The revolutionary shift to the gig economy has positioned independent contractors in the esteemed group of the global workforce. In the current day scenario, independent contractors are responsible for contributing to the entire spectrum of industries starting from IT to the creative media houses. According to a recent study, 45% of the US workforce earn their income as independent contractors.
This substantial number marks the industrial preference for flexible yet highly qualified professionals working as independent contractors. Independent contractors efficiently handle organizational projects with a unique blend of working on diverse tasks with high precision. This guide aims to explain to our fellow readers the evolution of independent offshore contractors, the benefits of hiring them, a few of the concerns related to them, and how they differ from other employment models.
What is an Independent Contractor?
An independent contractor is someone who works as a self-employed individual for short-term or long-term organizational projects. Independent offshore contractors are hired on time-based contracts by the companies but it is crucial to understand that they still remain non-employees and are not added to the company’s payroll.
Independent contractors have complete charge over their working hours and workplace. They also have their own resources and techniques required to perform the tasks and choose flexible timings to submit the work. They are responsible for managing and paying their own employment taxes. They also cannot access any employee benefits including health insurance or retirement plans from the hiring company.
However, numerous reports say that independent contractors earn more on an hourly basis by a significant percentage. Working professionals from any career path can be independent contractors such as financial consultants, marketers, HR professionals, software engineers, and website designers, among others.
However, people often get confused between the terms independent contractor vs employee and independent contractor vs freelancer. To clear this confusion, we have explained these terms vividly in the later half of this guide.
Evolution of Independent Contractors
As the global economy continued shifting to new phases, the role of independent contractors grew more and more significant with each passing phase. Today, 36% of the US working population is engaging in careers as independent contractors. Additionally, 46.6% of the global workforce is reported to be self-employed currently.
Flexibility and autonomy are two main driving points for working professionals to shift their careers as independent contractors. Flocks of people from various industries and companies created platforms for themselves to work remotely at their own ease and started utilizing various advanced digital tools and platforms to serve quality work to the companies.
To cite an example, the independent contractor market in India per se has generated a humongous revenue of USD 6 billion in the year 2023. This not only increased job satisfaction and consecutively productivity among employees, but also helped countries across the world to boost their job market and hence economy.
What Are the Popular Methods of Hiring an Offshore Independent Contractor?
As the demand for hiring independent contractors is shooting up in recent years, it is becoming increasingly difficult for companies to find the right talent for their teams. When it comes to international hiring, a few more complexities add up to the list. Amid this talent crisis, companies have adopted some of the tried and tested methods to hire the best and most suitable talent. We have listed down the most popular ones below:
- Professional Network: Networking in the industry is pivotal when it comes to hiring foreign independent contractors. Leveraging social media platforms like LinkedIn, and Facebook, attending various industry events, and initiating a proactive referral program are some of the important channels to build a strong network among foreign workforce.
- Online Portals: There are ample online portals and job boards like Naukri and Indeed where companies can connect with the finest candidates. They can build a good rapport with them, build a candidate pipeline, and hire the most desired ones among them.
- Recruitment Agencies: As they are experienced in hiring candidates for multiple clients, recruitment agencies already have a strong candidate network. They can help companies find the right talent matching all the necessary skills and expertise.
- Employer of Record (EOR): This is a comprehensive concept that emerged in the recent past. This employment model helps expanding businesses in a holistic way from recruitment to initiating engagement activities for the contractors. An EOR covers the entire contract lifecycle including onboarding, payroll, taxes, and other administrative tasks. An EOR also takes care of the legal and compliance factors required for the international team. Read through our blog to learn more about EOR benefits.
What Are the Advantages of Hiring Independent Contractors?
There are a multitude of advantages to hiring an independent contractor including a cost-effective budget, the highest talent from across the globe, and high-quality work with short-term commitment.
Companies prefer to hire a contractor over a full-time employee because an independent contractor has the expertise to adapt to a new business environment and the skills required for a particular project as they are frequently in between projects.
Access to Premium Talent Globally
Organizations can explore the diverse talent pool without any geographical barriers while hiring an independent contractor. This allows expert professionals from any location to work on a specific project without the need to be physically present in the hiring office location.
This way companies do not have to face any talent shortages at any given time. Also, as companies hire independent contractors for a project-specific time mostly, they can be flexible with their workforce and discontinue the term of a contract with an independent contractor in case the business or project requirements are not met as per expectations.
Additionally, the highly competitive market of independent contractors allows each one of the employees in the contract to give their best at work and bring out the most hidden skills within them to add the highest value to a certain project.
Reduced Employee Expenses
Companies have to bear numerous long-term expenses for their full-time employees which include employee benefits, employee training and development, workspace tools and infrastructure, and the most complex of all, employee taxes. By hiring independent contractors, companies not only save on employee-related operational expenses but also a huge deal on employee payroll and taxes.
Since the contractors are not added to the company payroll, paying taxes, health insurance and other added perks stay off the charts. Further, unlike permanent employees, independent contractors are paid project-based salaries which involve factors like the timeline and demand for the project.
This frees up the companies from any long-term expenses towards the hired contractors. Thus hiring independent contractors ensures maximum efficiency with minimum financial commitment.
Maximum Efficiency and Flexibility
Independent contractors are well experienced in working with short turnaround times yet bringing out the best solutions and unique perspectives within limited timelines. Hailing from a diverse range of career backgrounds, they need little to no training to adopt the new project requirements and are flexible in delivering any kind of expertise or requirements the concerned project demands.
This ensures speedy delivery and maximum efficiency of work. Additionally, companies can be really flexible with resource allocation if they plan to hire contractors for a specific project. This flexibility enables companies to appoint only the most suitable candidates for the project as well as maintain quality work among the team of contractors.
Minimum Efforts on Training
Independent contractors are well versed in the project requirements and expertise required in various industries to deliver an exceptionally high-value output. This is mainly because they are experienced in working for multiple domains and industries. They also keep themselves updated about the latest skills and trends in their career path to stay at the top of the game.
This significantly reduces the learning curve for them and consequently, the need to provide training and development support by the hiring organization. Thus organizations can successfully save on hiring resources and allocating time just for training and supervision purposes. Independent contractors are meticulously capable of working on a project immediately after joining yet executing it smoothly and effectively.
Concerns about Hiring an Independent Contractor
While the advantages of hiring an independent contractor always carry more weight, there are a few concerns as well to pay attention to before hiring one. The major concern is the hiring company merely has no control over their work specifications or timelines as they are not permanent employees. Additionally, being self-employed professionals, independent contractors have the freedom to choose their working methods and clients. This can lead to potential threats to the IP protection of the concerned company and non-compliance with the legal laws of the contract.
Also, many a time the contractors fail to understand the organization’s culture and vision which leads to misalignment with the project goals and delivery. There is also a good chance of miscommunication and worker misclassification in the case of foreign independent contractors. Let us discuss in detail the major issues faced by organizations when they plan to hire a contractor for their teams.
Engagement and Retention
The lack of proper communication and continued emotional engagement with other team members or company colleagues disrupts the motivation to work productively for a long time on a project. This leads to a constant hunger for more and imbalanced stability among the independent contractors which in turn leads to higher attrition rates.
It becomes difficult and expensive for the company to hire a new resource in the middle of an ongoing project. It becomes even more difficult to engage the new resource halfway with other team members, both emotionally and professionally. This cycle of onboarding and offboarding repeats itself making it a nightmare for companies at times.
All this puts a hindrance to the smooth and efficient execution of the ongoing project, often leading to incomplete and low-quality product delivery by the team.
Worker Misclassification
It is crucial to understand that each individual country has its own unique set of labor laws and regulations. When a company plans to hire a contractor from a foreign country and is not thorough with employee rights, there is a great chance of misclassifying a full-time employee as an independent contractor.
This not only rips off the misclassified workers from receiving employee benefits and insurance but also poses heavy reputational damage to the hiring company. The major problems faced by the hiring company for wrongly classifying an employee are financial and legal penalties.
Worker misclassification can impose heavy fines on the company which includes employee taxes and unpaid benefits. Thus without a proper agreement between the employer and the contractor, it is tough to be fully compliant with the legal labor laws in a foreign country.
Copyright Infringement Risks
As independent contractors are self-employed workers, technically they own the copyright of every creative or intellectual work they produce. Independent contractors can reserve their right to the work they have done in case of any disagreement or clash between the contractor and the company.
Without the proper legal agreement of owning the intellectual properties by default created by the contractors, companies may fail to utilize them properly or in the worst case at all. Independent contractors may also sue the hiring company for incorrectly utilizing or modifying their produced content if not legally bound. These disputes in copyright ownership heavily impact the output of the project at hand and the company’s business at large.
Legal and Compliance Risks
The liability and obligations of independent contractors towards the hiring company are often substantially lower than those of full-time employees. They often fail to comply with the legal standards of the organization and other related labor laws. However, it is the company that has to take the blow on their behalf.
Companies can face challenges while deciding the salaries of foreign independent contractors, onboarding the contractors, or offboarding them for the wrong reasons. There are increasing chances of overlooking the loopholes in the agreement while hiring an independent contractor as these types of employment agreements are more transient and divergent. Complying with diverse laws and regulations in a foreign country is difficult per se and adding independent contractors to the team makes it more complex.
Liability Issues
The major concern in hiring an independent contractor is that they are free to work with more than one client at a time. This could potentially lead to confidentiality breaches, conflict of interest, or a negative impact on work quality. Moreover, independent contractors mostly work on their own technical resources and tools.
This makes it difficult for the companies to maintain proper IP protection and strict security for their company data. Additionally, as independent contractors are not added to the payroll or do not have access to employee benefits, they can demand some unfair and added benefits to their worker compensation. All these factors convert an independent contractor to liability more than an asset to the hiring company.
The Remunance team being the local experts has been hiring and managing independent contractors for multiple foreign clients for a decade now. Learn how they are tactfully addressing the concerns regarding hiring and managing independent contractors in India.
Independent Contractor vs Employee
| Independent Contractor | Employee |
| An independent contractor is not added to the company’s payroll and does not have a regular salary. Their salaries are more project-based or time-based compensation. | An employee is added to the regular payroll system of the hiring company and gets a fixed salary on a monthly or bi-weekly basis. |
| Employee benefits like health insurance, overtime wages, retirement policies, leave policies, etc. are not included in their compensation. | An employee has access to all kinds of benefits and perks that are added to compensation policies by the company. |
| They have full control over their work schedules, work techniques, and work delivery timings. They also use their own resources and tools to perform their tasks. | The hiring company has full control over the work timings, workplace, and work techniques of the employees. They have to perform their tasks only on tools and resources provided by the company. |
| Companies are not responsible for handling their taxes. They have to manage and pay their own employment taxes. | The employer is responsible for paying and managing all kinds of employee taxes including income taxes, housing loan taxes, etc. on behalf of the employee. |
| They can work for more than one client at a time. | Employees have to be devoted to one organization at a time and cannot work for other clients during their employment tenure. |
What are the different functions of independent contractors?
Independent contractors work across multiple industries and business functions and are skilled in adapting to any project requirement quickly. Companies hire foreign independent contractors for various roles such as content creation, graphic designing, software development, etc.
Companies mainly hire a contractor over a full-time employee to get maximum output with minimum commitments. Let us look at a few of the functional roles in detail.
Technical Solutions
Independent contractors from various technical backgrounds are hired to deliver quality technical solutions. This includes a variety of services such as digital solutions, IT integration, cybersecurity, cloud services, information reporting, etc.
Companies hire foreign independent contractors from various parts of the globe to access specific and top technical skills required for high-end technical projects. Independent contractors having the freedom and experience of working on multiple and diverse projects add customized and unique solutions to the projects.
Content Creation
As there is no geographical limitation in hiring a foreign independent contractor, companies attempt to put the best creative minds in one team to build meaningful and eye-catching content.
Independent contractors who work in content creation are typically responsible for creating and uplifting the brand image of a company. They do so by investing their unique expertise in various formats such as blogs, newsletters, social media posts, infographics, etc.
Accounting
Companies hire finance scholars as independent contractors to manage their financial and accounting projects. The projects can be related to financial reporting, tax planning, bank reconciliation, budgeting, financial analysis, auditing, etc.
Financial services are the most crucial business functions in a company and it can directly impact the revenue of the business. Also, any disparity in auditing or financial analysis of the company budget or revenue can endanger the company legally. Thus, it is advisable to hire experienced and honest foreign independent contractors for such roles.
Professional Services
Independent contractors are hired on service-based projects from various domains such as marketing, finance, IT, legal, operations, etc. Businesses prefer to hire a contractor for professional services because they have the most hands-on experience in the services sector by working on multiple projects from multiple industries. They can bring in unique solutions and expertise within a short span of time and deliver quality output for a project.
Consulting
As independent contractors work solo most of the time, they are experts in building solid strategies, curating meaningful business flows, and providing their unique insights to grow a business. Be it financial advice or a piece of marketing advice to create a brand name and brand strategy, an independent contractor is always the best resource to seek advice. Additionally, as they work as consultants for many other clients, they can bring in real-time business case studies of those clients as well which helps the present client to think and strategize with fresh perspectives.
Why is an Independent Contractor Agreement Important?
When the hiring company and the independent contractor come in a legally bound contract to mutually safeguard the interests and rights of both parties, they establish an independent contractor agreement between them. The contract is signed by both parties and charts out all the information transparently that is to be adhered to by them during the complete tenure of the contract.
The terms and conditions clearly mention the roles and responsibilities of the contractor, delivery, and deadlines related to the project. It also mentions that the individual is hired as a contractor and not a full-time employee to avoid worker misclassification. Hence, the agreement outlines that the contractor will not be entitled to any employee-related benefits or perks from the company and is expected to work as a self-employed individual. This strikes out the possibility of any legal dispute or misunderstandings between both the parties in future.
The independent contractor agreement also specifies the payment terms of the contractor clearly. This ensures a fair compensation process where the payment is processed only after the completion of the work. The independent contractor contract covers one of the major clauses which is a non-disclosure agreement. Since independent contractors work on their own resources and tools, the companies do not have much control over the security of the tools and software they are working with.
Thus, it becomes very important for the company to protect sensitive business information and data from getting leaked or compromised in any way. The independent contractor agreement also covers other crucial terms like protection of intellectual properties, non-compete clauses that prevent the contractor from working with the company’s direct competitors during the period of the contract and a fair amount of time after that, and clarifies that the company reserves the copyright ownership of the work produced by the independent contractor during the contract period.
What are the Terms of Paying Independent Contractors?
The payment terms between the independent contractor and the hiring company should be transparent by all means to avoid any lawsuit or any other legal disagreements between the two parties. Paying independent contractors involves a lot of factors including the payment schedules and the compensation breakdown.
The most important factor is the payment timeline and the payment methods where both parties come to an agreement of when and how the payment will be processed. The most common milestone for a payment to be processed is project completion within the specified timeline. The common methods used in payment processing are electronic payment systems like digital wallets, bank transfers, virtual payment cards, etc.
The payment terms also consist of the frequency of the payment like hourly, bi-weekly, or monthly, and the additional compensation fees if any. Paying independent contractors also involves a dispute resolution process where there is a structured legal way to resolve any payment-related disagreements between the parties.
The common reasons for disputes can be late payments, invoicing rates and frequency, non-payment or payment disparity of added perks and benefits, and payment obligations in case of termination or if the contractor quits before the tenure of the contract ends.
It should be noted that international payment transfers involve certain fees and exchange rates. They can vary from currency conversion rates, transfer fees on different online payment platforms, and any intermediary fees if applicable. The payment terms also vary widely depending on the country of the hiring company and the contractor. The hiring company thus should check the payment method and the miscellaneous fees involved with it carefully before drafting the payment agreement with the independent contractor in a different country.
There is also a clause regarding the non-disclosure of the payment terms and the penalties involved with it in case the contractor fails to do so. All the clauses mentioned above ensure easy and hassle-free financial transactions between the hiring company and the independent contractors and keep the payment process safe, secure, and smooth.
What Is Worker Misclassification Risk?
Worker misclassification risk is the condition where companies wrongly classify employees as independent contractors and face unwanted consequences like financial or legal penalties and reputational damage. The labor rights and standards of an employee and an independent contractor differ a lot from each other in different countries and it is of absolute importance for the companies to comply with these laws.
Companies intentionally or unintentionally misclassify a worker mainly to save on company budgets or lower administrative burdens. This is typically due to the fact that independent contractors are considered to be self-employed individuals and hence companies do not have to bear any sort of employee liabilities such as payroll, taxes, insurance, leave policies, overtime wages, etc. However, employment regulatory authorities have quite strict policies about the employment status of an individual.
They monitor and conduct frequent audits on the nature of employment and work relationships of each individual with their hiring companies very closely. Thus, it is crucial for companies to designate proper and defined roles for each working individual to avoid worker misclassification and undesirable circumstances.
This is more important for businesses planning to expand internationally as the labor laws in the targeted country of expansion are completely foreign to them. It is not quite easy to understand and grasp the labor laws of a new country within a short period of time and that can lead to a lot of confusion in classifying the candidates they hire in the new country.
How to Avoid Worker Misclassification Risk?
To avoid risks involved with worker misclassification companies must adhere to certain strict rules starting from drafting clear contracts to keeping everything documented. Firstly, companies should make themselves well aware of the local labor laws and the classification guidelines provided by the state labor departments. Secondly, the drafted contracts should be exhaustive involving each and every detail about the scope of the work, contract tenure, project details and deadlines, payment terms, etc. Additionally, the companies must define the company culture, goals, and standards and ensure that the hired independent contractors are aligned with them.
It also should mention the degree of control over the independent contractors, working hours, and the kind of tools and resources they will use to perform the tasks. Companies must also maintain proper records of job descriptions, work agreements, and work outputs delivered by independent contractors to avoid any future disagreements.
The other major factors to be taken care of are regular reviews of the role classifications and seeking legal advice at an early stage in case of any dispute to avoid any further complexities between the hiring company and the contractor. Forming an agreement for independent contractor services can be complex at times given the nature and diversity of the employment model. However, if a few major things are taken care of, hiring independent contractors will prove to be cost-effective and hassle-free for businesses.
FAQs for Hiring Independent Contractors
The terms and clauses for hiring an independent contractor can be complex, especially for businesses expanding internationally. Let us discuss some of the most common concerns faced by companies.
How does an independent contractor pay taxes?
Independent contractors have to file returns to the government to pay their taxes. They have to take into account all kinds of income while filing the returns and take care of the local taxes as well. They must ensure paying taxes correctly and on time to avoid double taxation or any other kind of tax penalties.
How do you pay independent contractors?
Companies can pay independent contractors via several payment channels such as online payment platforms, digital wallets, bank transfers, direct deposit, etc. No matter what the payment channel is, companies always have to ensure that the channel is secure and the payment invoices are regular. This will avoid any payment dispute between the independent contractor and the hiring company at any time during the contract or after that.
How do you fill out a W9 as an independent contractor?
There are multiple lists to be checked off while filling out a W-9. The major ones are your name, address, business name (if any), and Social Security Number (SSN). After filling out these details, you have to choose your federal tax classification and sign the form to confirm the accuracy of the information provided by you.
What are some best practices for hiring independent contractors?
The companies must follow certain protocols when hiring an independent contractor. They include classifying workers correctly and drafting solid and exhaustive agreements. The agreement must specify the payment terms, project demands, contract tenure, work schedules, and the required non-disclosure agreement. The company must also verify the references and portfolios provided by the independent contractor and ensure that the contractor is free from any legal complications that may impact the company.
What does it mean to work as an independent contractor?
When an individual works as an independent contractor, the working professional is basically self-employed and has to deliver project-based tasks to the hiring company. The individual contractor is expected to work for a specific timeline mentioned in the contract and is not added to the company payroll. It also means that the contractor has to pay self-employment taxes and lacks access to any kind of employee benefits from the hiring company. While working as an independent contractor provides flexibility and freedom, it lacks job security and many other perks otherwise provided by the employer.
Do I pay more taxes as an independent contractor?
Yes, an independent contractor does pay more taxes than a full-time employee. As an independent contractor is a self-employed professional, the contractor is responsible for both the employee and employer portions of taxes. This covers income taxes, quarterly taxes, and self-employment taxes. Independent contractors must pay the taxes timely to avoid any tax penalties.
What type of business is best for independent contractors?
Independent contractors can work on a number of fields that have short-term projects. This includes digital marketing, web development, writing, graphic designing, consulting, etc. These roles have high demand in the market, provide flexibility in work schedules and work methods, and require creative and specialized skills that suit perfectly for an independent contractor. These kinds of projects help contractors to work on diverse projects and upgrade their skills continuously to stay at the top of the game.
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Rumela Chakraborty
Rumela Chakraborty is a passionate content writer specialist of Remunance’s marketing team with a knack for crafting engaging and informative articles. With extensive experience in curating versatile content, she has honed her skills to produce high-quality, SEO-optimized content. Be it blog posts, PR articles, or social media content, she takes pleasure in infusing storytelling into her work and has a keen eye for detail. She has emerged as a subject matter expert in the PEO/EOR industry, transforming a wide array of concepts related to remote work, freelancing, outsourcing, payroll, and more into compelling narratives that resonate with the intended audience.
Disclaimer
This blog is created for informational purposes. Everybody is requested to seek advice from an expert before making a decision based on the information given in the blog. Remunance disclaims any liability/loss or damage caused by using the information, directly/indirectly, given in this blog.
