How to hire and pay independent contractors in Pakistan

Hiring independent contractors is a cost-effective and flexible solution for companies that need help with short-term or specialized projects. Pakistan has become a popular option for companies to hire remote workers, particularly in industries such as textiles, agriculture, automotive, and professional services. The South Asian nation has a relatively young labor force and low and cheap labor costs. Hiring contractors in Pakistan is a solid option for businesses that are looking to boost profitability by recruiting remote workers.

However, hiring abroad does come with its own set of complications. It’s essential to understand and comply with local labor and tax laws in Pakistan. You will also need a reliable system to hire, pay, and manage contractors globally, and learn about misclassification risks.

Read on to learn how hiring contractors in Pakistan can be simple if you partner with a reliable contractor management service. This guide will also take you through key aspects of hiring and paying contractors in Pakistan compliantly.

Unique considerations of managing contractors in Pakistan

Pakistan has unique business customs, which founders and hiring managers should be aware of before hiring contractors from Pakistan. Some key considerations include:

• Cultural milieu. Pakistan has a collectivist culture that highly values trust and relationships. To successfully manage contractors, it’s essential to build personal relationships with them.

• Legalities. Understanding Pakistan’s labor laws and regulations regarding employees and contractors is essential. We will get to that later in this article.

• Language. Urdu is the official language of Pakistan, but working professionals widely use English to communicate in business circles. To communicate effectively with contractors, hire an intermediary who is bilingual or has a good command of English.

• Religion and holidays. With over 96% of the population identifying as Muslim, HR managers should have an understanding of the impact of religious holidays like Ramadan, where contractors may need to observe religious fasts and be unable to attend meetings.

• Communications and greetings. It’s common practice in Pakistan to address people with their title and surname rather than their first name. In the business world, it’s also common to precede meetings and company interactions with non-business-related conversations.

• Payments. Pakistan’s currency is the Pakistani rupee (PKR). The country has a heavily cash-based economy, and contractors may also prefer receiving cash payments. Make sure to agree and define international payment methods in advance with the contractor. You also have to ensure you document all earnings and comply with tax regulations. 

• Political situation. Pakistan has a volatile political situation, and contractors may be affected by political instability or social unrest. It’s essential to monitor the political circumstances in the country and adjust management strategies accordingly.

How do I pay an independent contractor in Pakistan?

Once an independent contractor sends you an invoice for their work, you can pay them. There are multiple ways to send payments to contractors in Pakistan, including:

• International bank transfer: Making a direct bank transfer to the contractor’s bank account is a secure and convenient payment method, although it can be subject to a few days’ delay.

• Online payment platforms like Wise or PayPal: While simple and secure, these online platforms often charge high transfer fees and currency exchange rates.

• International money orders: These are widely accepted and easy to document, but this is an inconvenient method to transfer funds.

• Physical checks: Paper checks can be beneficial when banks struggle to process online transfers.

• Money transfer services like Western Union: Contractors can collect payments in person from a Western Union agent.

Managing individual contractor payments can quickly get complicated, and it can be easy to make mistakes during the process. A simple solution to avoid the stress and complexity of paying contractors in Pakistan is to use a global payroll platform, like Remote. Remote’s contractor management capabilities allow you to process international payments at an affordable rate. You can generate and approve invoices quickly and make secure payments to your contractors in Pakistan in their local currency. 

Using Remote can help you minimize mistakes and compliance risks by automating and tracking payments in one place. Moreover, Remote’s Fair Price Guarantee ensures you know what you are paying exactly, every step of the way. There are no hidden fees or deposits on top of your payment.  

What are the risks of misclassifying Pakistani independent contractors as employees? 

It’s essential to understand that there are legal differences between independent contractors and employees in Pakistan. Whether a worker is considered a contractor or employee depends on the nature of the working relationship:

• Contractors typically perform one-off or temporary tasks and are free to work for multiple clients simultaneously. They have autonomy over when and how they work, and they invoice for their services rather than being on company payroll. 

• Employees, on the other hand, work for a single employer. Their work performance, working hours, and location are decided by the employer.

When hiring contractors, there are no legal requirements for the employer. However, employees are entitled to statutory benefits, tax contributions, and labor law protections. This can make hiring workers as contractors more appealing to employers. 

As the employer-worker relationship can be nuanced and change over time, employers may also find it hard to make the distinction between an employee and a contractor. But whether intentional or not, misclassifying workers is a serious offense that can have disastrous consequences. 

Companies could face legal and financial penalties, tax implications, and reputational damage. They may also lose intellectual property rights produced by the worker. Additionally, the employer may have to pay the misclassified worker back payments in missed benefits and payroll contributions, which can result in additional legal liabilities and financial costs for the business.

With a contractor management platform like Remote, you can minimize these risks via our compliant, localized contracts. We also have local experts on hand who can help you understand when to convert a contractor to an employee. Managing all international contractors in one centralized platform also allows you to scale quickly.

What are the labor laws in Pakistan?

Pakistan has multiple federal and provincial governing laws. Some key employment laws include the Workmen’s Compensation Act of 1923 and the Provincial Employees Social Security Ordinance of 1965. 

Income tax rates in Pakistan

When paying employees, employers should deduct tax at the source. When the individual income from salary exceeds 75% of taxable income, the following tax rates apply: 

• PKR 0 to PKR 600,000 - 0%

• PKR 600,000 to PKR 1,200,000 - 2.5%

• PKR 1,200,000 to PKR 2,400,000 - PKR 15,000 plus 12.5% on the excess

• PKR 2,400,000 to PKR 3,600,000 - PKR 165,000 plus 20% on the excess

• PKR 3,600,000 to PKR 6,000,000 - PKR 405,000 plus 20% on the excess

• PKR 6,000,000 to PKR 12,000,000 - PKR 1,005,000 plus 32.5% on the excess

• PKR 12,000,000+ - PKR 2,955,000 plus 35% on the excess

Different tax rates apply in certain other cases, such as for high earners and the Association of Persons (AOP). Contractors should file and pay their income tax to the government directly.

Employer contributions in Pakistan

Employers must withhold contributions for employees, including social insurance, which employers pay at 5% of the employee's minimum wage.

Employee benefits in Pakistan 

When hiring workers as employees from Pakistan, HR managers must offer employee benefits. Statutory benefits include:

• Injuries and disability benefit 

• Sickness benefit 

• 12 weeks of paid maternity leave 

• Medical care for staff and dependents during sickness

• Death grant 

• Survivor benefit

Since the employer does not have to make contributions and offer benefits to contractors, they may prefer to work with contractors instead of employees. However, some companies may offer benefits packages, like private health insurance, to contractors to attract them and become more competitive.

Employers may find it overwhelming to understand and comply with all these relevant regulations. The best solution is to use Remote to hire international contractors. Our expert team is proficient in Pakistani tax and labor laws and can advise you on every aspect of hiring and paying workers in Pakistan. Use Remote to simplify contractor management, minimize the risk of non-compliance, and pay your contractors quickly.

Tax and compliance practices for hiring independent contractors from Pakistan

It’s essential to check whether any tax treaties or agreements exist between your home country and Pakistan. For example, the US-Pakistan tax treaty helps US companies to reduce tax avoidance and double taxation.

US companies that want to hire and pay independent contractors in Pakistan may need to submit additional tax forms to the Internal Revenue Service (IRS). US companies have to fill out the W-8BEN Form to track income generated by foreign contractors, as it allows them to benefit from the reduced tax liabilities of the tax treaty. If you decide to relocate your contractors to the US, you will need the 1096 Form instead. 

Remote now offers a useful tax compliance feature that makes it easier for US companies to handle paperwork during tax season. When you onboard a contractor with Remote, your contractors are directed to automatically fill out and submit the relevant tax forms, saving you the hassle of chasing your contractors for tax information.

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

There are benefits to working with contractors, but you might think about making them a permanent part of your team at some point. For instance, it might be time to convert your contractor to an employee when:

• You want them to work for you in the long run.

• You want to offer them benefits to retain their services.

• You realize you are out of compliance in their country.

• You want additional protections for your IP.

There are various steps involved in converting your contractors in Pakistan to employees. You have to:

1. Write and offer a new, legally compliant employment contract. 

2. Check the legal requirements. You may need to set up a legal entity in the country or work with a global payroll platform.

3. Obtain the necessary documentation for the employee, including a national identity card, tax registration, and bank account details.

4. Register the employee with the relevant authorities, including the Employees’ Old-Age Benefits Institution (EOBI) and the Social Security Institution (SSI), to comply with labor laws and provide social security benefits to the employee.

5. Provide necessary employee benefits required by law or as part of the employment contract.

As you can see, the conversion process is not straightforward. When you decide to convert your contractors to employees, Remote can take handle this process for you seamlessly.

The best way to hire international contractors in Pakistan

Hiring contractors from Pakistan is an excellent way for businesses to save money while accessing a skilled labor force. However, it’s essential to remember that many unique challenges come with hiring contractors abroad.  

Employers must understand and adapt to cultural and business differences in Pakistan while ensuring compliance with local labor and tax laws. They should set up systems to manage contractors, onboarding, and invoicing effectively. They must also decide on an efficient and affordable method to make international payments.

This might seem overwhelming, but international hiring doesn’t have to be a headache. Partnering with a trusted contractor management and payroll service can make the process completely hassle-free. Use Remote's semi-automated platform to take on the complex work of onboarding and managing contractors. You can use Remote to:

• Generate customizable contracts and onboard international workers in just a few clicks

• Process international payments without hidden fees

• Avoid compliance risks and access advice from local experts 

• Minimize errors associated with manual processing 

• Scale without the hassles of HR admin work

Check out Remote’s global contractor management service, and begin growing your team with top talent from Pakistan today. If you’re ready to hire and pay independent contractors in Pakistan, sign up with Remote and get started in minutes.