Hiring International Contractors or Employees
There are many distinctions between international contractors and employees, but two of the primary differentiating factors are the degree of control and the exclusion of employer-provided benefits for contractors. The question is: when should you be hiring international contractors or employees? Believe it or not, when building a workforce overseas, there are important distinctions between the two employment categories. In this article, we’ll discuss:
- What defines an international contractor?
- Keeping contractors compliant
- What defines an international employee?
- Country requirements for employees
- Considering a PEO solution
As you consider the right fit for your international workforce, it’s important to understand each country’s employment classifications. Not only is this essential during the hiring process, but it also applies throughout the relationship of employment. If the nature of a contractor or employee’s work dynamic changes during the course of employment, you may need to make adjustments to ensure they’re always classified correctly.
Each country has a unique set of laws and regulations in place to determine how to classify contractors. While many countries follow the same general guidelines, it’s always important to conduct more extensive research into the countries where you’re considering hiring international contractors or employees.
As a general rule, international contractors are defined by the following criteria:
- The individual can work for many companies at the same time
- The individual gets to control and manage their working status and schedule
- These individuals are typically required to work for shorter periods of time with any single company, or else risk being classified as an employee
As long as these requirements are met, companies engaging with contractors will likely remain in compliance with in-country regulations.
Today, it’s become increasingly common for businesses to build an international workforce. By doing so, companies are more likely to remain competitive, reduce costs, increase output, and ultimately create more revenue opportunities. Thus, hiring international contractors or employees is a natural step in the growth process. Leveraging global contractors for one-time projects can be incredibly effective for rapidly growing businesses, as it allows them to save on costs through benefit reductions.
How do you ensure you’re maintaining compliance?
When it comes to international employment requirements, even simple mistakes can have expensive and time-consuming repercussions. Misclassifying a worker, for example, can result in costly fines, tax penalties, or law suits. Here are a few examples of common penalties a company is subject to when classifications don’t align properly:
- Back tax withholding on wages
- Benefits or overtime paid to the individual
- Paying full-time employee benefits, including vacation, sick leave or severance pay
It’s important for businesses to be mindful of these penalties, as it’s extremely common for international contractors to misclassify themselves as employees. The reason for this is that it’s financially beneficial for the contractor, as most countries are likely to side with the worker rather than the company.
For this reason, businesses should always have employment contracts in place to protect both their employees, as well as themselves. Some countries may also require in-country agreements, which means companies will need to follow local laws and avoid using a general contract template. Generic templates often leave loopholes, which workers can exploit to their advantage.
If employment contracts are set up incorrectly, labor courts often rule in favor of workers receiving withholdings and benefits from the company. The scary thing is, even if you have a local agreement in place, contractors can fight for employment status if they’ve been treated as an employee. This can be a costly process, regardless of the outcome.
In addition to these hiring laws, companies need to maintain compliance when it comes to payroll. Paying international contractors or employees requires in-depth knowledge of the tax and employment laws in countries of operation.
When an individual works exclusively for a single employer for a long period of time, they are typically classified as an employee. As a result of this relationship, employers are expected to implement appropriate wages, benefits, and taxes for that employee. Because of these requirements, companies with international employees must to have a legal presence in the related jurisdiction to maintain compliance with that country’s employment laws.
This creates complications when hiring international contractors or employees because employment regulations differ between jurisdictions, even if the jurisdiction is within the same country. For most businesses, international growth and success hinges on having a firm grasp of local employment law, so they can remain compliant and focus on other important priorities.
Compensation & Benefits
When hiring international contractors or employees, all salaries and benefits should be determined by socially expected norms, local market conditions and specific country benefit requirements. Offering global employees the same salary and benefits as home country employees could increase long-term costs. Regardless, it’s always better to offer salaries in the local currency of the host country. It’s also important to consider the additional complexities of international payroll, as some countries treat part-time and full-time employees the same for certain benefits.
Employee Data Protection
In some cases, it doesn’t matter whether you hire international contractors or employees when it comes to data protection. With the emergence and acceptance of GDPR regulations in Europe, companies typically only focus on the protection of customer data. What some people don’t realize is that employee data protection is also included within those regulations. When companies neglect these employee protections, they could be subject to significant fines from local governments.
Companies doing business in the EU should also be aware that EU employees have the right to access their employment information upon request. They also have a right to understand how employers intend to use their information. Having the right systems and processes in place will ensure that EU employees have access to their data when they need it. Companies must also be able to prove to local governments how they are processing, storing and destroying employee information compliantly.
Potential Hiring Concerns & Examples
What are some of the concerns when it comes to hiring international contractors or employees? We’ve listed out a few examples of common, country-specific challenges businesses face during the global hiring process:
- When doing business in France, it’s important to understand that there are two sets of Leave Calendars, and they both expire at different times. Complying with these time-off requirements is a complicated matter that is easily overlooked if companies aren’t aware of this.
- There is a difference between mandatory hiring requirements and supplemental or customary offerings to a candidate. For instance, if an employer wanted to hire a Country Manager in India, they are expected to provide a vehicle or education funding, though it is not required by law.
- Some countries require having a local director in place. If a company is out of compliance with certain laws or regulations, the local director (often the CEO or another executive) could be arrested when they visit the country.
- When hiring in China, employers will need to consider the contributions to country housing and social care schemes.
There is a lot of risk associated with hiring international contractors or employees. A Professional Employer Organization (PEO) is structured to mitigate those risks and reduce liability. PEOs have legal entities already established in other countries that enable businesses to hire quickly and compliantly. As a third-party provider, the PEO manages all the hiring requirements and payroll, while the business still maintains control of the international workers daily tasks and assignments.
With laws and regulations frequently changing across the world, it can be difficult to maintain compliance. Global PEO Services handles all the legal and tax requirements to enable businesses to focus on other important growth initiatives. For companies considering hiring full-time employees, leveraging a PEO can offer the lowest risk and cost.