How to hire and pay independent contractors in Portugal

Portugal ranks as one of the best destinations for remote workers, thanks to its year-round good weather and relaxed digital nomad visa scheme. Portugal's proximity to EU markets and low employment cost, also make it an attractive destination for companies that are looking to recruit remote talent. 

Of course, hiring independent contractors in Portugal has its challenges. You’ll have to understand Portuguese employment law and compliance practices and set up a reliable payroll system to pay your contractors. If you accidentally misclassify someone as an independent contractor rather than an employee, there can be serious consequences. 

You don’t have to worry, though. In this article, we’ll take you through some key considerations before you begin hiring in Portugal. We’ll discuss labor laws and tax regulations you need to be aware of. We’ll also discuss the dangers of misclassification, and how you can avoid it.

Ready? Let’s dive in.

Unique considerations of managing contractors in Portugal

Portugal's positive approach to remote working has made it a hot spot for companies that want to recruit skilled talent in Europe.  Once you’ve decided to hire from Portugal, you’ll need to understand and comply with the country’s employment laws. You’ll also have to be aware of Portugal’s unique business culture.

Professional and personal relationships are highly valued in Portugal. There is an emphasis on building trust between employers and employees. Employees expect guidance and leadership from their managers.

Working hours in Portugal are structured slightly differently than the typical working day. The workday starts at 9 AM and ends at 7 PM, with a two-hour lunch break from 1 to 3 PM. 

The maximum working hours per week are 40 hours, and employees are entitled to 22 days of annual leave. There are also 12 obligatory public holidays and two optional ones. Employees are also entitled to 14 months of pay in Portugal, where mandatory payouts for the 13th and 14th are given in June and December. 

What are the labor laws in Portugal?

The main law governing employment in Portugal is the Labor Code. It protects the rights of workers and covers several aspects of working in Portugal, including working hours, wages, holidays, health and safety, sick pay, and access to equal opportunities, among others.

The different kinds of employment contracts under Portuguese labor laws are:

• Fixed-term contracts

• Indefinite or temporary contracts

• Very-short contracts

• Part-time contracts

• Freelancer contracts

Contracts can be verbal or written. But Portuguese law requires that the following contracts must be written:

• Temporary contracts 

• Contracts with foreign workers (outside the EU)

• Part-time contracts

• Remote working contracts

There are certain conditions under which an employer can dismiss their employee, but the employee must be informed in writing. Depending on the length of time hired, the minimum notice period falls between 15 days and 75 days. 

Portugal's parliament recently approved new labor laws to address the burnout experienced by remote workers during the pandemic. The new rules brought in new protections for remote workers’ rights, duties, and agreement terms. Some changes include:

• Employers are not permitted to contact their workers outside working hours, and may be fined if they do. 

• Companies have to organize face-to-face meetings every two months to combat employee isolation

• Workers who are parents with young children (until age 8) have the right to work from home without making arrangements in advance with their employers.

• Employers are required to compensate workers for work-related expenses incurred at home, including electricity and the internet.

How do I pay an independent contractor in Portugal?

There are several methods you can use to pay international contractors.

SWIFT transfer

You can make payments via SWIFT transfer, which helps you make an international wire transfer between banks using the SWIFT (Society for Worldwide Interbank Financial Telecommunications) network. A limitation of this method would be the significant transaction fees, along with the high currency exchange rates.

SEPA transfer

You can make payments to your contractors via SEPA (Single Euro Payments Area), which enables bank transfers between 36 European countries. It’s relatively cheap and allows for payments via credit or direct debit.

International money order

You can prepay the amount you need to pay your contractors through international money order, and it will be sent through a secure provider (usually a postal service) to Portugal. It allows contractors to pick up their payment at a designated location after they provide an ID. No bank account is necessary to use this method.

Retail money transfer

With the retail money transfer option, money is transferred between two separate branches of an international transfer company (like Western Union). Contractors can pick up their payment using an ID at several locations. No bank account is required. 

Digital payment platforms (PayPal)

Payments can be made via digital payment platforms such as Wise or PayPal. However, these platforms typically charge a payment processing fee and currency conversion service charges.

Cryptocurrency

Cryptocurrency (like Bitcoin) is fast becoming a more common form of international payment. If you decide to use this method, you have to be careful to comply with the specific tax regulations that apply to cryptocurrency payments in Portugal. 

Global payroll providers

Because hiring and paying independent contractors in Portugal can get very complex — especially if you plan to manage workers globally — many companies choose to work with a global payroll provider. Working with a third party is an efficient way to manage global payroll while complying with international labor laws. 

When you use Remote’s contractor management platform to hire and pay contractors globally, you don’t have to worry about compliance. Remote can help you manage invoices, automate payments, and pay your contractors in the local currency with no hidden fees. 

What are the risks of misclassifying employees as independent contractors in Portugal? 

Hiring independent contractors in Portugal carries an inherent misclassification risk. Employee and independent contractor misclassification can occur when you give your worker the wrong designation.

Portuguese law treats employees and contractors differently. According to the Portuguese Labor Code, an employee is paid a regular salary to provide a service to the employer under employer supervision. An independent contractor, on the other hand, is a self-employed individual who is not under the control or supervision of the employer. They may work on multiple projects for several employers at a time.

Portuguese law uses the following criteria to decide if an individual is an employee or a contractor.

• Are their working hours and conditions fixed by the employer?

• Does the work need to take place in a specific location decided by the employer?

• Are equipment or tools provided by the employer?

• Are payments being made in regular, fixed amounts?

• Is everyday work and performance shaped by instructions from the employer?

• Is the individual integrated into the employer’s organization?

If the answer is yes to two or more of the above questions, there’s a legal presumption of an employer-employee relationship. In that case, if the worker in question has been classified as an independent contractor by the company, the employer can expect severe repercussions, including hefty penalties and fines. 

Because classification isn't always straightforward, it’s easy to make mistakes. For instance, you could hire a contractor who, over time, takes on more responsibility. Unless you perform regular classification audits, you could overlook the fact that your independent contractor has legally become an employee.

The consequences of misclassification can be massive. In addition to large fines, you could be required to pay back taxes, wages, or other benefits. You may also be vulnerable to lawsuits, which can be messy, expensive, and time-consuming.

Misclassification can also put your intellectual property (IP) rights at risk. For example, if misclassification results in an end to the relationship with your contractor, they could try to claim ownership of your IP. This scenario can result in a long and costly legal battle.

Remote offers you an effective, scalable, and secure way to minimize misclassification risks. The Remote IP Guard offers maximum protection for your IP and invention rights. Our contractor management services can make sure everyone you hire is categorized correctly and compliant with Portuguese labor laws.

Tax and compliance practices for hiring independent contractors in Portugal

Self-employed freelance contractors are responsible for filing and paying their taxes. Contractors are also responsible for social security contributions. The Value Added Tax, or VAT, applies to independent contractors; it can add 10% to 20% to contractor rates plus added bookkeeping and processing costs. Apart from this, contractors are not entitled to any of the benefits that employees are entitled to. 

If your company is based in the US, you may need to consider specific tax requirements when paying independent contractors in Portugal. If you employ contractors who earn more than $600 over the tax year, you’re required by the Internal Revenue Service (IRS) to report these contractor payments. This means you must collect the contractor’s taxpayer information, including their taxpayer identification number (TIN), and issue them a 1099 Form.

You should then send a copy of the 1099 Form to the IRS along with Form 1096. The 1096 form is used by US companies to report payments made to all global contractors outside the US. This document is a physical cover sheet for certain information returns pertaining to contractors; it is used when submitting Form 1099 by mail. Note that it’s not necessary to file Form 1099 or 1096 for contractors who aren’t US citizens or residents.

Companies must also collect Form W-8 BEN from each contractor working outside the US for submission to the IRS. Form W-8BEN-E is filed if you work with an international contractor who bills through their entities.

Forms W-8BEN and W-8BEN-E ask the contractor to confirm whether the country they reside in has a tax treaty with the US. This status determines whether you should withhold tax from their payment. Not withholding the necessary taxes could result in owed back taxes and other IRS penalties.

If you want to avoid dealing with the complexities of tax compliance, we have the solution you’re looking for. Remote’s contractor management platform has a tax compliance feature designed to make your life easier. When you onboard contractors with Remote, they’re automatically directed to file and submit the relevant tax forms — saving time and ensuring tax compliance.

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

There are many reasons to convert your independent contractors in Portugal to employees. 

To start with, it’s a good way to give your company a competitive edge by retaining top talent. Another advantage is that full-time employees are generally more engaged and productive when they become permanent members of your team and are offered benefits. Most importantly, it can help you stay compliant with local laws and avoid misclassification risks that could lead to fines, penalties, and other legal issues. If you would like to know more about the benefits and drawbacks of conversion, read our helpful article to decide when you should convert your independent contractors to employees. 

However, the conversion process is not easy or straightforward. You’ll have to update employee employment contracts, figure out how much you need to pay your employees in taxes, offer benefits, and stay compliant with Portuguese labor laws. 

When you’ve decided to convert your contractors to employees, Remote can save you the hassle and manage the process for you in minutes.

The best way to hire international contractors in Portugal

Hiring independent contractors in Portugal can be a cost-effective way to scale your business. The country offers a talented workforce and relatively low employment costs — making it an ideal location if you want to expand in Europe.

But the process of hiring and managing global contractors can be tedious and time-consuming. You’ll have to consider Portuguese labor laws, taxes, and compliance requirements. You’ll also have to be aware of the consequences of misclassification, which could lead to penalties or legal issues. 

But, working with a global contractor management platform like Remote can make your life easier. We do the heavy lifting for you by helping you hire, onboard, and pay contractors quickly and compliantly. 

Remote can help you to:

• View and manage all your contractors in one place

• Onboard contractors in minutes

• Draft localized contracts compliant with local laws 

• Automate invoice approvals and payments

• Pay international contractors in their local currency with minimal fees

Sounds amazing, doesn’t it? We think so, too.

 Learn more about how you can hire international contractors with Remote. If you’re ready, you can sign up and start onboarding contractors today!