How to hire and pay independent contractors in India

If you need to hire workers for a short-term project or need workers with specialized skills, India could be an option for you. India has become a popular place for companies to hire contract workers due to its skilled workforce in the tech and services industry and low labor costs.

But hiring independent contractors in India does come with challenges. In addition to understanding local laws and regulations, you also have to be mindful of India’s unique business culture and practices. 

You don’t have to worry, though. This article will explain what you need to consider before you hire and pay independent contractors in India. We’ll also take you through relevant employment laws and explain the risks of misclassifying your contractors as employees.

What are the labor laws in India?

Many companies might view Indian employment law as an obstacle to hiring workers in the country. The Indian government recently introduced an updated Labor Code, which aims to make it easier for companies to do business with India. 

The Labor Code deals with different aspects of employment law, including wages, working conditions, industrial relations, and social security. It also sets out employers’ obligations while hiring workers in India.

Different laws apply to employees and independent contractors in India, including a difference in tax treatment and entitlement to benefits. While hiring from India, an employer must ensure they are correctly categorizing their worker, or they risk getting into legal trouble.

According to Indian law, a “contract of service” applies to the working relationship between an employer and an employee. The employer has a degree of control over the employee and can specify the employee’s duties, responsibilities, and working hours. The employee is contractually bound to follow the instructions of the employer and is paid a regular salary for their services.

An independent contractor is hired under a “contract for service” for well-defined projects. They typically have the freedom to work on multiple projects for different companies and can decide how and when they work. A contractor is usually paid once they submit an invoice at the end of their project or at regular intervals during the project, as agreed in the contract.

Employees in India are entitled to pension schemes, extended paid time off, sick leave, and health care benefits. They also have paid leave for national holidays and, in some cases, local holidays. Along with maternity leave, women may also have specific benefits depending on the company and location. Employers may provide daycare services for workers with children. Moreover, employers can terminate contracts only with cause, which makes things more difficult for businesses that have to downsize.

Contractors do not receive the same protections and privileges as employees do. Of course, you may still choose to provide your contractors with benefits and perks – but these are optional rather than required by law. Therefore, many businesses find working with contractors in India preferable to hiring employees.

Managing cultural norms 

Employers need to be aware that India has a distinct business culture that is different from that of other countries. Business practices in India can vary widely across the country depending on social, religious, and cultural factors. This ultimately influences the way business is carried out across different states and territories. Loyalty and trust lie at the heart of business transactions. 

For an overview of business culture, benefits, compliance, and working remotely, read our in-depth guide on hiring in India.

What are the risks of misclassifying independent contractors as employees?

In India, it’s illegal to intentionally misclassify a worker. This can happen when an employer misclassifies a worker as a contractor rather than an employee to avoid providing the worker with benefits.

Unfortunately, it is relatively common for a business to misclassify an employee as a contractor. In the United States alone, an estimated 10 to 20 percent of companies face this problem.

Misclassification can also take place when employee benefits, such as an office working space or work equipment, are being provided to the contractor, indicating that the worker is being treated as an employee.

A contractual agreement between the employer and an independent contractor should specify that the worker has been hired as an independent contractor, and not as an employee of the business. Misclassifying employees isn't just about what you call your workers on paper, though. It's about how you treat workers and your actual working relationship with them. 

If you’re worried about misclassifying your contractors in India, use our handy employee misclassification risk tool to check your risk level and what you can do to fix it.

Employers who misclassify their workers could face serious consequences such as regulatory fines and business penalties. In some cases, they may also lose their intellectual property rights or be banned from doing business in the country.  

Tax and compliance practices for hiring independent contractors from India

Independent contractors in India are responsible for filing and submitting their income tax returns annually. 

If your company is US-based, you must keep track of payments to contractors and report them when tax season comes around. All US employers who employ contractors in India are responsible for filing Form W-8 BEN annually. Depending on certain conditions, the employer may also be required to file Form 1096. 

Tax compliance for US companies has become easier in some ways, but it can still be hard to keep track of relevant paperwork that you’ll need to collect from your contractors. But, using a global contractor management service like Remote can make it easy for you. 

Remote has country-specific expertise that can make hiring and paying independent contractors in India a seamless process. For example, Remote can help you to draft localized contracts that are compliant with labor laws in India. If you’re a US company, we can ensure that your paperwork is up to scratch. Plus, we can set up automatic payments in the local currency, making payroll management a breeze.

How do I convert an independent contractor in India to an employee?

Whether you’re looking for someone to pitch in during busy periods or to work on a particular project, hiring international contractors can be the perfect solution to your business needs. However, there may be instances when it makes good business sense to convert your contractor to an employee. 

If you want to engage and retain a high-performing worker, for example, you could offer them benefits, and formally convert your contractor to an employee. Occasionally, your contractor may even request a change in employment status themselves. 

Converting a contractor to an employee could save you money in the long run, as hiring a contractor costs more than hiring an employee (as a contractor typically charges more).

The conversion process is not easy because you’ll have to understand Indian labor laws, set up payroll, and offer employee benefits. But, once you’re ready to convert your contractor to an employee, you can use a contractor management platform like Remote to handle the conversion process quickly and easily. 

How do I pay an independent contractor in India?

Handling finances with overseas workers can seem daunting, especially when you’re not familiar with the banking system of a particular country. Employees in India must be paid at regular intervals. With an independent contractor, though, you have the flexibility to make payments as contractually agreed by you and the contractor.

When paying contractors in India, you have a few payment methods to consider.

Direct deposit

Direct deposits are safe, secure, and easy to use. They allow you to allocate funds quickly, and you can easily check on the transfer status. Is there a downside to it, though? Well, depending on the bank, you’ll almost certainly have to pay a transfer fee. You may also have difficulties in canceling a payment after you initiate it. 

Check

Issuing paper checks is a good way to make payments, especially if you’re dealing with banks in regions that may have trouble processing money transfers. It’s also easy to cancel check payments if you ever need to, which is a great option to have in case you run into a problem with your payroll management system.

Paper checks are not as fast and secure as a direct deposit, though. They can get lost or damaged, and a clever thief can sometimes intercept and steal the money. Checks can be subject to fees, depending on your banking system.

Money order

Money orders have similar advantages to checks. They are widely accepted and are convenient for record-keeping. However, buying money orders can be a cumbersome process. You may even run into difficulties when cashing or depositing them.

Online payments

You can pay your contractors via digital payment platforms which support payments in India, such as PayPal or Wise. However, these platforms also charge fees for sending money.

Alternatively, you can make your life easier by using Remote’s contractor management solution to manage all your contractor payroll and invoicing needs. With Remote, you can approve invoices, raise recurring invoices, and make payments in the local currency to your contractors — quickly and securely.

The best way to hire international contractors in India

If you want to hire skilled contractors at a low cost of employment, it can be a good idea to hire independent contractors from India. Of course, there are employment laws and tax regulations you have to be aware of while doing business in India. You also need to have aware of the dangers of misclassification.

If you're looking to make your life easier, our global contractor management platform can help you hire, onboard, and pay your contractors in India with a few clicks. Remote's contractor management solution helps you take care of all your contractor management needs. We can help you:

• Manage all your contractors on one platform

• Draft localized contracts compliant with Indian labor laws

• Handle invoices and automate payments to your Indian contractors

• Stay compliant with relevant tax and compliance practices

Contact us to learn more about how Remote can help you hire contractors in India and take your business to the next level. Ready to sign up? Start hiring independent contractors in India in minutes today!