Global employment classifications: Contractor vs. Employee vs. PEO

Hiring International Contractors or Employees

Global Hiring Options

If you’re hiring people internationally, you’ll want to think carefully about the different ways you can engage talent and which hiring option is the best fit for your business. It is especially important to pay attention as the relationship between you and your hires changes over time to make sure your workforce continues to be classified correctly. Learn more about Independent Contractors, International Employees, and PEOs/EORs below.

Related: Accelerate global growth with an agile HR strategy 

Independent Contractor

Understanding Contractor Classifications

Different countries and governments have various definitions regarding contractors versus employees. But as a general guideline, if an individual exclusively works for one employer for an extended period, they are usually classified as an employee. As a result, the business owners will be expected to treat them as such. This means you need to implement wages, benefits, and employment tax for that employee and the work performed. 

If you want to classify a worker as a contractor, they’ll need to meet the following criteria:

  • They are allowed to work for several companies at the same time
  • They control their own working status or schedule
  • They can only work for a single company for a short period of time before moving on to a different company

Utilizing independent contractors for one-time projects can be very fruitful for a small business. They can enjoy significant cost savings when it comes to benefits reductions.

Consequences of Legal Errors

Even innocent mistakes can become costly endeavors for a company. If a company and local government don’t align on the proper classification of a worker, it can result in serious tax penalties.

Here are a few common tax penalties to be aware of:

  • Back tax withholding on wages, since contractors are expected to pay their own taxes 
  • Benefits or any overtime paid to the worker
  • Paying full-time employee benefits such as vacation, sick leave, or severance pay

In some countries, it is quite common for contractors to claim the work relationship classifies as an employee, and report a company to the local government so they can receive these back payments. 

Related: Independent contractor compliance? It’s kind of a big deal 

Businesses should always use legally-binding employment contracts that are drafted with will also need to establish in-country agreements, making sure to follow any regulations of the local labor laws in context and not templates that may leave loopholes. If this is done incorrectly, labor courts can rule in favor of contractors to receive withholdings and benefits. Even if you have a local agreement in place, contractors can fight for employment status. This can be a costly process, especially if you are subject to pay legal fines. 

Accurately paying foreign contractors requires thorough knowledge of the tax and employment laws in the countries where your business operates. These factors will weigh the heaviest when assessing a foreign country’s regulations and requirements for an employee relationship. 

International Employees

Overseas Laws and Regulations

When it comes to hiring full-time employees, you will need a legal presence to ensure compliance with local employment laws and obligations. This can be complicated especially if you are hiring in you hope to hire in multiple countries because regulations vary significantly between countries and often between provinces and states even within the same country.

Related: 7 common questions about international employment contracts 

Let’s look at China as an example. If an employer hopes to hire an employee, they will need to make contributions to housing and social care schemes. These legal requirements and costs will need to be taken into consideration during your expansion. 

Your international success is contingent upon having a firm grasp of local employment law. 

Compensation and Benefits

When it comes to employee compensation, all salaries and benefits should be determined by socially expected norms, local market conditions and any benefit regulation. Offering international employees the same salary or benefits as U.S. employees could end up costing significantly more in the long term. In these cases, salaries should be offered in the local currency of the host country. 

Overseas payroll may also have additional complexities due to various compliance regulations and exceptions to consider. For example, in some countries part-time and full-time employees are treated the same for certain benefits. 

Employee Data Protection

When companies think about GDPR, they likely only focus on the protection of customer data. However, employee data is also included in these regulations, which are often neglected. Failure to implement the proper protections could result in hefty fines from local governments. 

Related: 10 international HR mistakes 

When it comes to employee information, E.U. employees have the right to access this information for their own purposes upon request. This includes a right to understanding how companies intend to use their information and the right to be forgotten. It’s important to have systems and processes in place to provide these employees with access to their data when needed. As part of those processes, your company must demonstrate how you are processing, storing, and destroying this information in a fully compliant way.

Professional Employer Organization (PEO) / Employer of Record (EOR)

There can be a lot of risk when it comes to hiring overseas. Using an Employer of Record (EOR) service can help mitigate these risks, while still giving you control. With laws and regulations frequently changing for different countries, it can be challenging to keep track of compliance, legal and tax requirements. 

International PEO provides services to create legal entities in a target market, which allows businesses to hire local employees. This third-party entity manages all the legal requirements and payroll, while the business manages the international team on a day-to-day basis. 

Related: Global hiring playbook 

For those seeking to hire their own international employees, international PEO has the lowest risks and costs. 

Evaluate Your Options

Contractor Employee PEO
Type of Work Temporary/Short-Term. No specific duration applies globally. In case of a dispute, local country labor laws will determine if length of contract work implies employee status Long Term, day to day work is managed by employer Long Term, day to day work is managed by employer
Pay Paid hourly or by project Salaried Salaried via the PEO
Benefits (Medical, PTO, Pension) Managed by contractor Employer Provided – statutory, non-statutory Benefits are fully managed via the PEO
Taxes No taxes are withheld by employer. Contractor is fully responsible for reporting own taxes. In some countries, employers may be required to withhold payroll taxes. Employer must pay and withhold relevant taxes, including income, social and unemployment tax All withholding, taxes, filing, reporting are managed via the PEO
Exclusivity Typically works for multiple clients Typically, exclusive to one employer Typically, exclusive to one employer
Termination Can be terminated at any time Severance pay and notice period are required as per terms of employment contract Severance pay and notice period are required as per terms of employment contract

About Global PEO Services

Global PEO Services, a Safeguard Global company, helps companies expand globally without having to set up legal entities in foreign jurisdictions and deal with related talent acquisition, human resources, benefits, payroll, tax, and compliance issues. Hire employees fast, test new markets, or respond to growing business needs quickly while leaving the compliance and operational burden to us. 

With our Professional Employer Organization (PEO) or Employer of Record (EOR) services, you get control without taking on legal entity liabilities, contractor risks, or sacrificing on talent and speed to market. Contact us today to learn more.