Companies that expand abroad have a decision to make about which type of remote professional they need. If you are unsure about whether to hire a contractor or a full-time employee, this guide will point you in the right direction.
One thing to keep in mind is that every country has different rules and definitions about employment relationships, and it is the company’s responsibility to follow the laws of the country where the work is being performed. The engagement of contractors is increasing, but along with this is greater government scrutiny of working relationships and the potential for misclassification.
Why Employers Hire Contractors
The reasons why employers hire contractors are plentiful and suit many businesses – there is no commitment beyond the contract term, onboarding is fairly simple and quick, and there is no additional cost such as statutory payments, benefits, withholding, or payroll taxes.
Also, once the project or term is complete, the relationship ends, with no need to worry about termination, notice periods, or severance payments. A contractor can be re-engaged at any time as long as they are available, and their skills meet the business’s current needs.
In most cases, companies don’t need a local branch or entity to hire a contractor, and employers can pay them remotely from the home office. A contractor is also a good choice if a company needs someone to work independently and to complete a short-term project. However, these advantages can obscure the risks of engaging contractors overseas such as misclassification risks, non-compliant payment, and hefty legal fines.
Why Employers Hire Full-Time Employees
Despite the extra cost and administration of hiring full-time employees, it can be a safer choice in foreign countries. The primary reason is that companies can avoid the misclassification risk of contractors under local labor standards. Moreover, there is real value of securing talented employees long-term and creating continuity and ongoing contributions to your business.
However, there are more administrative steps to hiring an employee and it can be challenging if a business decides to set up a corporate entity and manage payroll themselves. These roadblocks are commonly mitigated by partnering with a global Employer of Record (EoR) which would employ the full-time employee for the company and take care of all the necessary employment steps in the foreign market.
Cost Considerations for Hiring Contractors and Full-Time Employees
When it comes to hiring contractors and full-time employees, there are important cost considerations to keep in mind. According to a 2021 report by the Bureau of Labor Statistics, companies have to pay large annual sums to ensure payroll compliance, as well as employee satisfaction and retention.
On average, salaries for full-time employees can cost employers up to 60% of business expenses or more than $27 per hour worked. This means for a medium-sized company with 15-20 employees, paying salaries can cost anywhere between $700,000-$1 million per year. With contractors, businesses can save money by retaining available self-employed workers without having to pay salaries.
On average, employee benefit packages can cost companies more than 30% of business expenses or $12 per hour worked. This means for a medium-sized company with 15-20 full-time employees, benefits can cost anywhere between $100,000-$200,000 per year. With contractors, businesses can save thousands by eliminating the costs of paying benefits.
On average, annual payroll taxes might cost a mid-sized company more than $50,000 per year. In the United States, businesses are most commonly taxed Federal Insurance Contribution Act (FICA) taxes at 6.2% for Social Security and 1.45% for Medicare withholding. Businesses must also pay state income tax withholding, federal unemployment taxes (FUTA), state unemployment taxes (SUTA), and other local tax withholdings.
Sometimes, the choice between hiring a contractor over an employee comes down to costs that don’t reflect a dollar amount. These costs include:
- Time and training. Contractors can bring experience to a project without the need for extra time and training. However, by properly educating employees over time, a company can invest in retaining long-term knowledge and expertise.
- Ethics and values. Hiring contractors with less protections than employees may eventually undermine the ethics of a business that desires to value team members and create a connected company culture.
- Quality and reputation. Because contractors do not have the same skills as a trained employee, they may end up diluting the quality of a product or service, which can have a negative impact on a company’s reputation.
- Reporting and classification. Tax law states that if a business does not declare the exact nature of a contract agreement, or attempts to control the time and work methods of a contractor, it can face tax penalties for misclassification.
So, Should You Hire a Contractor or a Full-Time Employee?
The answer to this question highly depends on your business’s needs and short and long-term goals. If the work is only project-based or seasonal, and your company needs talent fairly quickly, a contractor would be the best fit. If your company is expanding into new markets and seeking committed long-term talent, a full-time employee is best suited for the business.
Hire Your Talent in One Platform
Whether you decide to hire a contractor, a full-time employee, or perhaps both, it is essential to seek in-country expertise to remain compliant with local country regulations. Because the risk of building an international workforce is high, many companies partner with a global HR solution, such as Velocity Global, to ensure they engage contractors and hire employees legally.
Our Global Work Platform™ offers a full suite of talent management and payment solutions ranging from Contractor Classification, Contractor Payments, global Employer of Record, and Multi-Country Payroll. With a plethora of solutions in one, cloud-based platform, businesses partner with Velocity Global to easily manage and pay their global workforce.
Reach out today to learn more about how Velocity Global can help you employ international contractors and employees.