Understanding the Risks of Hiring Independent Contractors

Global recruitment unlocks great potential for your business, but how you employ international talent matters. Contracting may seem like the easier option when you find great talent abroad or begin expanding into new markets, but there are considerable risks and potential costs you should be aware of.

Contrary to popular belief, employing international workers permanently can be much simpler and less risky than contracting, especially if you partner with a trusted global employment provider. Full-time employment is far more advantageous for most businesses in the long run, boosting retention and engagement while protecting your company values and IP.

Why Should You Employ Remote Talent over Hiring Contractors?

Embracing a remote or hybrid work model opens your business up to new opportunities, allowing you to find top talent from further afield and even globally. This leaves you with a difficult choice, though: should you employ full-time remote workers or hire independent contractors instead?

For companies focused on long-term, sustainable growth, hiring remote employees is the best option and comes with many benefits that outweigh the perceived ‘simplicity’ of hiring independent contractors.

• Widen your talent pool: Contracting is cumbersome and bureaucratic, which means many highly skilled workers would prefer permanent employment instead. In some countries, contracting can be unpopular or very uncommon, too. Offering permanent positions over contract work will open your talent pool to far more applicants, increasing your chances of finding the very best.
• Retain top talent: Full-time employees have access to key benefits and perks that contractors typically don't, including social security, holiday pay, learning and development training, stock options, and other long-term aligned incentives. This helps to keep workers happy, healthy, and engaged, which in turn boosts productivity.
• Achieve your long-term goals: Contracting isn’t a long-term solution. After all, an independent contractor is typically hired for a particular service over a short period of time. Permanent employees, on the other hand, have a vested interest in contributing to company growth and living your business’s core values.
• Mitigate compliance risks: Misclassifying employees as independent contractors, permanent establishment risk, and IP protection are just a handful of the risks associated with hiring independent contractors abroad. We’ll go into more detail about each of these later.

When done compliantly, contracting is one way to get an urgent job done quickly, but nurturing home-grown talent is an investment that surely promises great rewards and higher profitability in the long term.

That being said, employing remote talent globally does come with its own risks. Luckily, global employment providers, like Omnipresent, can help take care of the legal burden and associated administrative duties by employing your staff on your behalf.

While the employee is very much part of your team and carries out the work you assign them, you don’t have to worry about local compliance, tax regulations, or international payroll - we do all that for you! Sold? Click here to find out more!

What Is an Independent Contractor?

The definition of ‘contractor’ varies from country to country, but generally speaking, an independent contractor is a skilled worker paid to do a specific job for a defined period of time. They will sign an agreed contract with the company contracting them, often use their own equipment, and define their own working hours and schedule.

Do Independent Contractors Pay Taxes?

Contractors have to pay local taxes and contributions, but they are responsible for doing so themselves, rather than through the employer. Contractors generally don’t go on your company payroll, so you don’t normally have to withhold or pay any taxes on their behalf. Instead, you pay independent contractors through invoices they submit.

While contractors do pay taxes, they generally aren’t entitled to the same benefits permanent employees enjoy, such as health insurance or paid leave for vacation or sickness. Contractors can take out their own private medical insurance if they wish.

Do Your Independent Contractors Need Insurance?

Independent contractors should have their own professional insurance, as they aren’t covered by a company’s workers’ compensation policy. If contractors don’t take out their own insurance, the company contracting them may be liable for any injuries they suffer at work.

When hiring a contractor, you should ensure all insurance requirements are covered within the contract before proceeding.

What Are the Risks of Hiring Independent Contractors?

Many companies assume hiring international workers as contractors instead of employees is simpler or more cost-effective because they don’t have to comply with local employment regulations. But that’s not necessarily true; contracting isn’t as simple and hassle-free as you might expect. From non-compliance penalties to complications with intellectual property rights, employing independent contractors abroad can be risky and costly.

Misclassifying Employees as Independent Contractors

One of the major pitfalls to watch out for when contracting is misclassifying employees as contractors. This can lead to severe legal damages and penalties due to non-compliance.

One of the fundamental differences between contracting and employing is the relationship between the employer or client company and the hired individual. Although this is defined differently from country to country, contractor or employee status is generally decided upon according to the following criteria:

• Whether a person is subordinate or dependent on a company for paid work
• Whether the remuneration for a job is a person’s only source of income
• How long a person has been working for a company
• How integrated the person is within a company
• Whether the working hours and place of work are stipulated by the employer
• How crucial an employee’s role is to the routine running of the company
• The control which the employer exerts over a person’s work

While you may think a contract alone is enough to determine an employee or contractor relationship, local authorities can challenge your definition of this relationship.

In fact, many countries are actively cracking down on misclassification by introducing measures to ensure employees are not wrongfully labeled as contractors. If your company is found to have misclassified a contractor, you may have to back-pay taxes and contributions with interest, pay fines, and even face legal action.

Employing compliantly from the start eliminates the risk associated with adhering to region-dependent definitions of contracting and the potential financial costs of getting it wrong. As measures to regulate the hiring of contractors are introduced worldwide, employing permanent team members can reduce your bureaucratic and legal burden in the long run.

Permanent Establishment Risk

Hiring contractors abroad can trigger something called permanent establishment risk, making your company liable to pay corporate taxes in multiple jurisdictions.

Permanent establishment risk refers to the presence of a fixed place of business in a country where a company is carrying out business activities. Permanent establishment is generally triggered by revenue-generating activities, but this doesn’t just apply when you start employing in a country - an independent contractor may be enough to trigger financial responsibility.

When hiring independent contractors abroad, your company’s legal status in a country can be unclear. Non-compliance with local laws and tax regulations can lead to hefty fines and lengthy lawsuits.

In contrast, hiring full-time employees is actually a more secure way to avoid permanent establishment risk. While you might still be liable to pay corporate tax, employing permanent staff is both legal and transparent in the eyes of local authorities.

When done right, employing remote talent instead of contracting them can help you avoid being non-compliant, giving you peace of mind to focus on your core business activities.

The Definition of Contracting Differs from Country to Country

Identifying a worker as an employee or independent contractor doesn’t just depend on local labor laws; it can also depend on local cultural norms and customs.

In South America, for example, contracting isn’t a popular or common concept. Any form of agreement of service in exchange for monetary compensation is treated as an employment contract. While contracting is possible in Argentina, for instance, the state usually assumes employment. Because of that, the employer has to prove that they hired a contractor rather than an employee, which can be a complex and difficult process. As a result, contracting is largely avoided in those countries.

It’s a similar case in several Asian countries, like China, where there is no legal definition for an independent contractor. Companies that hire contractors in China run the risk of engaging in a de-facto employment arrangement.

The definition of contracting varies significantly from one country to the next. Employing from the get-go is a far more transparent way of growing your global team and helping you to avoid bureaucratic and legal obstacles that get in the way of high ROI activities.

Complications with Your Company’s Intellectual Property Rights

Your intellectual property is what drives your business forward. But protecting intellectual property rights becomes more complicated when you hire contractors.

In an employment situation, intellectual property - including copyright, patents, trademarks, and trade secrets - usually belongs to the employer, not the employee who created it. This means that your employees’ work is directly tied to your company. While some jurisdictions grant intellectual property rights to employees, you can easily add additional contracts or clauses to secure these rights as the employer.

However, when it comes to hiring contractors, it’s significantly more difficult for employers to obtain intellectual property rights. This is because contractors are in business for themselves, and many will request to retain their own intellectual property rights.

Unlike contractors, employees are incentivized by your company’s success. A committed workforce is much more secure, cost-effective, and dedicated to the long-term goals of your company.