By Globalization PartnersJanuary 2021
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Hiring international contractors may seem like the fastest way to build a global team. However, there are some key things you must consider.
Let’s look at the five questions you should ask as you determine whether hiring international contractors is the best path for your company.
Question #1: What is an international contractor?
An international contractor is usually a person that’s hired on a short-term, project basis. They generally have a portfolio of their own clients, and your company is just one of those clients.
Question #2: How are international contractors different than employees?
International tax and legal advisors generally ask the following questions to determine if individuals qualify as employees rather than contractors.
- Do they work full-time for one company?
- Do they take management direction from that company?
- Do they have any other clients?
- Do they receive employee benefits? (i.e., vacation days, stock options, allowances, health insurance)
Local authorities may decide that an individual hired as a contractor falls under their definition of an employee — this is known as worker misclassification.
Question #3: What is worker misclassification?
Companies must understand the different international definitions of a contractor to avoid significant risks and liabilities when they enter a relationship with a contractor.
In China, for example, the government considers any worker who contributes to an organization’s business, or who is subject to a company’s rules or policies, an employee.
If local authorities determine that your contractor falls under the legal description of an employee, you may be subject to penalties for taxes, benefits, and interests on any salary paid to the employee.
Question #4: What are the possible consequences of worker misclassification?
Many companies think that hiring international contractors to serve the purpose of employees is the best approach to saving money on employer costs. The reality is that local authorities have procedures in place to identify worker misclassification.
- Payment irregularities
Brazil closely monitors payments that are sent from offshore companies to individuals and automatically flag them for investigation by the tax authorities. Outgoing payments from the Brazilian client to its overseas supplier are also tracked.
If a discrepancy between the employer’s payments and the contractor’s responsibilities is discovered, the Brazilian client can be fined for working with a company that is hiring someone illegally.
- Terminations and payroll taxes
If you must terminate an international contractor, it could end up costing you. An employer is required to pay employer payroll taxes. If a tax assessment is made, and your contractor is reclassified as an employee, the fees paid to the employee are typically treated as net income. Employee income tax and the payroll tax are assessed on top of that.
The assessment can go back several years, including interest and penalties. It can include income tax rates of around 30 percent, and payroll taxes, which may vary greatly according to region; from about 10-20 percent in Asia and up to 40 percent in some European countries. Additionally, with interest and penalties considered, the total assessment can reach around $250,000.
- Corporate taxes
The consequences don’t end with payroll taxes — by hiring contractors, companies avoid registering in-country and following the corporate laws required of all companies doing business there. When discovered, this can trigger potential corporate tax issues.
Once tax authorities realize the company has hired illegally in‐country, they may then determine that the company’s activities have triggered permanent establishment, or nexus, and that they should have been following corporate law and paying local corporate taxes all along.
Question #5: How can you avoid international worker misclassification?
To avoid worker misclassification, companies that are hiring and paying international contractors should consider the following:
- If contractors are working full-time for you, they should potentially be classified as an employee.
- You should consult local legal experts about the definition of a contractor before hiring anybody.
- If someone is hired to cover the functions of an employee, that person will most likely fall under the legal definition of an employee.
It is up to companies to protect their own interests. Even if international contractors tell you that they are comfortable with being hired to perform the functions of an employee, they stand to benefit the most from this relationship, while your company stands to lose a lot.
How to hire full-time employees without an entity
An Employer of Record (EOR) serves as the legal employer, handling payroll, benefits, taxes, and HR functions, while employees report directly to your company.
With a locally compliant entity already in place, an EOR like Globalization Partners gives your new hire access to local HR support, and ensures full compliance with all local labor laws and regulations.
The best thing about an EOR is that it takes on 100 percent of the risk, while you focus on growing your company. You can also onboard your global team in days with Globalization Partners.
What is the best path for your company?
Contact our team today for guidance on whether hiring full-time employees or contractors is the ideal solution for your company – we’re here to help. For more information, watch our webinar, “5 Things to Know Before Hiring International Contractors.”