As workplace trends evolve, more and more companies are exploring new recruitment avenues to reach their goals. And as remote work becomes ever more popular, new talent markets are opening up all over the globe.
But to onboard compliantly and make the best hiring decisions for your organization, it’s crucial to understand:
The legal difference between independent contractors and employees
The pros and cons of working with each one
Which hiring approach is right for your business
The benefits — and challenges — of hiring contractors and employees internationally
In this article, we’ll cover all of these things, and discuss some of the key risks you should be aware of.
Jump straight to a key chapter
So let’s dive right in.
What is the difference between an employee and an independent contractor?
In nearly every country in the world, the differences between employees and contractors is pronounced. It’s important to understand these differences, because if you incorrectly classify an employee as a contractor, you can create something called — which can result in significant fines, penalties, and reputational damage.
Ultimately, the key differences are as follows:
Employees
Employees work directly for their employers, which means that they are legally entitled to employee rights. Likewise, as the employer, you have certain responsibilities towards your employees.
For instance, you are entitled to regulate the terms and conditions of your employees’ work. This includes when, where, and how they carry out their tasks and duties. As an employer, you also have the right to discipline and terminate your employees, although this must be done in compliance with local labor laws.
It is also your responsibility to withhold and settle any taxes and social contributions on your employees’ behalf, such as healthcare, pension plans, and unemployment. Overall, workers who are hired on an employment contract enjoy more rights and protections than self-employed contractors, such as paid sick and parental leave, and notice periods upon termination.
Independent contractors
Unlike employees, contractors are self-employed (and usually run their own businesses). A company can hire a contractor to perform a one-off task or project, or deliver work on an ongoing basis. Contractors are entitled to decide when, where, how, and even who completes the work, provided that the deliverables meet the terms of the agreement.
Despite this flexibility, independent contractors are not usually entitled to workers’ rights or statutory benefits, such as paid time off, sick leave, and other standard employee perks. They are also responsible for handling their own taxes and social insurance contributions.
What are the differentiating factors between employees and independent contractors?
The above descriptions are a good overview, but when it comes to differentiating between employees and independent contractors, each country has its own nuances and guidelines.
However, there are several key factors that, in most countries, clarify the difference. These include:
The nature of the relationship (employment vs B2B)
In simple terms, an employment relationship is the link between an employee (an individual) and an employer (an entity). The individual receives remuneration in exchange for performing a job under specified conditions.
A business relationship, on the other hand, is between two entities. Even though the contractor is a person, they usually provide their services under the legal guise of a business (i.e. as a sole proprietor).
Contract terms and conditions
Terms and conditions are the rules which businesses establish to ensure a safe and smooth cooperation. They’re part of a legal agreement signed by both parties, where the obligations and contractual rights of everyone involved are recorded. Terms and conditions must be in line with local labor laws and rightly justified.
However, they will vary depending on whether the legal agreement is signed by a contractor or an employee. For example, an employee is obliged to work exclusively for one company and within certain working hours. Such terms wouldn’t apply to a contractor.
Specialized skills
Specialized skills relate to people’s specific talents or capabilities, and whether those skills make them fit for a job. They may be hard skills directly linked to a position (i.e. knowledge of programming languages), or be more generic soft skills, such as strong communication.
Businesses typically hire independent contractors because they possess specialized hard skills and don’t require training. Such an arrangement can be on an ongoing basis, or to fill a temporary skill gap. Conversely, a company may be more willing to employ someone based on their soft skills, and train them accordingly.
Statement of work
A statement of work (SOW) includes requirements for a given project and usually includes:
A scope of work
Project deliverables
Location
Liabilities
Payment terms and conditions.
Companies often use SOWs when they cooperate with external third parties, such as service providers and independent contractors.
Employees, meanwhile, are subject to employment contracts.
Autonomy
Autonomy is the freedom to decide how and when to perform a task. Employees and independent contractors usually have vastly different levels of autonomy, with the latter generally getting free reign (within the framework of pre-agreed deadlines).
Independent contractors are free to decide on their work hours, rates, and methods, while employees are subject to stricter requirements imposed by the employer.
Autonomy is one of the key criteria used by authorities to determine correct worker classification.
Degree of control (“the subordination relationship”)
This refers to the level of control that the worker has in the arrangement. Generally, employees have a lower level of control: they are obliged to follow the rules and requirements set by your organization. For example, they might be required to work from a specific location, and be online during specific hours.
Independent contractors are self-employed and therefore have a higher level of control. They can decide how and where they will complete the work, and at what rate of pay.
Labor rights
Independent contractors are not hired by your company: instead, you are the contractor’s client. As a result, contractors are not entitled to employment rights (in most countries).
In the US, for instance, this means you are not required to pay overtime, grant sick leave, or provide statutory benefits. It also means that the relationship between you and your contractor isn’t regulated by the:
Family Medical Leave Act
Title VII of the Civil Rights Act
Americans with Disabilities Act
While contractors can join the same unions as employees, they won’t be protected in the same ways should the union represent them in court. However, while the bargaining power of unions might be low for contractors, some countries will still pursue complaints aggressively. If a union is incapable of solving an issue for an independent contractor, the relevant tax and law authorities may step in.
Pedro Barros
Pedro Barros
Preston Wickersham
Income taxes
In most countries you are responsible for withholding and settling your employees’ income taxes with the relevant authorities.
Contractors, meanwhile, are responsible for handling income taxes themselves (although, in some instances, you may still need to submit certain declarations, which we will discuss later).
Either way, it’s your responsibility to understand and align with any relevant tax regulations. If you fail to meet the requirements in any country, you may receive penalties and fines from the tax authorities.
Contract value
Employees generally earn a recurring base salary, with any additional benefits — such as healthcare, stock options, or commissions — singled out on their payroll slips. In addition, most countries set a minimum wage to protect workers’ rights.
Independent contractors are free to set their own rates, based usually on their location and the industry. Some self-employed specialists join unions and agree on relevant market rates with fellow workers, although, as the market dictates the price, there is no legal minimum or maximum rate.
Benefits
In most countries, you are obliged to settle your employees’ social security and health insurance contributions, and also make additional contributions of your own. For instance, if the state health insurance contribution is 18%, 8% may be taken from your employee’s salary, and the remaining 10% paid by you.
As with taxes, contractors are required to arrange and cover their own contributions. In many cases, contractors — as self-employed individuals — are required to make both the employee and employer contributions, although some governments set special self-employed rates.
Note that while you are not required to offer benefits to contractors, a growing number of companies are doing so. Many contractors now expect certain benefits, such as paid time off and health insurance, as standard. However, it’s essential to remain compliant when offering benefits to contractors, and ensure you avoid misclassification risk.
Learn more about offering benefits to contractors in .
Compensation insurance
Most countries have some form of workers’ compensation program that insures employees who become injured or ill at work (this should not be confused with disability insurance, which covers non-work-related injuries or illnesses). Compensation insurance typically provides insured individuals with access to healthcare and cash benefits, although this can vary in different regions.
Independent contractors are typically not eligible for this insurance, which can be a source of concern for some workerswho engage in higher-risk work.
Tools, equipment, and resources
Most companies require their employees to use company equipment (such as laptops and phones) for work, usually under an employee equipment agreement. This regulates what your employees can and cannot do with your company’s devices, such as connecting to unsafe public Wi-Fi connections or using them for personal purposes.
With contractors, things are more complex. While some companies require contractors to use company equipment (usually for security purposes), this can create a significant misclassification risk.
Allowing contractors to use their own equipment is safer from a legal standpoint, but poses other threats, such as security and data protection. In addition, some countries might assign intellectual property (IP) ownership of the produced work to the device owner.
If your contractor is going to use their own equipment, it’s recommended to have them sign an agreement which regulates security, privacy, and IP standards.
Tax paperwork
As mentioned, you must withhold and settle taxes on behalf of your employees — which involves managing and submitting a whole host of tax forms.
While contractors settle their own tax affairs, there are still occasions where you may need to fill out and submit certain forms.
If you work with a US-based contractor, for instance, you will need to submit a Form 1099 to the Internal Revenue Service (IRS), even if you’re company is not based in the US. Conversely, if you’re a US-based business and you hire contractors abroad, you will need to submit a 1042-S form to the IRS on their behalf.
Whether you’re working with contractors, employees, or both, it’s crucial to understand what your tax reporting obligations are for each individual. Remote’s can tell you exactly what needs to be submitted and when, no matter where in the world your people are based.
What is the difference between a local and international employee?
A local employee is someone you hire in your own country (i.e. the country where your business is registered and based). In most cases, hiring a local employee is relatively straightforward from a tax and legal perspective.
However, if you decide to employ someone in a different country, you need to follow the employment and tax laws of that person’s country. To understand these laws, comply with them, and manage all your other obligations requires .
On the flipside, there are to hiring international employees, such as:
Increasing the diversity of your workforce
Covering new markets
Generating local knowledge and establishing networks
It also allows you to broaden your recruitment pool and gain access to some of the world’s top talent. Instead of restricting your candidate search to your city or region, you can find and onboard the right person for the role anywhere in the world.
To legally hire someone in a different country, you must either own a legal entity there, or use an service — like the one .
What is the difference between a local and international contractor?
For international contractors, the situation is slightly different. As mentioned, contractors are self-employed individuals, and so you do not need to own a legal entity or use an EOR to work with one.
However, when working with international contractors, it’s crucial to understand the worker status laws in their country, as they can vary significantly across the globe. For example, in some countries, ongoing contractor arrangements are automatically converted into employment arrangements after a set period of time (i.e. six months). If you’re unaware of laws like this, you can create serious compliance issues for yourself down the road.
That’s why, if you’re hiring international contractors, it’s advisable to work with an , such as Remote. As well as ensuring you stay within the lines, our platform enables you to automate invoice payments in multiple currencies, and create locally-tailored agreements for your contractors.
What are the different types of international contractors?
There are several different types of international contractors. They are defined as follows:
Independent contractors
Independent contractors perform tasks for you in the same way that a domestic contractor would, but they are based in another country. The engagement is governed by a localized agreement directly with the contractor.
Subcontractors
Subcontractors typically partner with an umbrella company, which acts as a middleman and manages local compliance requirements for a fee. This option is generally more expensive than hiring an independent contractor.
Agency contractors
Agency contractors are employed through an agency, and move from one contract to another while maintaining stable employment. Agency contractors usually get paid when they’re between contracts, so the agency is incentivized to find their contractors work. The agency helps maintain the quality of work, but they also put a sizable markup on every billable hour or fixed-price project. This is generally the most expensive way to hire international contractors.
Should I hire a contractor or an employee?
So, with all of the above in mind, which one should you hire?
Ultimately, the choice of whether to hire a contractor or an employee depends on your organization’s requirements and resources, and the nature of the role you need to fill.
If, for example, you want to regulate your workers’ operating hours, require them to use company equipment, and need their exclusive engagement, an employment contract might be the best choice.
However, if you are looking for a short-term fix, the amount of work required doesn’t justify a full-time employee, or you just want to set up a more casual arrangement, then a contractor agreement may be a good fit.
Hiring international employees
If you are in the position to hire an international employee, it’s worth considering the pros and cons of doing so as an alternative to hiring contractors.
Pros of hiring international employees
You can hire the best talent available regardless of where they are located
The investment you make in training is retained in the company
You retain
You can offer international assignments to your team
Any risk of potential misclassification is eliminated
Innovation is enhanced due to new perspectives and skills
Cons of hiring international employees
Building a globally consistent culture can be challenging when your team is distributed
You must supply office equipment, office space, and employee amenities in multiple locations
In some countries, you may be required to provide training and professional development beyond your usual policies
You must source local HR, legal and tax expertise everywhere you hire
Employment contracts must comply with local laws
How do I hire an international employee abroad?
Hiring international employees can be fairly straightforward if you have a legal entity in the country where the worker lives. If you don’t have (or don’t want to set up) your own entity, or if your business isn’t ready to scale in that country, the easiest and most cost-effective option is to work with an EOR provider, like Remote.
An EOR handles all the local legal requirements, so you can hire employees compliantly. An EOR also eliminates the need for you to source in-country lawyers, accountants, payroll providers, and HR professionals. Your EOR provider acts as your local HR and legal department on the ground in your hire’s country, and provides them with their pay and benefits.
Hiring international employees can be risky if you’re not familiar with local payroll, taxes, benefits, and compliance in every country where you source talent. This guide was developed to answer all your international hiring questions to help you feel comfortable and confident as you begin onboarding international employees.
Hiring international contractors
If you’re scaling and growing a company, contractors are an excellent option as they allow you to move quickly and flexibly. There are a few challenges, though.
Pros of international contractors
You can supplement your team with highly skilled workers who are “work-ready”
Contractors provide good local knowledge if you’re trying to break into a new area
Contractors usually have large professional networks who can be a good source of referrals for additional skilled workers
Contractors are self-sufficient with limited need for onboarding or training
Contractors supply their own office space and equipment
Contractors work independently
A contractor model is cost effective for short-term engagements
You don’t have to guarantee steady work, especially if you’re in startup mode
Cons of international contractors
Your contractor’s attention may be divided across several clients
You have little say in or control over how they do the job
Misclassification errors can occur if contractor status changes, even if you don’t realize it’s happened
Complying with local employment laws and taxation requirements can be a cumbersome exercise
Contracts must be localized for each country
If you need to convert a contractor to an employee, you must establish an owned entity in the country or find an EOR to hire on your behalf
Your IP and invention rights may not be as well protected as they would be with employees
You may have too many vendors to manage, especially if you use contractors in multiple countries
You could lose talent if they expect future employment and you can’t offer it
How do I hire an international contractor?
Hiring international contractors is also fairly straightforward — as long as you understand the legal and tax implications in both your and your contractor’s countries.
If you don’t have time to become fluent in these implications, don’t worry: Remote makes the hiring and onboarding process simple.
Our contractor management solution lets you:
Create locally compliant contracts
Make payments in local currencies in just a few clicks
Manage all your contractor invoices in one easy-to-use platform.
Our convenient service is designed to help you manage all your international contractors, while laying the groundwork to scale in the future.
Learn how to easily and compliantly hire independent contractors at home and abroad with our comprehensive guide.
Can I convert a contractor into an employee?
It’s entirely possible — and, in some cases, required — to convert your contractor into an employee. For instance, you may:
Be potentially misclassifying your contractor
Want to give the contractor a greater role in your company
Want more IP protection
Want the contractor to work exclusively for you
In some cases, your contractor may even approach you and ask to become an employee.
To learn how to convert your contractor into an employee — and determine when it’s a good idea to do so — check out .
Hiring international contractors and employees with Remote
Whether you’re looking to hire employees, contractors, or both, Remote can help.
Our global HR services allow you to hire across the world, and provide a best-in-class experience for all your people. Specifically, our in-house, on-the-ground experts take care of all the heavy legal, tax, and payroll lifting in every country you hire in, allowing you to focus on growing your business.
To learn more — and to discuss your global hiring options in more detail — with one of our friendly specialists today.
