setting up a subsidiary. With an extensive network in 160+ countries, Skuad lets you onboard and manage contractors on a single interface. 

Skuad allows you to pay your international employees through a single invoice and ensures that your company’s IP rights are protected. With consistent pricing no matter which country you’re hiring in, Skuad provides a fast and affordable way to start hiring internationally immediately. Contact our expert team to kickstart your global expansion and begin hiring today.