So, your company is looking to expand its hiring efforts, possibly even beyond borders. However, before hiring a full-time employee, consider this: an independent contractor might offer your business the best value and flexibility.
Whether you're testing a new market or seeking fresh perspectives for your team, freelancers can provide access to global talent and the flexibility to scale up or down based on business needs.
However, hiring a global workforce comes with challenges. Maintaining compliance and managing payments can quickly become a complex and time-consuming headache without a legal entity in your foreign contractor's home base country.
But what if there was a way to mitigate these issues without establishing a local entity?
Key takeaways:
- Since local labor laws governing worker classification vary by country, companies need to ensure they are properly classifying contractors.
- You may be required to pay hefty fines if your company is found to have created a permanent establishment.
- Companies generally don't need to withhold payroll taxes for independent contractors.
Do You Need to Open a Local Legal Entity to Hire Contractors?
First, let's clear up some confusion. You might have heard that establishing a local entity is the easiest way to employ a global team, but that's not necessarily the case. In fact, it's often the most complicated method.
Sure, establishing local entities does offer businesses some benefits, including gaining a more granular, on-the-ground control over the international talent they hire.
But, opening an entity is also time-consuming and costly, and it can snow you in under an avalanche of paperwork.
Unless you plan to open an office with a few dozen workers, the juice of establishing a local entity probably isn't worth the squeeze (pardon our business speak).
The easier, more flexible, and scalable option is to grow your team by hiring global contractors. However, maintaining compliance can be an issue.
What Are the Risks of Hiring International Contractors?
Contractor Misclassification
Laws aren't always complicated — some are even pretty straightforward. But there's a reason lawyers need licenses for specific jurisdictions: what's legal in one country might be off-limits in different countries.
For companies hiring internationally, this can be a potential legal minefield. Misclassifying workers as contractors when their country's laws define them as employees can lead to serious consequences.
And the penalties for getting it wrong — keeping someone on the books as a contractor when they should be a full-time employee — can be steep.
Even if you make the right call today, it doesn't mean that will always be the case since laws can evolve over time. So, even if you've employed a freelance design team for years, the local laws governing their labor rights and your obligations may change.
Unless you want to convert your freelancers to full-time employees, you must remain current on evolving contractor classification laws.
We've previously written about Germany's "Scheinselbstständigkeit" (false self-employment) regulations. Most countries have similar laws regarding improper worker classification.
Well-written contractor agreements are one of your best defenses against misclassification by clearly defining an employee's contractor status and the independent nature of the relationship.
Be careful, though. Some laws may supersede employment agreements. The easiest way to ensure you remain compliant is to work with local legal and/or HR partners in the countries where you employ international contractors.
Permanent Establishment
Here's a potentially unforeseen circumstance. You haven't established a local entity. You've hired freelancers and made sure they're correctly classified. Then, the local government swoops in and levies a tax judgment against you for creating a permanent establishment (PE).
PE is a determination by local tax authorities that your company is a permanent and ongoing local business. This legal judgment call can be made against your company even if the workers are local contractors.
So what might draw local tax collectors' eyes and ire? High-risk PE behavior includes:
- Empowering local freelancers to sign contracts on your behalf
- Hiring local talent into executive-level positions
- Establishing a board of directors
The longer your company operates in a country, the greater your risk of being labeled as having PE. Once that happens, you can be on the hook for fines, back payments, more frequent audits, and potentially even criminal penalties.
Yikes. That definitely sounds like something you need to avoid. But how?
Companies that want to avoid the potential for PE have two primary options: establish a local entity (which might make sense if your company is hiring a large number of people in one country) or partner with an Employer of Record (EOR) — a much more cost-effective solution.
Do You Need to Withhold Taxes from International Contractors?
To withhold, or not to withhold, that is the question. Generally, companies don't need to worry about tax withholding when paying international contractors. Contractors are typically responsible for their own taxes.
But it's always a good idea to check local employment laws since a mistake by your business or the contractor can result in unexpected tax liabilities.
For example, in Brazil, employers must withhold and contribute to Social Security (INSS) for individual contractors (autônomos) but not for legal entity contractors (PJs), who handle their own contributions.
Ultimately, your tax obligations when paying international contractors depend on the laws in the country where the contractor lives and works, not where your company is based.
Choosing the Best Way to Pay International Contractors
Paying contractors worldwide efficiently is key to smooth operations (and happy contractors). However, whether you go with payment platforms like PayPal or Wise, bank account wire transfer, crypto, or — gasp — paper check, each payment method has its own challenges.
Even your company's payroll system might not be the best fit since it may be designed primarily for paying employees, not contractors. And let's not forget the challenges of paying foreign workers with fluctuating currency exchange rates. It's a lot to tackle.
That's why many companies opt to partner with an EOR for contractor management and international payments.
An EOR Simplifies Hiring and Paying International Employees
An Employer of Record streamlines managing contractors globally without the need for companies to establish a local entity. EORs manage compliance with local regulations, including:
- Developing compliant employment contracts
- Ensuring proper contractor classification
- Managing global payroll, navigating currency fluctuations, and facilitating payment in the contractor's local currency
- Conducting regular audits and regulatory reviews to maintain compliance with local employment laws
The result? A smoother experience for your business and your contractors.
Hire and Pay International Contractors With RemoFirst
RemoFirst provides a solution for companies that want to manage and pay international contractors in 150+ countries. We also offer complete EOR services for global hiring, helping companies employ and pay employees in 185+ countries.
Schedule a demo to see how we can streamline your international workforce management.
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