When expanding into new territories, you may not wish to commit the level of resources required immediately. In such instances, hiring an independent contractor abroad can be a cost-effective solution. It allows you to set up operations to test the viability of your business without deploying large-scale assets.

Despite the obvious appeal, there are dangers of operating in this manner. The risks arise from the variety of labor laws that exist in any country. So before you move forward with your decision, it is recommended that you consider the various aspects of hiring independent contractors abroad.

Who is Classified as an Independent Contractor?

Labor laws that make determinations about worker classification exist to fulfill two basic purposes:

1. Ensure fair compensation and treatment for workers
2. Maximize tax revenue from corporations

As long as you keep these two goals in mind, there shouldn’t be any problems. If your corporation is found to have misclassified an employee as an independent contractor, severe legal action may be taken by local authorities. This may include paying back all compensation that the local bodies determine the employee was entitled to but not provided for the period of the employment.

Of course, this is only the monetary damage that may arise. The company will also lose significant goodwill in the eyes of the locally available talent, meaning that the best individuals will not want to be associated with your company.

While a contract detailing the nature of the relationship is a given in any employment situation, the local authorities may wish to carry out independent investigations into this matter. You should not assume the contract to be the solution to all your problems. Try your best to collect any documentation that proves the nature of the relationship between your company and the independent contractor.

There is a lot of variety in working relationships between an individual, and a company, which is why classifying workers is a tricky area. Add to that, each country has its own criteria, and each jurisdiction within that country has its own criteria as well.

Of course, there are general principles that can help you avoid compliance issues. Here is a checklist of things that will lead to most governments considering your worker as an employee. When hiring independent contractors abroad, ensure that none of these apply to this individual.

1. An individual is given tools to work with.
2. An individual is paid a fixed monthly income.
3. An individual can be tasked differently based on the situation.
4. An individual has a set number of work hours under contract.
5. An individual is not part of a separate legal entity.
6. An individual is instructed to carry out tasks by someone else.
7. An Individual’s income stems from one source (employer).

The Importance of Compliance

When hiring independent contractors abroad, the importance of compliance with labor laws lies in distinguishing between an employee and an independent contractor. An employee is generally eligible for several benefits outside of their basic pay. This may include health and dental insurance, social security benefits that arise from employment, access to a pension plan, and much more.

A contractor with whom you’ve had a long working relationship may suddenly begin to believe they’re an employee of your company. Of course, this isn’t the case, but you need to ensure that you’ve got all your bases covered to dispute the claim.

Failure to prove that the contractor is indeed independent of the company may result in having to make payments for the benefits that the company has allegedly withheld so far. These can be significant if the contractor has had a long-standing relationship with your company.

There is another key compliance-related matter to consider. If the contractor is determined to be an employee of your company, then the local government may make the case that you operated in the country without establishing a local legal entity. This is important because it means that the government can claim that you have failed to pay the corporate taxes that you owe.

Operate with Caution!

If you do decide to hire an independent contractor abroad, make sure you do your own research. During your due diligence, you should observe how authorities in your country of choice handle and classify all matters related to labor.

If you don’t fancy doing all that leg work, don’t worry! You can hire a third-party advisor like us to advise you on local labor laws and other regulations you may need to comply with. This has the added benefit of being certain that you haven’t missed anything important.

If you do decide to go it alone; however, then you should ensure at least the following requirements of an independent contractor abroad are met:

• A formal contract should be agreed upon in both the local language and the language of your country. This contract will lay out the terms of the business relationship, the exact nature of the tasks contractor has been hired to perform, and the nature of the relationship between your company and the contractor. This limits your liability in the event of a dispute.
• Document all financial transactions related to the contractor. Many countries do not require the independent contractor to pay taxes; however, you should still carry documentation on your end. This is because the contractor must complete the relevant paperwork to be exempt. If they fail to do so, you might be asked to provide the relevant data to the authorities. Even outside of this event, it is considered good practice to track financial information related to independent contractors to limit liability.

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