Hiring independent contractors abroad: your expert guide

Managing independent contractors working abroad is a simple and effective way to grow your business. Using foreign contractors can be a fast, affordable, and productive option while giving you access to the best talent in the world. You’ll want a good system to scale your hiring process, especially if you’re working with contractors in multiple countries. Using a contractor management platform lets you kickstart the whole process.

Because here’s the deal — every country has its own employment rules and regulations. These include different labor laws and tax obligations. If you’re working with independent contractors abroad, being legally compliant from the very beginning is going to save you countless headaches and keep you out of trouble with local authorities. It’s not hard, but it is serious business.

Read on to find out everything you need to know to onboard, pay, and manage the best talent for your business, anywhere in the world. This expert guide is designed to give business owners and hiring managers the blueprint required to protect their team and their business. You can focus on scaling and growing your operations knowing you’re working to international hiring standards and ensuring compliance.

Let’s get started.

What is an international contractor?

An international contractor, also called a foreign contractor, is someone who works under the laws of a country other than the United States. They are self-employed, work for multiple companies, and are not controlled by your company.

For American companies, the International Revenue Service (IRS) determines the difference between a local and international contractor. Here are things to keep in mind:

• All U.S. citizens are taxed on worldwide income and will not be considered international contractors by the IRS.

• It does not matter where the contractor was born or what passport they hold.

• Where the work is performed is a critical factor in determining local vs international contractor status.

• If you’re paying someone in the U.S., even if they live and work outside the U.S., there will be a U.S. tax obligation for them.

• Your contractor may not understand their own classification and could be genuinely mistaken about their status.

Here’s a quick overview you can use as an indicator to tell whether your contractor is considered local or foreign by the IRS.

Local independent contractors:

• Must be a U.S. citizen, or a permanent resident who meets the green card test

• Perform the majority of work in the U.S., as defined by the substantial presence test. It’s a slightly complicated calculation, but a contractor must work for a total of 31 days in the current calendar year and a total of 183 days in the 3-year period which includes the current year and the previous two years.

International independent contractors:

• Not a U.S. citizen or U.S. National

• Cannot pass the green card test or substantial presence test

• Must report income to a foreign government

One last thing to consider is the foreign government where your contractor resides may legislate your relationship differently than the U.S. would. In some countries, this can be quite straightforward. For example, a contractor's status is defined by the length of the engagement or the exclusivity of the relationship.

In other countries, the status of a contractor can switch to an employee automatically, and without notice, if the status changes during the relationship.

Research in more detail: You can investigate the specific labor laws for more than 170 countries using Remote's Country Explorer.

What are the benefits of hiring foreign contractors?

Working with remote contractors brings a wealth of benefits, especially if you’re experiencing a limited talent pool in the local market or require a highly specialized skill to complete a project. One advantage of the post-COVID business world is how many people became familiar with work-from-home and remote-work technology. This transition reinforced the benefits of globalization to growing companies and makes the decision to target the international contractor pool easier than ever.

Here are some of the major benefits of working with foreign contractors.

Flexibility

You have a chance to design your projects any way you want. You can bring people on for single tasks, assemble a team of differently skilled workers for a special project, or supplement your existing team with a foreign contractor who can help you with capability building. The opportunities are only limited by your imagination.

Consider working with an independent contractor abroad to consult with and advise you on functions outside your area of strength. If you find an international expert who is not actively working with a competitor, you can gain valuable insight from an industry veteran without the pressure, cost, and delays involved with a full-time employment relationship.

Diversity

Common knowledge and best practice are enemies for anyone working towards building the foundation of an innovative company. Hiring international contractors gives you access to different perspectives and a diverse approach to innovation. These, in turn, become the building blocks to develop a competitive advantage. Your people provide the foundations of a sustainable business. Diverse people from different backgrounds, cultures, and locations can give you an edge, especially if you sell to an international market.

Greater hiring pool

Different cultures have different value systems when it comes to education and career development, so skills that are scarce in America may be in abundance elsewhere. The U.S. always comes near the top of the Global Innovation Index, but there are many countries punching above their weight in various sectors. You could find that opening up your hiring across borders delivers a gold mine of specialized candidates.

If you’re looking to outdistance your competitors, you can use the Global Innovation Index to compare two economies, using indicators like technology, creativity, or business sophistication. This lets you tap into a potentially hidden talent pool and find the countries that are likely to produce the best chances of finding the unicorn your business needs.

Facilitates around-the-clock async work

How would it feel to go to bed each night knowing your projects were being progressed even as you sleep? Leveraging multiple time zones is another reason to work with foreign contractors.

You can find built-in efficiencies for areas like quality assurance or quality control if your teams are distributed across different parts of the world. Imagine the pure joy of working on the nuts and bolts of code or content and then having it tested for quality and back on your desk when you arrive to work the next day.

Asynchronous (async) work maximizes productivity, improves your workflows, and makes every minute of a 24-hour day count without burning out your staff.

Perfect for enabling 24-7 customer support teams

For as good as async work is for your business, it’s even better for your customers. Offering around-the-clock support ensures your business is operating 24/7 and any problems or questions your customers encounter are managed in real time. You can comfortably focus on your strategic role, knowing your operational support is ticking along.

Local knowledge for new market expansion

When your business is entering new markets, international contractors are invaluable for having on-the-ground intelligence. They can represent you for in-person meetings, advise on local customs, localize marketing and advertising, and provide insight into the best way to manage a multitude of tasks. They will also have a local network of skilled professionals and can make referrals to your business.

Research in more detail: You can learn more about the processes you need to work with remote contractors abroad in our expert guide to working with remote contractors.

Hiring contractors provides multiple benefits — the flexibility to hire beyond borders, customize employment terms without long-term commitments, and leverage cost savings to strategically drive diverse product innovation.

— Meghan Watchorn, Head of Growth at VanHack, Tech talent recruitment specialist

How do I hire international contractors compliantly?

Compliance is the one issue hiring managers need to be diligent about when hiring international contractors. Understanding local labor laws from country to country adds complexity but it also adds risk to people who don’t respect the upheaval and chaos non-compliance can cause your business.

Even if you’re currently on top of things for your foreign contractors, the situation is always changing. These employment laws are updated regularly in many countries, and often a worker may be deemed an employee over time, many months after the initial engagement is analyzed and the initial classification is assessed. Chances are you won’t be notified when this occurs. It’s also possible the international contractor who has become part of your team won’t know the local labor laws unless their expertise is in Human Resources.

Make sure you minimize the risks of misclassification

The last thing you want is to stumble when figuring out how to classify employees and contractors. There can be harsh consequences for misclassifying contractors, even if the mistake was completely unintentional. You may incur fines and penalties, lose your IP (don't neglect IP protection if you have remote workers), and even lose permission to operate.

If you don’t have the support of local labor experts in every market, it’s essential to find help. Luckily, Remote provides a way to hire global contractors for an affordable price, with a clean and simple service.

How do a country's labor laws affect hiring contractors abroad?

While business fully embraces the benefits of globalization, there’s still no universal body or agency to manage global workers. As a result, the onus is on each business to navigate local hiring practices on a country-by-country basis. Areas to consider when drawing up a contract with an international contractor include:

• National and regional labor laws – Some countries, like Canada, have varying laws between provinces or states. In addition, some countries split their labor laws between regional and federal jurisdictions.

• Worker protections – Each country has a different focus and puts different weight on protections. Common areas to consider in your international contracts include age, religion, sexual orientation, gender expression, and race.

• Public holidays – Compared to most countries, the U.S. has very few public holidays, so make sure to address how to handle local holidays in your contracts.

• Vacation time – Most contractors don’t receive paid vacation days but it’s good to specify it in the agreement. 

• Minimum wages – Some countries set these at the national level; some have them set at a regional level. 

• Overtime – You probably won’t be paying overtime but you may want to address the maximum number of hours in a working day to avoid overworking your contractors. 

• Fringe benefits – In some countries, it may be illegal to offer benefits to a contractor. In other countries, benefits are an expected part of a contractor’s package. 

• Taxes – Employment taxes, statutory fees, income tax, and social safety net taxes are all common and they’re all different in each country. 

• Currency – You need to specify how, where, and in what currency you plan to pay your foreign contractor. The way you pay your contractor can also have an impact on classification. If you’re paying a worker in U.S. dollars to an American bank account, they will not be considered an international contractor. 

• Types of leave – While vacation and holiday time are not usually part of a contractor agreement, you may need to be compliant with national policies on things like medical leave, family violence leave or maternity/paternity leave, jury duty, or bereavement leave, to name a few. 

• Contract deliverables – How you define deliverables may be reflected in the local labor law. 

• Length of contract – It may not be legal to offer open-ended contracts. Contracts exceeding a certain length of time may be automatically classified as an employment contract. 

• Hours of availability – Local labor laws may not allow you to dictate working hours for a contractor. 

• Mediation – In the event you are not happy with the outcome of your contract or the work produced, you’ll want to have a legal way to exit the contract. 

• IP Protection – Your intellectual property, inventions, and ideas are not necessarily protected when work is being performed by a foreign contractor. You’ll want to make sure you have a way to guard your IP in the contract. 

Having localized contracts becomes increasingly important with every new country where you have a team member. What works in the U.S. may be illegal in another country. Penalties of noncompliance can vary greatly between countries. All of this makes contractor classification complicated. 

The risk of misclassification can attract serious penalties for both the employer and the worker, but no two countries are the same. Here are typical examples from countries where foreign contract work is popular. 

Australia treats self-employed contractors and full-time employees differently. Misclassification of contractors may lead to fines and penalties for the offending company.

1. Workers are entitled to receive payments, plus interest, backdated to when the contract started. This includes paid vacations, their base salary, overtime, public holidays, and national retirement scheme payments. 

2. The employer may be liable for penalties of up to $54,000 per violation.

3. The company may be penalized for failing to hold workers’ compensation insurance and is required to pay backdated premiums. 

4. Large companies with a monthly payroll of $750,000 or more could be liable to state taxation offices and be required to pay penalty taxes for any payroll tax payments.

5. The company may also face large penalties from the Australian Taxation Office – including penalty interest – for non-payment of the national retirement scheme and noncompliance with payroll withholding and reporting obligations. 

United Kingdom also treats contractors and full-time workers differently, and there are risks associated with misclassification.

1. Employers will be investigated by an employment tribunal and incur associated legal costs.

2. Workers are entitled to all protections and benefits an employee would receive and can ask to have their claim backdated to the start of the contract. This includes paid vacation time to a minimum of 5.6 week’s per year, public holiday pay, and pension contributions. 

3. All worker fees must be reclassified for tax purposes and subjected to income tax. 

4. National insurance contributions must be paid by the worker and the employer.

South Africa also has a range of stiff penalties when an employee is misclassified as a contractor. 

1. The employer could be liable for historic overtime pay. 

2. The employer may incur fines ranging from R300 to R1500 per worker.

3. The employer could be liable for historic unpaid vacation time for each worker. 

4.  The South African Revenue Service expects the employer to pay income tax, and possibly fines, owed by the worker. The employer is left to try to recover payment from the worker. 

5. The worker could face additional consequences and repayments of tax deductions that were taken as a self-employed person but not allowed for employees.

6. The employer has to make social safety net contributions like unemployment insurance, skills development levies, etc.

7. Foreign companies may have to register as an external company in compliance with the Companies Act.

Explore more: Check out Remote’s Country Explorer to find specific information about the local labor laws of the countries where your foreign contractors work. 

Use our Contractor Compliance Checklist to avoid misclassification

Work through this checklist to help determine if a new hire should have a contractor or employee relationship.

Download

What are the penalties for misclassifying workers?

If you’ve ever been audited by the IRS, you’ll know what an unpleasant experience it is. Now imagine being exposed to the same kind of scrutiny in multiple countries. The consequences for misclassifying international workers are wide-ranging and painful. They may include:

• Being subjected to legal hearings

• Attracting fines and penalties for violating local labor laws

• Paying back taxes along with penalties and fines on taxes owed

• Reimbursing your workers for public holidays, vacation days, sick days, and personal time-off benefits

• Paying backdated workers’ compensation insurance payments

• Making contributions to pension funds, unemployment tax, national health funds, and social security schemes

• Being forced to register your business as a legal entity in that country

• Losing the license to operate

Your workers could also be penalized

One thing to keep in mind is it’s not only you who will be on the hook for misclassification errors. Workers on your team may be faced with refiling income tax returns, losing deductions taken as a self-employed businessperson, and paying interest and penalties for misfiling. Your company culture will be impacted, and you’ll have to endure embarrassing conversations with your team. Count on the morale of your team plummeting.

Global Payroll —

2 min

[Webinar Recording] Managing contractors and avoiding misclassification

In this one-hour webinar on contractor management, three expert panelists discuss best practices for the contractors on your team, including what to include in a contract, who should own the contract, contractor status reviews, and more. 

Do I need to issue a 1099 to a foreign contractor?

No. The IRS reserves 1099 forms for U.S. contractors only. You do not need to issue a 1099 to anyone who qualifies as an international contractor. You will, however, need to collect a W-8 BEN form from every foreign contractor working for you.

How do I pay international contractors?

The first rule of working with contractors is to make sure they get paid as quickly as possible. If you can’t do that in a consistently timely manner you’ll find it hard to attract the best people. It’s difficult to repair a reputation of being poor at paying invoices. International contractors are already taking a risk working with foreign businesses, so they tend to be unforgiving if you haven’t figured out how to uphold your end of the bargain.

Paying international contractors is easy if you have access to the right platform. You’ll want to have the terms of payment clearly stated in your contractor agreement so there’s no confusion about when and where your international team receive their compensation for working with you.

Some key points to keep in mind are:

• Make sure you’re abiding by the local government’s labor laws for contractors.

• Know the tax implications for independent contractors in each country where your team works.

• Understand the local tax reporting laws related to independent foreign contractors.

• Ensure your contractor agreement meets the legal requirements of the country where the work is being performed.

• Consider where you’ll pay your contractors and in what currency.

Research in more detail: Download Remote's Global Payroll Management Guide

What are the differences between an international contractor and an employee?

As a general rule, an international contractor is an individual who is not controlled by the employer except for the outcome of the work. If you are directing what will be done and how it will be done, then your worker is an employee. There are pros and cons for international contractors and international employees, so consider whether it’s time to make a transition in your business.

In many cases, the decision might not be up to you. Foreign worker classifications can be prescriptive, which is why it’s necessary to maintain awareness about local labor laws. One way to keep on top of this, without becoming an expert on international industrial relations, is to use a software platform that keeps track of all aspects of international employment. Remote helps you employ your global team by managing payroll, tax, benefits, and compliance.

Research in more detail: When should you convert a contractor to an employee?

How to create a winning contractor management system

Hiring independent contractors abroad provides multiple advantages to a business or startup looking to scale and grow. It’s a chance to find exceptional talent, build capability in your team, and acquire a new perspective on everything you’re doing. In many cases, it’s a cost-effective chance to work with highly experienced professionals, and another way to boost your innovation.

Without doubt, foreign contractors can supercharge your competitive advantage. Wading in without fully understanding how to safely navigate a myriad of international labor laws is risky business. Business leaders have two choices:

1. Invest in international HR consultants, specialist tax professionals, and legal services with knowledge of every country where your talented team is working. They’ll help you draw up the appropriate contracts and advise you on local taxation issues. It’s also a good idea to find local experts for each location so you’ll have “feet on the ground” knowledge. You’ll also want in-house knowledge to ensure you are effectively managing the governance and compliance risks associated with international contractors. That means juggling multiple vendors and spending a lot of time delving into industrial relation laws.

2. Find a global contractor management platform to onboard, pay, and manage all of your local and international contractors. Remote’s solution is an easy way to stay compliant while managing international contractors and avoid misclassification risk.

Remote offers the most simple, secure, and cost-effective solution for onboarding and paying international contractors. No one else in the industry provides the same accessible, transparent pricing. There are no hidden fees or markups.

There are several advantages to you and your business for using Remote’s contractor management platform:

• Create and manage payments and invoices with a single click. Remote offers a variety of payment methods in more than 100 currencies.

• Tailor contracts to local labor laws. Remote’s local experts have created helpful templates to protect you and your contract workers from fines and penalties.

• Make faster, easier global payouts to international contractors at a moment’s notice.

• Get the strongest protections in the industry for your intellectual property and invention rights. Remote IP Guard ensures you receive the maximum rights to your company’s IP under the laws of the countries where your contractors work.

• Seamlessly integrates with your entire HR tech stack.

Hire international contractors and employees with Remote

As your business grows, Remote is right there to help you hire remote employees. Our global employment platform works seamlessly with our global contractor management platform to give you the broadest coverage for any type of contractor or employee you have around the world. You can build your international team with confidence, knowing you’ll be compliant and your contractors and employees are receiving the right payments in rapid time.