Contractor Management

International contractor vs. employee

Mayank Bhutoria
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For businesses looking to build an effective and efficient workforce, having a mix of both contractors and permanent employees is the way forward. There is no denying the fact that having either type of worker - contractor or permanent employee comes with its own set of advantages and disadvantages. If you solely hire international contractors, you must compromise long-term commitment and loyalty for the perks of having a flexible workforce - on-demand specialist talent, at-will hiring and termination, costs and compliance. On the other hand, if you rope in full-time employees to build your workforce, you have to compromise on flexibility and the cost-effectiveness contractors can offer.

Owing to this the demand for international contractors is ascending. Only in the United States did the number of independent contractors increase from 57.3 – 73.3 million during  2017 – 2023, and by 2028, the number of freelancers in the U.S. will be 86.5 million. It will make up 50.9% of the total U.S. workforce.

Hiring independent contractors when testing new overseas markets does make sense. However, owing to employee misclassification laws, is it a sustainable option in the long run? 

Here are some crucial differences between employees and independent contractors to help you make an informed hiring decision.

Employee vs. independent contractor

BASIS FOR COMPARISON EMPLOYEE INDEPENDENT CONTRACTOR
Nature of relationship An employee is a worker hired by the employer to work on a regular basis in exchange for a fixed remuneration. There is an employer agreement in place. A self-employed individual who performs services for another organization in exchange for fixed compensation is an independent contractor. There is a contract in place.
Work Work is a key aspect of business operation Work is temporary and not an integral part of business operation
Source of income Salary Proceeds from each project
Taxes Employers have to pay and withhold relevant taxes, including income, social, and unemployment taxes for employees No income taxes are withheld with the client company. Contractors will be responsible for all of the relevant taxes
Benefits Most employers pay for and provide benefits like health care, disability, paid leave, and retirement for their employees. Contractors have to pay for their own benefits like health care and retirement.
Training Employees receive training for performing services in a particular manner. Contractors do not receive any training from the client company.
Independence Works under the control and direction of an employer. Works independently.
Management Oversight The employer manages day-to-day work Only the result of work is managed, not what work is done or how it's done
Service Loyalty Service is provided to one company during a particular period of time Service is often provided to multiple clients simultaneously
Expenses Employers are responsible for reimbursing work expenses incurred Self-responsible for work expenses, like device purchase, software purchase, etc., and may not receive reimbursement from the client company
Termination In most cases, severance pay and a termination notice are required before terminating an employee; regulations vary by country. A contractor can often be terminated at any time.
Protections Employees are entitled to benefit from various legal protections, including minimum wage laws, overtime pay, and workplace safety regulations. Employment laws provide a framework for fair treatment and working conditions. Independent contractors have limited legal protections compared to employees. Certain labor laws that safeguard employees' rights and working conditions do not cover them.

Why do employers hire independent contractors?

There are multiple benefits of hiring independent contractors over regular employees. Let’s learn about the key benefits of hiring contractors.

1. To bring a specialized talent at scale:

International contractors bring flexibility to an employer’s hiring plans. With independent contractors in the mix, you can scale your workforce depending on your changing business requirements. It allows you to scale their workforce based on demand, seasonality and project requirements. 

2. To achieve cost efficiency:

When hiring a contractor, you are not burdened with additional expenses like health insurance, retirement contributions, paid leave, and other benefits. As your company doesn’t have to pay for employer tax liability payments or other service benefits, you may find it’s more cost-effective to work with an independent contractor vs. employee.

3. To have a global talent pool:

Since independent contractors prefer to work remotely, hiring contractors allows companies to get skills and knowledge that might not be easily available in their local labor market. Here, employers have access to a worldwide talent pool.

Why do employers hire full-time employees?

1. For long-term commitment:

Full-time employees start associating themselves with the organization and work towards the company's goals. A long-term relationship with an employer fosters loyalty and develops a commitment to the organization and its vision.

2. For continuous training and development:

Investing in employees allows continuous up-skilling and growth, leading to a knowledgeable and talented workforce that can change with the company's demands.

3. For fostering company culture:

Full-time workers help create a unified work environment that promotes belonging and teamwork.

Pros and cons of having International Contractors

Here are the key advantages and disadvantages of having international contractors in your organization.

Pros Cons
Access to Global Talent: You get a chance to tap into a diverse pool of skills worldwide. Limited Control: You have less control over work processes.
Cost Efficiency: Can save money on benefits (tax, insurance, etc.) and overhead expenses (devices, software, training, etc). Legal Complexity: Navigate varying international labor laws and follow them accordingly. There is a chance of misclassification risk.
Flexibility: Scale up and down the workforce according to project needs. Communication Challenges: You have to deal with issues related to time zone differences and language barriers.
Specialized Expertise: Access professionals with specific skills and expertise. Reduced Loyalty: Contractors may lack long-term commitment to the organization.

Pros and cons of having full-time employees

Now, move on to the pros and cons of hiring full-time employees.

Pros Cons
Consistency: You can form a stable, ongoing workforce for sustained operations. Higher Costs: It is a greater financial commitment with benefits and overhead.
Loyalty and Commitment: Considering the opportunity for individual benefits and personal growth, employees invested in company goals. Limited Flexibility: Hiring full-time employees is not suitable for fluctuating workloads.
Company Culture: Hiring permanent workers contributes to developing a collaborative work environment. Recruitment Time: It is a long process to hire and onboard employees for permanent positions.
Training and Development: Through training and learning facilities, your employees upskill themselves and contribute to your business with continuous skill enhancement. -

Cost considerations for hiring contractors vs. employees

Contrators Employees
Upfront cost Lower upfront costs as you don’t need to pay for their benefits, taxes, training, or extensive onboarding. expensive due to benefits, training, and onboarding processes.
Ongoing Costs Cost-efficient. You need to pay them for the project they work on—no fixed expense. Higher ongoing costs as you need to pay salaries, benefits, and training expenses.
Legal and Compliance Costs You may need to consult local law experts to understand contractors. You may need to have law experts on your team to deal with legal and compliance costs.

Partner with Gloroots To Hire a Global Workforce

Whether you are planning to recruit an international employee or an independent contractor, you may have to deal with several associated challenges and risks.  An EOR like Gloroots can help you hire independent contractors and employees quickly and compliantly. Gloroots handles all the legal requirements of hiring any type of employee and helps you seamlessly generate employment contracts, freelancer agreements, payroll, benefits administration etc. 

Laws and regulations related to international contractor hiring are frequently changing across the world. So it becomes difficult to maintain compliance. Gloroots can handle all your legal and tax requirements to enable you to focus on other business growth initiatives. If you plan to hire international contractors or full-time employees, Gloroots can provide you with every necessary support.

FAQs

Q. 1: What are the tax implications of hiring international contractors?

Ans: Independent contractors are responsible for managing their own taxes. This is why many employers prefer hiring independent contractors. However, employers must classify the independent contractors correctly, as misclassification can lead to serious consequences like penalties and fines. 

Q2: What factors should businesses consider when deciding between contractors and employees?

Ans: When deciding between contractors and employees, you must consider factors like the nature of the work, project duration, required skill set, budget constraints, and the level of control and supervision needed.

Q3: Do international contractors need work visas, and how does this affect the hiring process?

Ans: The need for work visas depends on the contractor's location and the nature of the work. Employers must know visa requirements and work with contractors to ensure legal compliance.

Q4: What risks are associated with misclassifying workers as contractors instead of employees or vice versa?

Ans: Misclassifying employees or independent contractors can lead to legal action from the Ministry of Labor of the corresponding country and financial penalties in the form of fines and employee compensation. Employers must classify workers accurately based on the nature of their relationship and adhere to local labor laws accordingly to avoid penalties and potential lawsuits.

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