Many multinationals believe that hiring international contractors to perform work in a country where the company has no locally incorporated subsidiary is the easiest, safest option. On the surface, it may seem like hiring an independent contractor rather than employee seems like a shortcut around the complexities surrounding payroll and labor compliance, but that’s typically not the case. In this article, we will delve into the pros and cons of these working relationships to help you decide what’s best for your business.
It is important to note that labor courts rarely reference the contractor agreement when determining the status of a company’s international team member. Instead, officials determine if the parties have an employment relationship based on the work performed. As you can probably guess, more likely than not, courts will decide that the contract is an employee, which leads to significant problems for employers.
For example, in 2007, Spain and Peru passed laws stating that there is an automatic employee classification for international contractors who work for one client. Also, in the Ministry of Defence v. Kettle EAT 2007, it was deemed that in the UK, employment tribunals must look outside the four corners of the contractor agreement and base employment status on the realities of the job.
Given these examples, you may be thinking that all international contractor relationships are a bust. That’s not true. There are cases such as a one-off design jobs and project-based work with start and end dates in which contractors are the perfect solution. Let’s look at the pros and cons of these working relationships.
Defining International Contractors
To put it simply, an international contractor resides in your target market (let’s say, France) and works for your U.S.-headquartered company. A contract defines this relationship, not an employment agreement.
Quick tip: Do not use a contractor agreement that you use for U.S.-based contractors. Work with an international consultant and/or your legal team to create a country-specific contractor agreement.
Types of International Contractors:
You can find and hire contractors through face-to-face meetings, online job sites, and through umbrella companies (typically in the UK). Here’s a brief overview of each:
- Autonomous Contractor: Works for your firm in your target country without oversight. An agreement, preferably local to that country (see quick tip above), defines the relationship.
- Project-Based through Agency: This international contractor works for your company but lives in your target market. They are hired through the digital agency under a contract that may or may not be foreign. The agency helps maintain the quality of work.
- Contractors through Umbrella Companies: These contractors partner with an umbrella company. Your business can work with these companies to hire contractors. The umbrella company manages all of the compliance requirements including payroll, taxes, benefits, and withholdings.
Pros & Cons of International Contractors
We described some of the risks associated with engaging in an international contractor relationship. It’s not all bad. Let’s explore the benefits below.
International Contractors: Pros
Contractors allow your team members to focus on strategy and customer penetration. Canterbury Property Services, an Australian property and wealth creation company, earned $180 million in turnover in just a few short years. They had a team of 10 employees. Contractors performed all of their accounting, legal, IT, research, architecture, and engineering work. By using contractors for highly-skilled, complex jobs that went outside of the realm of its internal team, Canterbury found tremendous success in its operations.
International contractors may make more money per hour, depending on their work, but it can save companies money in the long-term. When working with contractors, companies do not pay into costly entitlements including social security, healthcare, and pensions.
Highly qualified, flexible workers. First, international contractors are experts in their trade. They make their living performing jobs for various clients usually in one field. Some companies need highly skilled workers. Plus, they are typically more flexible with their schedule and willing to adapt to your needs.
International Contractors: Cons
No security through an agreement. As mentioned, labor courts will look at the work performed, not an agreement when determining the status of an employment relationship. This is the biggest risk to employers. Contractors deemed “employees” must receive all back taxes, withholdings, and benefits.
Establishing a legal entity, even with contractors. Don’t be fooled into thinking your company is safe by just hiring contractors and not having a legal presence in-country. If a legal battle occurs, your company needs a presence in that country through a foreign subsidiary or International PEO. If you do not have a legal presence, you will be subject to significant fines on top of the benefits owed to your employee.
Lack of control over performance. Whether you’re working directly with a contractor or through an agency, your company still has less control over the quality of work. By nature, international contractors are autonomous. You cannot place restrictions or schedules on their work.
Lacking IP Protection. Your company’s IP is not protected by your domestic agreements in foreign markets. Due to this restriction and international laws, it’s often hard for companies to protect valuable information overseas, especially when working with contractors.
In short, the risks are prevalent. Instead of engaging in an international contractor relationship, consider converting them into a locally compliant employee using International PEO. Contact Velocity Global today to get started.