Your company is scaling internationally, and with that comes the need for more hands on deck. Your tech team may need fresh engineers in Australia, or accounting could use a math whiz in Canada to keep the numbers in check.
But there's a catch: not every role requires a permanent hire. So, before you bring someone new on board, you have an important decision to make: should you employ independent contractors, employees, or a mix of both?
The right choice depends on several factors, like the type of work to be performed, your company's goals, and your budget.
Key Takeaways:
- There are several significant differences between contractors and full-time employees.
- When hiring, it's essential to weigh various factors to determine the best fit: an employee or a freelancer.
- RemoFirst can simplify the process of hiring workers and ensure your company is doing so compliantly.
What Are the Differences Between Contractors and Employees?
While both contractors and employees may bring similar skills to the table, several distinctions come into play from an employer's perspective.
Here’s a high-level look at the differences between the two.
Here's why these differences matter: Knowing which type of worker you need to meet your company's goals helps you allocate your budget wisely and avoid overhiring.
Even more importantly, correctly classifying workers ensures you comply with local laws and prevents potential legal issues down the line — which could affect your finances and credibility.
Take Nike, for example, which employs over 79,000 people worldwide. Because of the misclassification of temporary office workers, the sporting goods brand faced potential tax fines exceeding USD 530 million in 2023.
That said, hiring and paying international employees can be tricky. You must comply with evolving local labor laws, calculate employment taxes, and manage fluctuating exchange rates.
Unsurprisingly, 14-19% of organizations say navigating different countries' regulations is their top challenge when paying workers in other countries.
While all of that may sound daunting at first blush, we have some guidelines to help you determine which type of worker makes the most sense for your business and how to ensure compliance.
When Should You Hire an Independent Contractor?
Self-employed contractors are typically a good fit for short-term projects that could benefit from a few extra hands. Plus, you skip the hassle of a lengthy hiring process when bringing on freelancers so that you can quickly respond to market shifts or project needs.
When you employ a contractor, you get someone with the exact skill set you need for a specific project. So, instead of a full-time employee who handles multiple tasks (and might also need appropriate training), your contractor will focus solely on the task at hand, such as designing a new company logo or creating a promotional video.
A few more upsides include:
- You won't have to spend weeks training contractors; they usually bring specialized skills and experience from day one.
- Contractors take care of their tax withholdings and insurance, so you don't have to spend time on those administrative tasks.
- Hiring international contractors can be more cost-effective than hiring full-time staff; you don't need to offer employee benefits or manage payroll taxes.
Regulatory Complexities for Contract Workers
Of course, there are more nuances to consider, especially when working with contractors in different countries.
For example, you can't extend temporary contracts in the Netherlands indefinitely. In most cases, you must offer a permanent position after three consecutive temporary contracts or three years of temporary work.
Meanwhile, in the U.K., employers can't treat workers on fixed-term contracts "less favorably" than permanent employees doing the same job unless there's a solid business reason.
This means fixed-term employees must receive the same pay, benefits, and information about permanent openings as their permanent counterparts, among other requirements.
Legal and Compliance Implications of Contractor vs. Employee Status
It's also important to correctly classify contractors and employees to avoid potential legal issues down the line, such as fines, audits, and even harm to your company's reputation.
For example, in the U.S., the IRS relies on the Common Law Test — which defines the degree of control the worker has over the work, how the worker is paid, and the type of relationship — and the Reasonable Basis Test to identify whether an individual is considered an independent contractor or an employee. If you get it wrong, it can lead to legal and financial headaches.
Take Uber and Lyft, for example. The rideshare companies recently went to court over allegations that they misclassified thousands of drivers as independent contractors to dodge the higher costs of treating them as employees — an issue that caused the companies' stock prices to drop by 10-12% just two years ago.
When Should You Hire an Employee?
A full-time employee is usually the right choice to fill long-term roles, drive your long-term business strategy, and enhance your company's overall performance.
Investing in full-time employees ensures stability and alignment with your goals while fostering a positive workplace culture. Prioritizing employee satisfaction and well-being helps businesses boost resilience, productivity, and competitive advantage in today's market.
According to EY's 2024 Work Reimagined Survey, businesses that place a strong emphasis on the employee experience and their well-being are almost eight times more likely to handle external pressures successfully, over six times more likely to boost their productivity, and nearly six times more likely to outperform in today's economy.
That's not all. Employing full-time employees can make a significant impact on your business for a few more reasons:
- They are more likely to be dedicated to your company's goals and values. They will be more invested in your company's mission, which can translate to consistent company growth.
- Because the hiring process for full-time roles typically evaluates cultural compatibility, these employees will likely fit well within your company culture, fostering better teamwork and creating a positive work environment where everyone thrives.
- Full-time employees build valuable internal knowledge and expertise as they grow with your company. Their deep understanding enhances the quality of their work and benefits newer colleagues (and your business).
- Employees are typically more motivated to excel, i.e., have a more substantial commitment to achieving business goals because their success is tied to their career growth within your company.
That said, hiring and onboarding international full-time employees can be complex. For starters, you must comply with local payroll taxes, benefits, and social security regulations.
And these complexities only increase when hiring employees in multiple countries, as you need to establish a local business entity in every country you hire.
That is unless you work with an Employer of Record like RemoFirst, which helps companies grow globally by taking on the HR responsibilities of payroll, compliance, and more. More on that later.
What Are the Cost Considerations for Contractors and Employees?
When deciding between hiring contractors or employees, you must evaluate all the costs, not just payroll.
For instance, when you hire employees, you'll need to provide them with benefits and incur additional expenses such as payroll taxes and workers' compensation insurance.
While a contractor might charge more per hour than you'd pay an employee, it could cost you significantly less once you factor in the cost of benefits and taxes.
You also need to consider other costs, like:
- Country-specific labor laws
- Local wage rates
- Currency fluctuations
- Tax obligations
Ultimately, while costs should be taken into consideration, they shouldn't be the sole factor when making hiring decisions.
Contractor or Employee: Which Do I Choose?
When making hiring decisions, it's essential to evaluate your company's needs carefully.
Independent contractors give you the flexibility and expertise you need for short-term projects or specialized tasks without a long-term commitment. On the other hand, employees are typically better suited for work that is essential to your long-term business goals.
Hiring contractors can keep costs down and allow you to scale quickly if you own a small business, like a startup. In comparison, employees are often a better fit for larger organizations focused on worker integration and retention.
And remember, no matter who you hire, you'll want to ensure that you are doing so in compliance with all local labor laws.
The good news? An Employer of Record like RemoFirst can help protect you against the risks of misclassification and any subsequent payroll or tax issues when you hire across borders.
It's Hassle-free to Pay Global Contractors and Employees with RemoFirst
Hiring internationally doesn't have to be overwhelming.
With RemoFirst, you can hire, manage, and pay workers in over 180 countries while complying with local laws.
Our platform handles all the human resources logistics — like background checks, onboarding, shipping equipment, managing taxes and benefits, and ensuring compliance. Essentially, we take on the legal responsibilities as the official Employer of Record (EOR) for your international employees.
And if you're working with international contractors, RemoFirst makes it just as easy to onboard, manage, and pay them (in 150+ countries). We even handle creating the 1099-NEC forms for U.S. contractors, so you don't have to.
Schedule a demo to see how RemoFirst can help you hire and pay workers.
