Managing Independent Contractor HR Risks

Managing an overseas workforce of contractors can be a challenge. We highlight considerations you should make when engaging and paying contractors overseas to ensure you stay compliant.

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Managing the employment and payroll requirements of a single foreign contractor can cause headaches. When you have multiple contractors in disparate countries around the world, managing the salary payments and legal considerations can suddenly become a full-time job. When entering into an arrangement with an overseas contractor, there are multiple factors to address. We highlight complexities to consider and what you can do to ensure you retain productivity while avoiding any costly legal troubles in the future.

Paying Contractors

Does your bank have the functionality to transfer currencies into the country your contractor resides? Banks frequently have restrictions regarding the countries they are willing to transfer payments into, and limitations on currencies they can handle.

Even if you can pay the worker from your domestic bank account, numerous problems can arise on the contractors’ end. Their account may not be set up to receive foreign currency, resulting in a bounced payment or they may incur additional bank charges or FX fees, effectively resulting in a pay cut for the employee. In worse case scenarios, the government may have sanctions in place on foreign currency payments resulting in the contractor being unable to access payment for the work completed for a set period of time, which can be upward of 60 days in some countries.

Alternate options, such as money transfer systems, may not be a viable option for both employee and employer due to the additional tax filings, potential security issues, or lack of support for batch payments, creating further administrative tasks for the employer.

Employer Responsibilities

When using the services of global contractors, there are numerous considerations and requirements that must be dealt with throughout the engagement. For instance, contracts, pay rates, banking release statements and W-8BEN forms are all typical, and often burdensome, necessities that will occur during the contractor lifecycle. The time and resource requirements needed to manage these responsibilities can often be amplified when having to navigate time, language, or cultural differences.

When your arrangement with the contractor has ended, there are still a number of obligations employers must adhere to. Records of payments, contracts and other agreements should be retained in case of any IRS or State Tax Authority audit. In rare instances, disputes may arise between the employer and contractor even after the arrangement has come to a close. Comprehensive employment contracts and additional clauses that cover confidentiality, intellectual property and notice periods can help to mitigate any potential fallout. However, such contractual agreements should meet the labor law requirements of both countries involved. In the event the contractor wishes to pursue the matter in court, U.S. companies frequently discover that foreign labor courts and agencies are more frequently sympathetic to employees rather than the employer when an improper employment arranged has been utilized. When legal procedures have not been adhered to, it can expose companies to large settlements and fines.

Independent Contractor or an Employee?

The final consideration for employers with international contractors is whether the work relationship is defined as that of a contractor or an employee. In the United States, the IRS provides a criteria checklist for determining the correct status for your domestic contractor workforce. However, violation of adhering to that checklist results in severe penalties and fines for employers that misclassify an employee as a contractor. Overseas, each country will have its own unique laws and regulations to determine the employment status – and its own repercussions for misclassification.

In most countries, employers are held fully liable for any wrongful employment status classification. Not only should the criteria be carefully checked when entering a contractor arrangement, but, validation of status should be periodically reviewed throughout the engagement to ensure they are still accurate. Failure to correctly classify your worker can result in significant penalties including payments for backdated entitlements and benefits, fines, court awarded settlements, and even imprisonment or a ban from conducting business in that country. The potential cost and involvement of resources to settle a dispute can create a significant burden for most companies; ensuring that you are adequately protected from complex scenarios is a necessity when engaging internationally located contractors.

A Compliant Engagement

Ensuring you have the necessary resources and processes in place to avoid the potential fallout of compliance failure or employees seeking damages are essential when engaging with independent contractors internationally. Paying employees, handling the day-to-day administrative tasks and ensuring a straightforward off-board are just some of the components your team will be responsible for.

If your organization would benefit from increased confidence in your international workforce and contractor compliance, and liberating your resources from bandwidth-draining administrative tasks, evaluating an international employer of record provider may provide the solution for you.

Regardless of your entity and employer registration status within that country, an international employer of record solution provides you with the ability to hire and pay contractors compliantly in more than 115 countries. A network of trusted and vetted partners are on hand to assist you through the entire process – from providing employment contracts in the local language to guiding you through employee off-boarding.

SafeGuard World’s team of expert Global Solution Advisors can discuss available options to ensure you are protected against contractor disputes and government recourse, without the requirement for any significant investment of your resources.