By Globalization PartnersJanuary 2021
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Hiring international contractors seems 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 before hiring international contractors.
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 contractor misclassification.
Question #3: What is contractor misclassification?
Companies must understand the different international definitions of a contractor to avoid significant risks and liabilities when they enter a contract or 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 contractor misclassification?
Many companies think that they can get away with hiring international contractors to serve the purpose of employees to save money. The reality is that local authorities have procedures in place to identify contractor 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.If you must terminate an international contractor, it could end up costing you. Click To Tweet
Question #5: How can you avoid the international contractor trap?
To avoid contractor misclassification, companies that are hiring and paying international contractors should consider the following:
- If contractors are working full-time for you, they should be considered an employee.
- It is illegal to pay international contractors “under the table.”
- You need to 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.
If your company wants to avoid the contractor trap and hire international employees without going through the tedious process of setting up an international entity, then an Employer of Record (EOR) could be the answer.
What is an Employer of Record and how can it help you avoid the international contractor trap?
An 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 gives you access to local experts that will make sure that your employees are completely compliant with local laws and regulations.
The best thing about an EOR is that it takes on 100 percent of the risk, which means you don’t have the burden of ongoing compliance. Also – you can onboard your global team in days.
Want to learn more about paying international contractors and what an EOR can do for you?
As we mentioned, international expansion doesn’t look the same for every company. The biggest mistake that you can make is not taking the time to look at all your options before hiring and paying international contractors.
We invite you to discover the best option for hiring your international team, including hiring international contractors and hiring through an EOR. If you want to learn details about the top five things you should know before hiring international contractors from legal experts, we invite you to listen to our webinar.