For HR leaders, paying international contractors opens up talent acquisition opportunities that can address skills gaps, enhance culture, enhance the company’s ability to develop new resources, and connect with new markets in ways that before they could not. But it can also present multiple legal and financial challenges.
In this article, we will explain why hiring international contractors has several benefits. It permits companies to board talent with particular abilities, proficiently delegate plans without employing or training additional employees, or even expand into new international markets.
- What is an international contractor?
- What could be the consequences of hiring an international contractor without being informed?
- Will I be penalized if my foreign contractor is legally defined as an employee?
- Make sure the contractor is not an employee under applicable foreign labor laws
- Determine if your business is required to declare and withhold taxes
- Complies with the tax agencies (Ministries of Finance)
- Should I write a contractor’s agreement?
- Consider hiring corporations or outsourced employees instead of independent contractors
- Stop controlling the day-to-day employment relationship
- How can PEO Middle East help you obtain more information about paying international contractors?
1. What is an international contractor?
A contractor offers their services or merchandise as a freelance individual. An international contractor is located in a different country than the business or client to which they are providing their services.
1.1 Can you pay an international contractor?
Yes. Still, other countries have diverse payroll and worker regulations. Tax requirements contractor classification and payment methods are aspects that vary from country to country, and difficulties may arise in case they are not followed. Knowing the correct steps, guarantees paying international contractors in an appropriate and compliant way.
The company and international contractor must outline and agree to the terms of the procedure in a contractor arrangement. The best way to pay an international contractor includes a depiction of the services provided. Also, the terms and dimensions of the assignment, payment specifics, privacy, non-solicitation, and dispute resolution clauses.
There is a diversity of ways to pay an international contractor. The best way is upfront and at the correct time. Or begin with a down payment and recompense the remainder when the assignment is complete. Define what choice fits the best for your company and describe those payment terms in the worker agreement.
2. What could be the consequences of hiring an international contractor without being informed?
Recently, an online company hired independent professionals (freelancers) abroad. One of the contractors was unhappy with his payment and publicly threatened to blackmail the company. The enterprise was unable to solve the problem and had to sue him in court in his country of origin.
Finding a local attorney, to litigate in an unfamiliar legal system and a different language required many resources on the part of the small online business. The courts are very sympathetic to the workers and probably also defend the rights of an independent one. It is possible that the company end up paying more fines and compensation due to local legislation.
The company’s attempt to cut costs by hiring a foreign contractor led to a very onerous legal nightmare.
Many companies pay international contractors without realizing that they are suddenly exposing themselves to more liability under foreign law. Find out below how to reduce the risks associated with employing foreign independent contractors.
3. Will I be penalized if my foreign contractor is legally defined as an employee?
If a court determines that a person who works with your company as an independent contractor is an employee, you may face legal liability for failing to meet the employment requirements. You may have to pay outstanding Social Security, Medicare, and unemployment taxes.
If a worker lives outside the country, there may be even more obligations under applicable local laws.
For example, in European countries, you have to pay for 4 weeks of paid vacation and holidays per year. In France, pretending to be self-employed can lead to more than 3 years in jail.
An employee must have the right to severance pay under a termination clause. While the relationship with an independent contractor may terminate without additional compensation. Thus, a dissatisfied contractor could seek severance pay in a local court, citing his or her employment status. The worker could get the payment thanks to the compassion of local courts and labor ministries around the world.
4. Make sure the contractor is not an employee under applicable foreign labor laws
Distinguishing a contractor from an employee is not always easy. In most countries, a written agreement is not enough evidence of a relationship between a client company and a contractor. Instead, countries often follow a list of factors to analyze the circumstances of the relationship.
Although different countries have different rules to prove an employment relationship, they are all similar.
For example, in many countries, a contractor who works full-time exclusively for a client company is an actual employee. It also becomes more difficult to defend a contractor status when the contractor is an employee for a long independent contractor than an employee.
In certain countries, contractors may not have anti-competition and solicitation clauses in their employment contracts, because these are evidence of an employer’s control over a worker after the relationship ends.
5. Determine if your business is required to declare and withhold taxes
If a business works with independent contractors, it must annually report payments better than AED2,203.86 on a 1099-MISC form. However, the Treasury has special rules for businesses that work with contractors from other countries. Such businesses are not necessary to report or withhold taxes in most cases where a foreign contractor provides services outside a country.
However, if a foreign contractor performs services, you must meet certain conditions to avoid tax liability. Those conditions are:
- That the service provider, foreign and non-resident, stays in the country for less than 90 days during a fiscal year.
- The total payment does not exceed AED11,000.00
- That the payment is for work performed or services rendered for an office or business headquarters in a foreign country.
If any of the above conditions are not met, the client company must withhold and report foreign independent contractor income taxes. However, you can avoid this if the contractor’s country has a tax agreement with the country.
6. Complies with the tax agencies (Ministries of Finance)
If a client company is not located or does not have a permanent establishment in the country where the foreign contractor resides, there are generally no requirements to declare or withhold taxes in that country. In addition, few countries require the declaration of payments to international contractors before the Treasury or a Ministry of Finance.
Despite this, a small group of countries has enacted laws to protect independent contractors. For example, France handles statutory wage portage and auto-entrepreneur designations for freelancers who are freelancers. Even though their client companies may have to do payroll withholding and deductions similar to what a typical employer does.
To avoid unnecessary legal liabilities and penalties, it is important to speak with a professional familiar with the tax treatment of independent contractors in the country in question before working with one.
Also, the best way for paying international contractors is to make sure they comply with local tax requirements. This by specifying that duty in the employment agreement or by requesting proof of compliance.
7. Should I write a contractor’s agreement?
A written agreement with a foreign contractor is an important step in specifying the terms of a special employment relationship.
The agreement should clearly stipulate the scope of services and payment that the contractor must receive to prevent future disputes. One of the best ways to pay an international contractor is establishing a contractual relationship by demonstrating the contractor’s independence and lack of control over how he performs his work.
However, there are many reasons to write an agreement with a worker. Independent contractors own the rights to the work they perform for a client company, except transferred in writing.
Many companies fail to take into account that the copyright remains, by default, with the contractors, and they often lose the rights to their most important intangible assets. Your company can prevent unfortunate incidents by providing a clause that transfers the copyright from the contractor to the client company.
You may also consider adding clauses on how to resolve disputes when they arise. When multiple countries are in the same employment relationship, choosing the applicable law and forum in advance can save a lot of time and resources in future litigation. The parties may also choose to have alternative dispute resolutions, such as mediation or arbitration, instead of a lengthy trial in court.
8. Consider hiring corporations or outsourced employees instead of independent contractors
Your business may be more concerned with the status of contractors if you plan to maintain some control over them, or if the employment relationship becomes long-term or full-time.
When a business is not yet ready to work with them as direct employees, they can do so with contractors that are incorporated in the country in question. In many countries, an intercompany contract could be easily a relationship with a contractor.
A company may also hire individuals as outsourced employees through a temporary agency, or an allied business in the country of origin, that hires them as employees. That way your company could have a contract with a local company that offers contractor services.
9. Stop controlling the day-to-day employment relationship
As mentioned above, most courts look beyond the contract to determine the nature of the employment relationship. That is why it is important that the facts show that the person is autonomous and that the client company does not control how or when they do their work.
For example, having a work schedule set by a client company, or receiving supervision or training, is not good evidence to protect contractor status. Similarly, long-term contracts that are constantly changing are subject to challenges in court.
It is undeniable; the best way is to work with international contractors because it offers a wide range of advantages for growing businesses. By paying attention to the points mentioned above, a business will be able to prevent costly legal problems in the future before hiring someone.
It is always a good idea to have records of payments and other employment matters in writing. If a business is planning a long-term relationship with a contractor, it needs to take additional steps to seek labor law advice from local attorneys or hire the worker as an employee.
10. How can PEO Middle East help you obtain more information about paying international contractors?
Having business legal strategies not only helps us in our lives but also in our commercial life. You must follow a sequence of stages and have certain requirements to make this procedure easier and with fewer problems.
PEO Middle East offers services that could help you in this way that can be difficult for some people. Our recruitment capacity, market familiarity, and how we have adjusted to new technologies to contract the best talent can be of great usage to your business.
Your company’s growth is our greatest pleasure. Being by your side when creating, and advising you so that your enterprise is the most prosperous is our focus. In a short period, thanks to our services, you will be able to see the outcomes you have been waiting to see for a long time.
Do you want to contact PEO Middle East for more information about paying international contractors? Do not hesitate and send us an e-mail at [email protected]. Explain your situation and current need to us so we can offer you the best plan we have available. Also, we will answer any questions you may have.