International contractors are a great way to fill in gaps for your business. They can help you do everything from data entry and marketing to design and programming. And thanks to the internet, hiring freelancers and remote workers abroad is a lot more feasible.
It is legal to hire international contractors; however, legally hiring an international contractor is not always easy. You need to be aware of the risks that come with working outside of your country’s legal jurisdiction as well as any restrictions on currency exchange or payment processing methods that may exist where they live and work.
In this article we’ll outline some things you must avoid when hiring international contractors so you can stay out of trouble and make sure your project is a success.
Mistake 1: Misclassifying Your Contract Workforce
Misclassifying employees as independent contractors is a very common mistake because it allows companies to avoid the charge of meeting employment regulations. This mistake usually occurs when first hiring abroad or in the early stages of engagement.
There are many international contractors who will not be considered employees. As long as they meet certain IRS criteria then they may still classify under independent contractor status for the company and can provide their services without being subjected to employer-related taxes or insurance fees.
In the U.S., there are different tax rates for employees and independent contractors. If you hire an international contractor as a freelancer, they may be subject to paying much higher taxes than if they were your employee.
If you don’t know what type of worker should be assigned to a vacant position, the Fair Labor Standards Act has created several categories that define who is an employee versus an independent contractor. As of March 8, 2021, the Final Rule on Independent Contractors has gone into effect, and there are penalties for misclassification.
One of the best ways to tell whether or not a worker is classified as a freelancer or independent contractor is to ask these questions:
- Is the person able to set their own work schedule?
- Does the company provide them with tools they need for performing tasks such as internet and software access?
- Are you engaging this person temporarily rather than long-term?
- Do they have any freedom in what projects they can take on outside of your business environment without getting approval from a supervisor first?
If the answer to all of these questions is “yes”, then the worker is most likely an independent contractor.
However, the U.S. laws aren’t the only ones you need to be looking out for. For a picture of how vast the differences in classification can be from country to country, check out Ogletree’s article: Independent Contractor or Employee: How Some Countries Differ.
The Cost of Misclassification
Your company is at risk if it doesn’t properly classify your workers as contractors or employees. As many people know, there are legal definitions of an employee. Companies that hire people with a contract that legally defines them as independent contractors may be penalized if these people work for you in the employee capacity.
Different countries treat misclassification differently, too. Jiah Kim Law points out that “in France, a bogus self-employment can bring up to 3 years of imprisonment and a fine for employers.”
A lot of times it can be difficult to know whether an individual working with us will be classified differently than we initially expected; so sometimes those situations lead to mistakes like mislabeling our workers as “independent contractors” instead of full time staff members because they were hired internationally early on.
Hiring managers need to consider the role they are hiring for carefully to determine if it is best fit for a full-time employee, part-time employee, or contract worker. Read our recent article on the ABC test to understand the criteria for employee classification in the U.S.
For hiring outside the U.S., classification gets very complicated. There is no universal classification of employees, but rather a system that can vary by country and local regulations. The best practice is to use an EOR like GreenLight who works with top labor lawyers and can update classification in real time as these laws can and do change quickly.
GreenLight is the first AI-driven classification engine. We’re the 21st-century solution for businesses that want to avoid the headache of misclassification. We provide the technology and resources needed to ensure your local and international hiring workflow is legally sound. Our mission is to make sure that workers are always paid promptly, reliably, compliantly, and seamlessly.
Mistake 2: Hiring with Non-Compliant Contracts
International contractors can be a great asset to any company, but as with all hiring processes, it’s important to make sure the contract is in compliance with local laws. If you’re not careful, you may end up having contracts that are non-compliant and difficult to enforce.
A general international contract may not be compliant with the laws where all your contractors live and work. For example, a contract drafted in India may not comply with U.S. labor standards or non-compete agreements for your project so it must be redrafted before signing. There are many considerations that can make this mistake possible including: specific country’s laws, communications processes between you and overseas team members, culture of the organization, and language barriers.
A written agreement with a foreign contractor is not only important to establish terms of the work relationship, but also for an independent contractor designation. It should specify what services are required and if compensation will be given in advance or at project completion. In addition, it’s best to clarify who has control over how a worker performs their duties so that there are no misunderstandings on either side and disagreements can’t arise later down the line as well.
To avoid being challenged by applicable courts about this declaration of independence from one another, make sure you keep parameters like these clearly stated within your documentations; otherwise any declared status could lose its enforcement power quickly. When hiring employees abroad, it is important to understand the in-country regulations because usually local employers and freelancers are favored.
Contractors from other countries may also have a different understanding of what constitutes an employer-employee relationship. Keep in mind that there are often differences between the legal definitions and perceptions of responsibilities within these relationships, as well as their resolution processes when conflicts arise. Be sure to check if your contractor’s country requires using local laws or courts on work contracts before agreeing with them.
Mistake 3: Not Following International Payroll Guidelines
Non-compliance with payroll regulations is a major issue for any organization. If your company is not complying with payroll regulations, or if you are in violation of these laws, it can lead to hefty penalties and fines that come right out of your pocket.
Failing to understand the in-country contribution list and payslip could mean being noncompliant with payroll. Incorrectly running payroll and failing to make required withholdings or contributions can affect the contractor’s take-home pay and social security benefits.
Mistake #2 is so critical because most withholding information is determined by the contracts you have in place from the start. Both you and the foreign contractor will rely on the claims made in your contract to determine withholding obligations and tax reporting.
Businesses with contractors in the US must report all payments made over $600 to these workers. However, if a business hires contractors from other countries and they are not located within America’s borders then there is no need for those companies to withhold or pay taxes on that contractor’s income. It is still necessary to report the amount you pay international contractors to the IRS via a Form W-8BEN for individuals and Form W-8BEN-E for entities to prove that they are not a US Independent Contractor.
There are additional documents that may be needed depending on the status of the worker and their location. When you hire using a freelancer management tool like GreenLight, you will be able to get W-8 and any other necessary documentation automatically.
How to Avoid These Mistakes
Working with foreign independent contractors can be an excellent way to grow your business. By following the steps given above, you will avoid costly legal troubles and ensure that all work-related records are in writing. Check out our recent article, How to Stay Compliant with International Workers, for more information.
It’s always a wise idea for businesses who expect long term relationships with their contractors to know local labor laws inside out or use an Employer of Record like GreenLight. Schedule a demo today so you can start hiring abroad with ease.
