How to Recruit and Hire Contractors Overseas

With remote technology and the normalization of working from home, businesses have incredible access to global talent. No matter the industry, companies are recognizing the value of international expansion, while leveraging international contractors. There are 3 main ways to hire contractors overseas:

1. Establish a legal entity

2. Work with a global PEO provider

3. Hire freelance contractor and comply with local restrictions

Although it’s possible for businesses to conduct their own hiring process via job boards like LinkedIn or Upwork, they often don’t understand the legal ramifications of foreign contracting. Without proper documentation and compliance, companies recruiting and hiring independent contractors could be at risk of various fines and penalties.

This guide will help you recruit and hire contractors overseas. From small businesses to large startups, these best practices can help you navigate the complexities of hiring foreign contractors overseas.

There are three main ways businesses can recruit and hire contractors overseas. Each option has its own pros and cons, and your unique circumstances will determine the best course of action for your growing needs. Understanding the role you intend to hire and how long the project will last will help you determine the best route when hiring foreign independent contractors.

1. Establish a Legal Entity

Having a legal entity in the country of operation can help companies avoid potential miscommunication between governments and tax agencies. By incorporating in a country, all local tax laws, hiring, payroll and more can be run through your own entity.

Although this offers the lowest risk to a company, it also takes the longest to set up. Depending on the country you want to expand to, this process can take anywhere from 3-12 months. On top of that, entity establishment can be an expensive option.

This route is better for companies that have long-term plans for a country. They’ve tested the market and seen its potential for success and want to ensure greater growth stability. This makes it easy to transition workers from contractors to employees if the need ever arises. It also establishes a strong foundation for the business to have better contractor relationships.

2. Work with a Global PEO

For companies hoping to hire right away or test new markets, global PEO providers may be the best solution. This is often seen as a solid starting point for international expansion from the United States. Companies maintain full control over the day-to-day operations of their workers, while the PEO manages the HR, payroll, and compliance using their own network of legal entities.

With a global PEO, you can hire contractors and employees right away in accordance with local law because everything has already been established. Although the company will have less administrative control, they still have full control over the daily tasks and oversight of their workers.

This route is better for companies that are looking to test a new country of operation or need immediate hiring support. They see potential for success in a country, but don’t want to commit to investing into a legal entity of their own just yet. In some cases, PEO providers can help you transition to your own legal entity if that need ever arises.

Related: Eliminate international contractor risk

3. Hire Contractor Directly

The final option is to recruit and hire contractors overseas on your own. For companies that want to avoid outsourcing altogether, a DIY approach is going to be the best option. In order to do this, the company will need to have a firm understanding of employment regulations before they begin the process. Payroll, HR, holidays, working hours, employment contracts, etc. can all vary depending on the country of operation.

Related: DIY global expansion

Businesses can often leverage job boards such as LinkedIn, Indeed, Jobrack, or Upwork to find international talent. They will then need to find out if they need to offer the contractor an employment contract and also understand the working hour requirements for independent contractors.

This route is better for companies on a tight budget. They need to avoid fees associated with outsourcing, and are willing to incur the correlating risk that comes with hiring international workers. They are 100% liable for any compliance mistakes and consequent fines leveled against the company.

In order to avoid some of these fines and penalties, they will need to ensure they have strong independent contractor agreements in place. These can sometimes protect the business from civil suits from disgruntled foreign workers.

When hiring contractors overseas, businesses need to ensure the worker meets the correct classifications for their designated employment type. Although it varies from country to country, international contractors are typically required to fall within the following guidelines:

· The individual can work for many companies at the same time

· The individual gets to control and manage their working status and schedule

· The individual is typically required to work for shorter periods of time with any single company, or else risk being classified as an employee

Related: Related: Independent contractor or employee?

Most contractors accept payments through international wire transfers, digital payment networks like PayPal, or through a service provider like Upwork or Fiverr. Now, with the last option, you’ll have to pay a percentage as a fee to use the platform.

Working with an international contractor means the burden of reporting taxes falls on the hired individual. As long as you don’t violate the listed conditions, your business shouldn’t have to pay things like social security or income tax.

For businesses determined to hire contractors overseas without the help of outside agencies, here are the steps you should follow:

Step 1: Make sure the person you are hiring fits within the independent contractor criteria. If the worker expects to work longer hours or more days, it could put you at risk of employment law violations.

Step 2: Make sure the job role is best suited for contractor work. This is typically short-term or project-based initiatives that require a specialized skillset.

Step 3: Research the local labor laws for the specific country you are hiring from. Even though many countries follow the same standards, it’s important to be sure you are maintaining compliance.

Step 4: Determine if you have any obligations to the U.S. government when hiring overseas workers. You may need to report to the IRS or withhold tax payments made to independent contractors in some cases.

Step 5: Send the foreign contractor a IRS Form W-8BEN and have them fill it out. This ensures they are not a U.S. citizen and that they pay taxes in their home country.

Step 6: Prepare and draft a detailed contractor agreement that meets all legal stipulations for the countries involved. Do not use a generic template you find online. If it does not include country-specific requirements, the foreign government can rule against you in any potential disputes.

Step 7: Check on the tax requirements for the country where you are hiring the independent contractors. Even though many countries will be compliant with Step 5, it’s possible that you may need to fulfill other tax obligations for that specific region.

Step 8: Find a payment processor that will allow you to pay contractors overseas. With many banking regulations in the U.S., it can be a challenge to find a payment platform to pay these workers in a compliant manner. Make sure the payments are accurate and timely to avoid any potential disputes.

It’s very common for businesses to expand their workforce to international markets. As they do, companies become more competitive by reducing cost, increasing output and creating more revenue opportunities. Thus, hiring contractors overseas is a very natural and common step in the expansion and growth process. Using international contractors for one-time projects is an effective strategy for growing businesses, as it enables them to save on costs through benefit reductions.

However, as we’ve mentioned throughout this article, even simple mistakes can have expensive and time-consuming consequences. When companies misclassify a worker, it can lead to costly fines, tax penalties or civil lawsuits. Although this varies from country to country, here are a few examples of common penalties if the employment classifications are incorrect:

· 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 may seem simple enough to abide by the employment laws, but it’s very common for international contractors to take advantage of their legal system. Lawsuits can be very beneficial for an independent contractor, as many countries side with the worker when disputes arise.

An easy solution is to have employment contracts in place to protect both yourself and the contractor. Even if not required by law, employment contracts can act as a binding agreement between the two parties to help settle any potential disagreements. Every country has their own set of regulations, so avoid using a generic contract template, as these often have loopholes that the worker can take advantage of.

When the employment contract is set up correctly, labor courts often rule in favor of the company. However, it’s important to note that even with all these provisions in place, a contractor can still fight for employment status if they’ve been treated as an employee. No matter the outcome, that can create a very expensive situation.

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.

Related: Paying foreign contractors: What you need to know to stay out of risk