The pandemic-induced remote work trend has prompted global reliance on freelancers or independent contractors. Technology companies have hired contractors over full-time employees over the last few years.
The United States has over 3.3 lakhs of IT contractors currently. LinkedIn's Economic Graph shows the tech job listings for contractors tripled within a year in 2022.
The trend is also observed in India, which has 15 million freelancers in its gig economy working on independent contracts in IT and programming, finance, HR and other industries. The country is also a supplier of qualified talent to the world, making it among the largest exporters of IT services globally.
As the rise of the gig economy shows high attrition rates, more companies are ready to make this shift. Hiring international talent poses a common question of how to pay international contractors.
In the digital payments era, there are varied ways to make payments, but it has to suit the needs of both companies and employees.
In this article, we give you a comprehensive guide on how to pay foreign contractors.
Who Is An International Contractor?
An independent professional who provides services to a company while being a resident of a different country than the business location qualifies as an international contractor. For example, if a company in the United Kingdom hires an individual on a contract from India, the hired person is an international contractor.
An international contractor can work with other companies and is not liable as a full-time employee. You have less control over an international contractor as they work independently on their tasks/projects.
Another important aspect here is you pay international contractors based on their invoices for their services and not on the company's payroll.
Researching the guidelines defining an international contractor in each country is essential to avoid employee misclassification.
What Is Employee Misclassification?
Employee misclassification occurs when an employer wrongly classifies their employees as independent contractors.
A report by the National Employment Law Project states that almost 10-30% of employers have misclassified workers as contractors. Misclassification could be a deliberate or a genuine mistake, but it has hefty repercussions, such as public tax revenue losses and worker exploitation.
The same report states that companies misclassifying workers cause losses worth billions of dollars to the US economy. In a recent case, an HR startup is also under fire for misclassifying contract workers.
Improperly categorising your contractors can subject your company to scrutiny by foreign governments and affect your operations. Different countries have differing definitions of employees and contractors, so when you hire and pay international contractors, you must keep this in mind to avoid misclassification risks.
How to Avoid Employee Misclassification
Employers recruiting contractors should regularly examine the nature of working conditions to avoid risks of misclassification.
To assess if you are hiring employees or contractors, ask these questions:
- Who decides when the work is done?
- Does the individual have their own business?
- How long are you working with this contractor?
- Does the contract state a fixed duration?
- How is the individual getting paid?
An independent contractor has more control over how they perform their tasks. They could have their own business or work with other companies while working for you.
A fixed payment contract for a defined period usually binds independent contractors. The payment is processed after they send invoices for their services. The company payroll does not secure an independent contractor.
Things to Set Up For Paying International Contractors
Establish a well-defined payment system to pay international contractors by getting the following things in order:
1. Know Your Customer (KYC) Check:
A part of the hiring and onboarding process, it confirms the identity of the international contractor. It is essential to check if their bank account is genuine.
2. Define The Payment Terms:
Consider the needs and expectations of your contractor to design the payment terms carefully. This should include:
- Rate of the contractor
- Type of payment: Per project, monthly or retainer basis
- Preferred currency of payment
- A payment method that is convenient to them to receive payments
- The deadline for invoicing and payment
3. Sign an Employment Contract:
A written agreement must be signed between the employer and employee, which defines the terms of employment, role, payment, benefits and duration of the contract.
An international contractor agreement clarifies the relationship between the employer and employee and leaves no risk of misclassification.
4. Collect Tax Forms:
Check the local labour laws from where your international contractor is based to understand their tax implications. Get the necessary tax forms filled out to report correct payments and ensure compliance. Research the Indian payroll system when hiring contractors from India to know all tax-related submissions.
Best Ways to Pay International Contractors
After finalising the employment contracts and payment terms, the main question is how to pay international contractors.
Read on to find some of the best ways to pay international contractors along with their pros and cons.
1. Wire Transfer: This bank service electronically transfers money from one bank account to another in a different country. The Society for Worldwide Interbank Financial Telecommunication (SWIFT) has a network that seamlessly connects most banks worldwide.
- Most banks provide international wire transfer services as a traditional method of international money transfer.
- You can transfer large amounts of money, although you need to check the bank limits.
- Payment is received straight into the contractor’s bank account. They won’t have to create a new account.
- It can take 3-5 days for international payments.
- They have a fee per transfer. The prices may not be cost-effective if you make frequent transfers.
- For transferring in local currency, additional charges are applicable. Big banks and institutions charge 3-5% on the exchange rate.
- Some banks may even charge your contractor for an incoming transfer fee.
2. Money Order: International money order is an electronic form of issuing cheques for paying overseas contractors. The method follows an old-fashioned way of sending the money order via post, which your contractor will deposit in a bank to receive money.
- You do not need a bank account. Your contractor can get the money in cash from a money order.
- It guarantees a trustworthy money deposit to the right person as the recipient has to confirm their identity when they encash it.
- When compared to checks, a money order has no chance of bouncing.
- You must physically visit a local postal service or banking institution to purchase a money order. Using third-party money transfers will incur additional fees.
- You may not always get a fair exchange rate.
- The sender and recipient must pay fees when transacting with a money order. For international payments, these fees can be very costly.
- Sending via international post will be a slow process, and you should begin the process in advance to ensure timely payments.
3. Digital Wallets: A virtual wallet is perhaps the most convenient way to pay foreign contractors. Many mobile wallets like PayPal, Google Pay, Wise, PhonePe, Apple Pay, Venmo etc allow sending and receiving money online.
These digital wallets act as an intermediary between a user and their bank. PayPal is one of the oldest international payment services to transfer funds overseas.
- It is easy to set up a digital wallet account for new users.
- The transfer process is quick and efficient.
- It offers security with data encryption.
- It enables faster payments. Best to process delayed payments.
- You can choose from a business account or a payment card.
- The risk of fraud is not entirely eliminated, and it is susceptible to hacking.
- Some wallets, such as PayPal, charge fees on transactions from a business account.
- The contractor may also have to pay additional charges for transferring the funds to their local bank accounts. Currency conversion fees can be 4% and up.
- Not everyone may be compatible with using e-wallets.
When you select a digital wallet to pay international contractors, ensure that your contractor’s country has the service available. Despite being a popular global payment service, PayPal is unavailable in Pakistan, Afghanistan, Lebanon, Central Africa, Ghana, Russia and many others.
In India, PayPal is only used for receiving international payments but domestic payments are discontinued.
4. Cryptocurrency: A study published in 2022 highlighted that 50% of gig workers in the United States were open to receiving a part of their payment in cryptocurrency. As per a news report citing industry experts and professionals, the trend is also seen among Indian gig workers. So cryptocurrency is emerging as a payment option.
- It is easy to set up a crypto wallet and transact over a few clicks.
- It is cost-effective to send money anywhere in the world.
- It eliminates any extra transaction fees.
- You can track live transfers.
- Cryptocurrency valuations fluctuate rapidly, which can affect the final payment amounts.
- Your foreign contractor may not have the same crypto account as you.
- Not a legal tender in all countries.
- Cryptocurrency exchanges are prone to data hacks.
5. Payroll software: A hassle-free and regulated process to pay international contractors would be partnering with hiring and payroll software. An employer of record (EOR) service works best to have a systematic method of invoicing and payments.
An EY report finds a payroll error can cost $291 on average to remedy. Using payroll software can considerably reduce the frequency of errors with automated processing.
- Pay contractors all over the world in their local currency.
- Data entry and processing payroll are accurate.
- You can keep a tab of all your invoices, reimbursements and payroll transactions. Also stores data regarding working hours and leaves.
- Most companies charge a monthly flat rate per contractor.
- Employees can easily access their payslips.
- Training the staff to use the software can be time-consuming.
- Some software could have hidden costs.
- Prone to technical glitches.
If you look forward to hiring and paying foreign independent contractors in India, you should check out Rapid, a trusted EOR with an all-integrated HR platform and payroll management.
Things to Remember When Paying International Contractors
The best way to pay international contractors will depend on the convenience of both you and your independent worker. However, there are some other factors that you need to consider once you choose a payment method.
- Exchange Rates: When paying international contractors in their local currency, you must consider the exchange rates. If you make monthly payments, the rate could differ from previous months. Managing independent contractors from various countries with different currencies can affect your operating expenses.
- Transaction Fees: No matter your chosen payment method, you will bear some transaction fees. These fees may differ for banks, digital wallets or third-party software, so consider these costs in your expenses. Do considerable research to find out which suits your needs and your contractor's preferences.
- Compliance With Foreign Laws: The local labour laws differ in every country. In a diverse country like India, the regulations vary even in its states. Your compensation policies for paying foreign contractors should consider the legal and statutory requirements of the contractor’s country.
Gather thorough knowledge of the tax and employment laws in the countries where you plan to hire your contractors. Leave no risks for employee misclassification, as it can attract hefty fines.
Use Rapid to Simplify Global Hiring and Payrol
If you are still unsure how to pay foreign contractors, you can rely on Rapid, especially for Indian contractors. With two decades of experience and local expertise in the Indian market, they can offer you a comprehensive process of finding the right talent, onboarding them and managing their payroll. Whether you want to hire 1-2 contractors or set up your small team in India, Rapid can help you at every step.
Along with an all-integrated HR platform, their payroll management system leaves no room for errors. They have a single invoicing system for businesses, smoothening the whole process. Your contractor’s reimbursements, leaves and attendance can all be managed through a few clicks, accessible to them.
Rapid also has a services marketplace that helps you with specific business needs, such as recruiting talented individuals, renting workspace, sourcing IT equipment etc. With best-in-class and customised health benefits, they will ensure your independent contractor is happy to be associated with you.
Rapid does much beyond payroll, allowing you to focus on your business strategy while they do the rest. Book a demo to know more.