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How to Pay Contractors in India

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01-How-to-Pay-Contractors-in-India

Hiring an independent contractor in India opens your company up to specialized talent with specific training and skills without the need for a long-term commitment. This level of customization and flexibility gives both you and the contractor freedom to decide how and when a task is completed. However, working with a contractor does not fall under the same laws and guidelines as standard workers, and you have to be careful not to manage contractors as if they were employees.

This guide covers paying an Indian contractor and the difference between contractors and employees.

02-Access-international-talent

Employees vs. Contractors

Hiring employees or partnering with contractors in an international market gives you access to unique resources, new time zones, and lets you choose the perfect candidate for a project, regardless of their location. If you want to access international talent, you have three options:

  • Expand your company: Expanding your company into a new market could mean establishing a subsidiary or opening a branch in India and hiring local employees. International expansion is an intricate process that takes careful consideration and planning but could be the best way to achieve global recognition and increase profits.
  • Hiring remote contractors: Hiring remote contractors lets you take on new help without the need for a presence in a new market. Hiring contractors in India typically involves working with a contractor outsourcing company and international payroll management to help facilitate the logistics.
  • Working with an Employer of Record (EOR): A global EOR like Globalization Partners acts as your payroll and human resources (HR) management in new markets, so you can focus on daily operations and project management while we take care of the complexities of international labor laws and currencies.

Are employees or contractors right for your company? In many cases, combining both could be the best fit for your industry and projects, but it all comes down to the type of work you need done, your hiring structure, and your overall company goals in India.

1. Employees

Employees include full-time and part-time workers on your company’s payroll who receive legally required benefits, like insurance, paid time off, and pensions. With an employer-employee relationship, you determine which tasks the employees are responsible for as well as their schedules, salaries, and bonuses. While employees have a definite start date, contracts often do not include an end date, and you must follow special steps if you decide to terminate the relationship.

In India, employees are classified as either workmen or non-workmen. Workmen are skilled and unskilled operators who work in manual, technical, clerical, and similar fields. Non-workmen are typically in managerial positions.

Staffing your company with employees can be very beneficial — it’s a traditional business structure that promotes feelings of loyalty between the employee and company. Hiring employees also allows you to invest in their growth and help them develop their skill sets to enhance their position and take on more projects as they gain experience. With these benefits come several legal requirements for employers, including the following:

  • Completing legal paperwork
  • Withholding taxes
  • Investing in training programs
  • Providing incentivizing benefits
  • Maintaining a competitive wage
  • Reimbursing work-related expenses
  • Choosing employee insurance plans

2. Contractors

Unlike employees, contractors shouldn’t hold an integral role in your company, such as management positions. Instead, companies choose to hire a contractor to fulfill a specific need or project and work until the project is completed. Contracts have a specific start date and qualifications for completion. For some companies, this could be an ongoing, as-needed partnership or a one-time event. Some countries refer to independent contractors as entrepreneurs, sole traders, gig workers, or freelancers. Contractors are not a part of your company payroll, and you are not responsible for providing insurance or withholding taxes from their pay.

Labor laws do not cover independent contractors, but companies are expected to regulate their use of contractors by not misusing the contractors as employees and, therefore, denying them suitable payment or benefits. Some industries or regions may have specific guidelines or prohibit the use of contractors, depending on the type of business you’re engaged in. India does have restrictions in place for contract laborers, and in some areas, employers may need to meet qualifications to hire contract employees or laborers.

Working with a contractor gives both parties the freedom and flexibility to pursue as-needed partnerships. You can choose the best contractor with the skills you need for an upcoming project, and the contractor is free to work with other companies and industries.

Where to hire contractors in India

Many companies use a combination of employees and contractors to meet various goals. While employees often offer more long-term benefits for a company, using a contractor may be the best choice for certain projects, such as localizing your product or service in a new market. For example, if you choose to expand your product or service to the Indian market, local contractors will be a valuable asset for translations, local marketing, product design, and labeling regulations.

Unsure how to get Indian contractors with relevant experience to facilitate your next project? You can find them in several places, including:

  • Local contractor outsourcing companies
  • Virtual job boards
  • Industry-specific databases
  • Freelancing websites

Legal requirements for hiring contractors in India

Legal requirements for hiring contractors in India

The most important part of paying a contractor in India is avoiding misclassification. Misclassification occurs when the relationship between the company and the independent contractor becomes too close to an employer-employee relationship. One such misstep that may lead to misclassification includes reimbursing the contractor for work-related expenses, without the added benefits of being an employee, like health insurance and tax withholdings. Working with an EOR is one way to navigate global labor laws that can help you identify the differences between your core employees and optional contractors.

Consider the following components when working with a contractor.

1. Written contract

Written contracts are not required for employees or contractors but are highly advisable. The written contract sets guidelines between you and the independent contractor and establishes clear expectations for the project. Your contract should include:

  • The project’s scope and a list of expected tasks
  • The start date and end date, if applicable
  • Compensation, payment structure, and frequency of pay
  • Intellectual property (IP) protection and detail of rights
  • Liability for tasks and resources
  • Non-disclosure agreements (NDAs)
  • Termination expectations and stipulations

2. Benefits and insurance

You are not responsible for providing contractors with benefits, including the following:

  • Health insurance
  • Life insurance
  • Retirement plans
  • Pension programs
  • Vacation time
  • Sick time
  • Maternity leave

You may choose to award bonuses or similar non-payroll rewards to contractors, as long as you avoid misclassification while doing so.

3. Termination and severance

Because contractors work on a project-by-project basis, termination is usually only necessary if the contractors fail to uphold their end of the agreement or your company goals change mid-contract. Be sure to review termination policies in your written contract before partnering with an independent contractor and give adequate notice, as required. Depending on the payment structure you agreed on and your reason for termination, you may still need to pay the contractor some or all of the amount agreed to.

4. Intellectual property

Per the Patent Act of 1970, the author of a piece of work — such as a logo or product design — is the owner of its copyright unless it was created under contract or as an employee, in which case the employer may be the rightful owner. Be sure to discuss all IP rights with contractors before hiring them to work on a project.

Tax practices and considerations

Contractors are responsible for paying their own income taxes and securing insurance, but the company must still keep track of employment and contract-related expenses, including compensation, and report them to the appropriate body when filing their taxes. If you’re using a combination of workers, be sure to keep records separate for employees and contractors to avoid confusion.

04-How-payroll-works

How payroll works when paying contractors in India

India’s minimum wage is competitive and equates to about INR₹176 per day and INR₹4,576 per month. If you’re hiring an employee in India, you are typically obligated to pay wages by the seventh or 10th day of the month, depending on your industry and how many employees you have. Part of the flexibility of using an independent contractor is that you can agree to a payment structure and timeline that works for both of you.

Common options include:

  • Before the project: When you pay a contractor upfront, you’re assuring the contractor that you’re upholding your end of the agreement. In some cases, the contractor may use the payment to cover the cost of project-related expenses, like equipment or travel. The biggest risk with this method is that you have no control over the final product’s quality or the contractor’s performance — be sure to include a contingency plan for refunds in the written agreement.
  • Upon project completion: Paying the contractor upon project completion is the safest way for you and your company because you can make adjustments as needed if the contractor failed to complete the project in the agreed-upon manner. Some contractors may not agree to this payment method without specific written guidelines in your contract to ensure they receive payment.
  • Partial payments: Partial payments are a hybrid of pre-project and post-project payments and involve paying the contractors a deposit before they begin and withholding the remainder of their payment until the project is completed. For this method to be successful, you must clearly define the payment structure, amounts, and payment dates in the written contract.

You can also choose between paying per project or by the hour, depending on how long your relationship with the contractor will last.

1. Currency and exchange rates

As noted above, India’s currency is the Indian rupee. Exchange rates vary, depending on inflation, trade flow, investments, oil prices, and other factors.

As of the third quarter of 2021, INR₹1 is currently equal to:

  • US$0.014
  • GBP£0.0097
  • EUR€0.011

Currency transfer fees will also vary, depending on your payment delivery method, the financial institution you’re going through, and the amount you’re transferring.

2. Payroll handling methods

Part of handling payroll for international contractors is choosing the safest and most cost-efficient payment method, such as:

  • Direct deposits: The biggest advantage of direct deposit is that it’s a safe and fast method of distributing payment worldwide — no physical checks or cash are involved. However, you must factor in all bank fees, exchange rates, and possible transfer fees associated with your and the contractor’s financial institutions. It’s also challenging to stop a payment once you’ve submitted a transfer request.
  • Paper checks: Paper checks take longer to travel to the contractor and are at risk of being lost or getting destroyed in transit. However, in less developed regions, the paper check may be the only payment option available. They are also easy to stop in transit, should something change. Be sure to check with your bank about the fees and exchange rates for international payments.
  • Money orders: Money orders are similar to paper checks in that they are a good option in less developed regions, and they give you and the contractor a strong paper trail for recordkeeping and taxes. However, you can only purchase international money orders at specific locations, like a bank, and the contractors must physically deposit the money order themselves after receiving it.
  • Virtual wallets: Virtual wallets let you transfer money to international contractors, which they can then transfer directly into their bank account or associated debit card. While there are still fees and exchange rates to consider, you get total protection from loss, theft, and destruction. The most significant drawback of virtual wallets is that you must have the necessary equipment and resources to facilitate all digital payments.

While other methods like payroll debit cards are optional for employees, they aren’t the right choice for contractors who will only be working for a fixed term.

05-Establish-presence-in-India-with-help-from-Globalization-Partners

Establish a presence in India with help from Globalization Partners

Working with international contractors in India gives your company the flexibility to choose highly qualified candidates to help you complete special projects on an as-needed basis. Most companies find success with a hybrid model, so you can select contractors for project-based needs and rely on full-time employees for integral parts of your operation.

If you’re interested in hiring employees in India without establishing a subsidiary, Globalization Partners can help. We are a global EOR that handles all international hiring, payroll, and HR management for your part-time and full-time employees. We understand the local labor laws and have a presence in more than 185 countries and ensure your company remains compliant, all without the need for a local branch or entity.

Learn more about how our comprehensive solution can help you establish a presence in India and access worldwide talent. Request a demonstration today.

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