International contractor vs employee: What’s the difference and which is right for you?

By Mark Baggs, Head of Global

international contractor shaking hands

Contractors can bring many benefits to your business, including flexibility, specialist skills and a diverse range of experience. However, there are several differences that come with choosing an international contractor over an employee. Understanding the difference between both is important to mitigate risk of financial and reputational damage.

What is the difference between a an international contractor and an employee?

A key difference is an employee works for its organisation only. That employer dictates tasks, hours, location of work and provides resources. As part of the working relationship, the employee also receives holiday and other benefits from their employer.

In comparison, contractors use their own tools and generally pay for their own benefits. Contractors can also work for more than one employer, regardless of a contract length. This means it’s also the responsibility of the contractor to manage their taxes. In comparison to the employer, who must pay and withhold relevant taxes from their employees.

As a contractor is usually brought on for temporary purposes, they can be a cheaper option for businesses wanting to fill a skills gap. However, if the contractor is charging by the hour there may be less control over the end price, should a project require more work than originally planned.

What are the advantages of an international contractor vs employees?

Reduces risk of compliance issues 

When you work with a contractor, they are usually employed by an umbrella company who ensure the contractor is compliant. This also means the company does not have to utilise its own time and resources into navigating the local laws with regards to benefits, payroll and tax etc.

Cost

An employee is usually paid a fixed salary. The cost of hiring a new employee is high, especially to begin with should additional training or expenses be required. Plus, the cost of benefits, insurance and compensation schemes can add up.

In comparison, a contractor is often a set fee. Prior to the work, there is often an agreement detailing the work and costs required for a specific project. The contractor generally gets to negotiate their pay, location and hours worked. This arrangement is therefore ideal for employers requiring a specific skill or more assistance for a specific project.

Specialisms

Employees often have a specialism, however, can be expected to be trained by their employer to grow their skillset and help pave their career within the company. Contractors on the other hand usually sell themselves based on being an expert in a particular specialism. This is what they bring to businesses. This means they are often brought on for particular projects, where there may be a gap in the team.

To stay up to date with their specialisms, contracts therefore are often required to have specific certificates or regularly undertake CPD.

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Disadvantages of an independent contractor vs employee

Less control over day-to-day activities

The worker is only obligated to fulfil the specified work. Therefore, project requirements need to be communicated clearly. Once their contract date is over, there is no obligation to continue and they are not required to take on any additional work outside of their contract.

Misclassification can be costly

Should a contractor and employer relationship be misclassified, there could be unexpected costs for the employer.

These misclassifications can include costs relating to contract termination, benefits and tax. This does not include any additional fines or penalties incurred. Misclassification costs can also cause issue with local tax authorities, as hiring contractor enables a company to omit the cost of setting up in country.

How do you know what your staff fall under?

Whilst there are many aspects that determine the status of a worker, the most obvious when determining a contractor vs employee are:

  • The structure of the payment. Is the worker getting pay hourly or by a fixed salary?
  • Control of the location, hours and resources of the worker
  • Distribution of taxes

Which is right for your business?

Many businesses use a combination of contractors and employees. The biggest benefit of hiring a contractor is getting an already highly skilled worker for a specific project which has a short to medium end date. Hiring a contractor in this instance means can be cost effective, as the worker is only required for a set time. Plus, they can start straight away without training. When deciding to hire a contractor, their work also should not require much management. The objectives and result should be communicated at the beginning.

Advantages of hiring a PEO for your global staff

When you hire a PEO, you can hire employees and contractors easily and compliantly. When you work with a PEO, they spend the time ensuring your workers adhere to the local laws and regulations and keep them up to date when they change.

Procorre Global operates in over 120 countries worldwide, ensuring businesses’ staff remain compliant. Our PEO service enables you to have just one point of contact who will deal with all the arduous HR admin that comes with having a global workforce.

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