Common contractor management mistakes and how to avoid them

Pedro Barros, a seasoned leader at Remote, shares his expertise in our new thought leadership series on contractor management. Drawing from extensive interactions with contractors and customers, Pedro explores industry challenges and discusses how Remote's platform offers reliable, efficient solutions.

Contractor management is critical for many businesses, especially those that rely on a flexible workforce to meet project demands and scale operations globally.

Plus, managing contractors comes with its own challenges, too. Making mistakes here can lead to inefficient operations, legal issues, and strained relationships — impacting your business negatively.

Below, we’ll look at some of the most common mistakes companies make with managing contractors. We’ll also provide some tips to help you avoid these pitfalls and maintain healthy collaboration with your contractors. 

Let’s dive in.

How could mismanaging contractors impact your business?

Mismanaging contractors can lead to issues that affect not just the project at hand, but also the long-term health of your business relationships and reputation. 

Imagine you're juggling several contractors for a big project — if communication isn't clear, or expectations aren't set properly from the start, things can quickly start to unravel.

Project delays

First off, poor management can lead to delays. Contractors who aren't sure of their priorities or deadlines might not deliver on time, causing a domino effect that pushes your entire project off schedule. This can be especially problematic if you're working with tight deadlines or have other teams depending on these deliverables.

Standard of work

Quality can also take a hit. Without clear guidance and regular check-ins, contractors might not produce work that meets your standards. This can result in a product or service that's subpar, potentially leading to unhappy clients or customers and damage to your brand's reputation.

Unexpected costs

Financial implications are another big concern. Miscommunication can lead to scope creep — where the parameters of a project expand beyond the original plan, without corresponding adjustments in budget or timeline. This can inflate costs unexpectedly and strain budgets.

Erosion of trust 

Lastly, the morale and trust between you and your contractors can suffer. If contractors feel mismanaged, undervalued, or confused about their roles, it can lead to dissatisfaction and disengagement. This not only affects the current project but can also make them hesitant to work with you in the future.

In essence, effectively managing contractors is crucial. It ensures projects run smoothly, within budget, and to the high standards you need to uphold your reputation and achieve success.

What common mistakes do companies make while managing contractors?

Companies often face challenges when managing contractors, and several common mistakes can occur. Here are some of the most frequent ones and what you can do about them.

1. Not having a contractor agreement in place 

A major pitfall companies fall into when managing contractors is lacking clear contracts and defined expectations. Ambiguity in contract terms and job descriptions can lead to misunderstandings and disputes over the scope of work, deadlines, and payment terms.

A contractor agreement helps to put you and the contractor on the same page and puts a structure in place for the project to run smoothly. The contract spells out the key terms, expectations, the budget, and the timeline. Without it, you're leaving yourself open to all sorts of headaches — such as overpaying,  sub-par work being delivered, or having no way to hold the contractor accountable.

The absence of a contract can ultimately lead to misunderstandings, disputes, and even legal complications. It becomes difficult to hold a contractor accountable if they fail to meet the agreed-upon standards, or if the project goes over budget or beyond the specified timeline. 

Plus, without a clear written agreement, it can be challenging to prove your case if the contractor fails to deliver on their promises, or if any issues arise during the project. Contractor agreements also serve as a record if you’re deducting the contractor’s fee as a business expense.

How can businesses address this?

To set a fair and successful collaboration with a contractor in motion, always insist on having a written contract in place before starting any work with a contractor. 

The contract should clearly outline the scope of work, project timelines, payment schedules, and other terms and conditions. Make sure both parties understand and agree to the terms before the work starts.

Having a contractor agreement in place will safeguard your interests, provide clarity, and help facilitate a smooth working relationship throughout the project. Learn how to create an independent contractor agreement in our article below.

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2. Misclassifying workers

This distinction between an independent contractor and an employee is crucial, because it determines contractor rights and benefits the worker is entitled to, as well as the employer's obligations. 

Misclassification can be unintentional, due to misunderstandings of legal definitions, or intentional, to avoid costs associated with employees like payroll taxes, overtime, minimum wage, and benefits such as health insurance and retirement plans.

The risks of worker misclassification are significant for both parties. For workers, misclassification can mean a lack of employment security and access to benefits, which can lead to financial instability and no protection under employment law, such as workers' compensation or unemployment benefits. They may also miss out on the right to join a union or the protection of workplace safety regulations.

For employers, the risks include legal consequences such as penalties, back taxes, and fines imposed by tax authorities, labor departments, or courts. These can be substantial, depending on the duration of the misclassification and the number of affected workers. Additionally, there's the risk of reputational damage. Being found guilty of misclassifying employees can harm a company's reputation, affecting its ability to attract talent and potentially leading to a loss of business from clients who prefer ethically compliant partners.

Contractor misclassification undermines fair labor practices and can lead to significant legal and financial repercussions. It is essential for businesses to carefully assess and correctly classify their workers to comply with labor laws and maintain a fair working environment.

How to avoid misclassification 

While managing contractors, set clear expectations from the beginning. This includes defining the scope of work, timeline, budget, and any other relevant details. Focus on building a trusting and collaborative working relationship with your contractor. This means setting clear expectations and giving them the autonomy to do their job, without micromanagement.

You should also regularly set up audits and reviews to assess the classification status of your workforce to make sure employees and contractors are correctly classified. Additionally, keep agreements updated to reflect a change in the worker’s duties and responsibilities, and evolving labor laws in the worker’s country.

If all this sounds like too much of a hassle, consider partnering with a global HR platform like Remote. Remote’s team of employment experts can help you manage contractors compliantly while minimizing the financial and legal risks of misclassification.

Use our free employee misclassification tool to check whether you’re at risk of misclassifying your workers.

3. Overlooking compliance

Working with contractors requires thoughtful consideration of legal aspects to ensure a hassle-free and compliant working relationship. 

Apart from the proper classification of workers and the importance of drafting comprehensive contracts, here are some other legal factors to keep in mind when bringing in contractors.

Compliance with labor laws

Each country has its own legal standards for contracting, taxes, and employment. Ignorance of these laws can result in legal penalties and complications. Even though contractors are not employees, certain local labor laws may still apply, especially around discrimination and safe working conditions.

For companies working with international contractors, understanding local tax and legal requirements is crucial, and companies must comply with labor laws that affect contractors in their jurisdiction.

Companies need to improve engagement practices and legal compliance to enhance the benefits that contractors bring to companies.

- Pedro Barros, General Manager of Contractor Management at Remote

Intellectual property rights

Ownership of work produced by a contractor can be a legal gray area without explicit agreements. You might want to include intellectual property (IP) clauses in the contract that clearly define who owns the work product. If the intention is for the hiring company to retain ownership, ensure this is clearly stated in the contract. 

Confidentiality and non-disclosure

Protecting sensitive company information is crucial when engaging contractors. Include confidentiality or non-disclosure agreements (NDAs) as part of the contract. Clearly outline what information is confidential and the consequences of breaching these terms.

Tax obligations 

In some regions, incorrect handling of taxes related to contractors can result in liabilities for unpaid taxes (in other regions, there is less responsibility placed on businesses when it comes to the tax status of their contractors — which are considered the contractor’s responsibility alone). Ensure that contractors fill out and submit the necessary tax forms (like Form W-9 in the U.S.). Make it clear in the contract that contractors are responsible for paying their own taxes.

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How to promote compliance using contractor management software

A contractor management system is a powerful tool for ensuring compliance with local laws and tax practices. By automating and streamlining compliance processes, it helps companies reduce risks, improve efficiency, and maintain a strong legal and financial standing.

Remote’s contractor management software has intuitive tools to manage contractor onboarding, contracts, invoices, compliance documentation, and more, in one easy-to-use interface. Managing a large group of contractors across different regions can be tricky, but Remote's contractor management services can help you reduce risks and stay compliant effortlessly. 

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4. Inconsistent contractor payments 

Delayed payments or failing to pay on time damages the trust between you and the contractor, and can plunge them into financial difficulty. This can make future collaboration difficult, as the contractor may hesitate to work with you again. It can also harm your reputation in the industry, making it harder to attract new contractors for future projects.

Late payments can also have legal consequences. Most contracts have payment schedules and penalties for late payments. Not following these terms can result in a lawsuit for breach of contract, which can be expensive and time-consuming.

Delayed payments also often disrupt a contractor's cash flow and impact their ability to pay their own expenses. This can lead to delays in project completion, as the contractor may be forced to prioritize other projects that provide faster payment. In extreme cases, it can even lead to the contractor going out of business, leaving you without a reliable partner for future projects.

Navigating global payments

You might be able to easily pay your contractors if you’re managing a small team based locally. You can do this via popular payment methods like bank transfers, wire transfers, checks, or online payment platforms like PayPal, Xoom, or Wise. 

But if you’re planning to grow your team abroad, or have to manage multiple payments internationally, things can quickly get complex. If your team is based in different parts of the world, you must navigate labor and tax rules in the country they are based in as well. Paying contractors in different countries involves navigating foreign exchange rates, international banking fees, and compliance with international trade regulations. Differing payment terms and schedules can lead to confusion and cash flow issues, both for the company and the contractors.

How to fortify your payment process for contractors

To make on-time payments to your contractors a top priority, you’ll have to establish unambiguous payment terms in your contract and work with a system that makes sure payments are processed without delay.

Choose an international payment platform that handles currency conversion and is compliant with global financial regulations. These platforms can also help reduce transaction fees and improve payment processing times.

If you’re looking for a trusted and reliable contractor management system to make contractor payments effortless, check out Remote. We can help you make global payments efficiently and in contractors' local currency.

Make contractor management fast and easy with Remote 

Hiring contractors gives your business processes agility and flexibility, and creates opportunities for more diversity among your team. Managing them efficiently, though takes some effort and planning.

From compliant contracts and onboarding procedures to ensuring compliance with local laws and swift, timely payments — there’s a lot to consider. If you make mistakes at any step, you’ll be at risk of legal or financial penalties.  If you feel overwhelmed, or just have the time or resources to manage your contracts efficiently we can step in with Remote’s contractor management services. Our Contractor Management mastery pack has expert guidance on hiring, onboarding, and paying international contractors compliantly. You can also speak to one of our friendly team if you have any questions about hiring contractors internationally.