Independent contractor vs. employee: which should you hire?

As workplace trends evolve, more and more companies are exploring new recruitment avenues to reach their goals. And as remote work becomes ever more popular, new talent markets are opening up all over the globe.

But to onboard compliantly and make the best hiring decisions for your organization, it’s crucial to understand:

• The legal difference between independent contractors and employees

• The pros and cons of working with each one

• Which hiring approach is right for your business

• The benefits and challenges of hiring international contractors vs employees 

In this article, we’ll cover all of these things and discuss some of the key risks you should be aware of.

So, let’s dive right in.

What is the difference between an employee and an independent contractor?

In nearly every country in the world, the differences between employees and contractors are pronounced. It’s important to understand these differences because if you incorrectly classify an employee as a contractor, you can create something called a misclassification risk — which can result in significant fines, penalties, and reputational damage.

Ultimately, the key differences are as follows:

Employees

Employees work directly for their employers, meaning they’re legally entitled to employee rights. Likewise, as an employer, you have certain responsibilities toward your employees.

For instance, you’re entitled to regulate the terms and conditions of your employees’ work. This includes when, where, and how they carry out their tasks and duties. As an employer, you also have the right to discipline and fire your employees, although you must do this in compliance with local labor laws.

It’s also your responsibility to withhold and settle any taxes and social contributions on your employees’ behalf, such as healthcare, pension plans, and unemployment. Overall, workers hired on an employment contract enjoy more rights and protections than self-employed contractors, such as paid sick and parental leave and notice periods upon termination.

Independent contractors

Unlike employees, contractors are self-employed (and usually run their own businesses). A company can hire a contractor (also called a contract employee) to perform a one-off task or project or deliver work on an ongoing basis. Contractors are entitled to decide when, where, how, and even who completes the work, provided that the deliverables meet the terms of the independent contractor agreement.

Despite this flexibility, independent contractors aren’t usually entitled to workers’ rights or statutory benefits, such as paid time off, sick leave, and other standard employee perks. They’re also responsible for handling their own taxes and social insurance contributions.

So, in short, if your organization controls the entire process of an individual’s work, they’re an employee. On the other hand, if you only control the results of that work (but not the process itself), then they’re an independent contractor. We’ll expand on that in greater detail below.

How labor laws treat contractors vs employees

Worker classification determines your tax obligations, eligibility for benefits, and rights within the workplace. Getting it wrong could mean fines, back taxes, or even legal trouble for your business. 

Here are three main factors to consider when determining worker status:

Behavioral control

Does the company control how the work is done, or does the worker have control over their own work? 

Companies with more control over the work process are typically more likely to have employees than contractors.

Who has the final say on the outcome?

Companies have more control over the results produced by employees, while contractors have more autonomy. 

Financial control

Can the worker make business decisions?

Contractors can make their own decisions, whereas companies make the decisions for employees. 

Does the worker have control over their business expenses, or are they reimbursed? 

Contractors manage their own business expenses. Employees, on the other hand, are typically reimbursed.

Is the worker paid hourly or by project or deliverables? 

Employees are paid hourly or have a fixed salary, while contractors usually receive project-based payments. 

Relationship type 

Is the work project-based or ongoing? 

Employees usually have ongoing work, and contractors have projects with end dates.

Can the worker take on other clients? 

While regular employees usually work for one company, independent workers can have multiple clients.

To get it right the first time, use Remote’s employee misclassification calculator to help you determine the correct classification for your workers. 

How does the law affect remote workers?

Remote work can cause many jurisdictional headaches, especially when the worker and company are located in different states or countries. 

There may be complex tax obligations for businesses, with potential tax liability in multiple jurisdictions. So, it's important to stay up to date with remote work regulations, as these laws differ based on location. 

Remote's contractor management platform can help you handle the complexities of compliance and protect your business. 

Consequences of misclassification

While the respective definitions of “contractor” and “employee” vary from country to country (especially now that the number of contracting jobs overseas is increasing), many countries commonly enforce strict laws against misclassifying workers. Violations can lead to serious consequences, including fines, legal disputes, and increased regulatory oversight. In a worst-case scenario, they could even result in bans on doing business in that location.

Take Australia, for example. If individuals work for themselves, they have independent contractors status, whereas those who work in someone else’s business are considered employees. Organizations found intentionally misclassifying employees as independent contractors in Australia may face fines of up to $93,900 per violation.

Keep in mind that in most countries, having a written agreement that specifies a worker as a contractor isn’t enough. Countries decide if someone is an employee or contractor by looking at the details of their work.

Learn more about the consequences of misclassifying employees as contractors in our dedicated guide.

What key factors set employees and independent contractors apart?

The above descriptions are a good overview, but when it comes to differentiating between employees and independent contractors, each country has its own nuances and guidelines.

However, there are several key factors that, in most countries, clarify the difference. These include: 

The nature of the relationship (employment vs B2B)

In simple terms, an employment relationship is the link between an employee (an individual) and an employer (an entity). The individual receives payment in exchange for performing a job under specified conditions. Basically, an employee is an individual who gets paid to work for your company.

A business relationship, on the other hand, is between two business entities. Even though the contractor is a person, they usually provide their services under the legal guise of a business (as a sole proprietor). In other words, an independent contractor earns their money by being an entity doing business with your company.

Contract terms and conditions

Terms and conditions are the rules that businesses establish to ensure a safe and smooth cooperation. They’re part of a legal agreement signed by both parties, where the obligations and contractual rights of everyone involved are recorded. Terms and conditions must be in line with local labor laws and be rightly justified.

However, they’ll vary depending on whether a contractor or an employee signs the legal agreement. For example, an employee is obliged to work exclusively for one company and within certain working hours. Such terms wouldn’t apply to a contractor.

Specialized skills

Specialized skills relate to people’s specific talents or capabilities and whether those skills make them fit for a job. They may be hard skills directly linked to a position (i.e., knowledge of programming languages) or more generic soft skills, such as strong communication.

Businesses typically hire independent contractors because they have specialized hard skills and don’t require training. Such an arrangement can be on an ongoing basis or to fill a temporary skill gap. Conversely, a company may be more willing to employ someone based on their soft skills and train them accordingly.

Statement of work

A statement of work (SOW) includes requirements for a given project and usually includes:

• The scope of the work

• Project deliverables

• Location 

• Liabilities 

• Payment terms and conditions

Companies often use SOWs when they cooperate with external third parties, such as service providers and independent contractors.

Employees, meanwhile, are subject to employment agreements. 

Autonomy

Autonomy is the freedom to decide how and when to perform a task. 

Employees and independent contractors usually have vastly different levels of autonomy, with the latter generally getting free reign (within the framework of pre-agreed deadlines).

Independent contractors are free to decide on their work hours, rates, and methods, while employees are subject to stricter requirements imposed by the employer.

Autonomy is one of the key criteria authorities use to determine correct worker classification.

Degree of control (“the subordination relationship”)

This refers to the level of control that the worker has in the arrangement. Generally, employees have a lower level of control: they’re obliged to follow the rules and requirements set by your organization. For example, they might be required to work from a specific location and be online during specific hours.

Independent contractors are self-employed and, therefore, have a higher level of control. They can decide how and where they’ll complete the work and at what pay rate.

Labor rights

Your company doesn’t hire independent contractors; instead, you are the contractor’s client. As a result, contractors aren’t entitled to employment rights (in most countries).

In the US, for instance, this means you aren’t required to pay overtime, grant sick leave, or provide statutory benefits.

It also means that the relationship between you and your contractor isn’t regulated by the:

• Family Medical Leave Act

• Title VII of the Civil Rights Act

• Americans with Disabilities Act

While contractors can join the same unions as employees, they aren’t protected in the same ways should the union represent them in court. However, while the bargaining power of unions might be low for contractors, some countries will still pursue complaints aggressively. If a union is incapable of solving an issue for an independent contractor, the relevant tax and law authorities may step in.

Income taxes

In most countries, you’re responsible for withholding and settling your employees’ income taxes with the relevant authorities.

Contractors, meanwhile, are responsible for handling income taxes themselves (although, in some instances, you may still need to submit certain declarations, which we’ll discuss later).

Either way, it’s your responsibility to understand and align with any relevant tax regulations. If you fail to meet the requirements in any country, you may receive penalties and fines from the tax authorities.

Contract value

Employees generally earn a recurring base salary, with any additional benefits, such as health coverage, stock options, or commissions, singled out on their payroll slips. Additionally, most countries set a minimum wage to protect workers’ rights.

Independent contractors are free to set their own rates, based usually on their location and the industry. Some self-employed specialists join unions and agree on relevant market rates with fellow workers, although, as the market dictates the price, there’s no legal minimum or maximum rate.

Benefits

In most countries, you’re obliged to settle your employees’ social security and health insurance contributions and make additional contributions of your own. For instance, if the state health insurance contribution is 18%, 8% may be taken from your employee’s salary, and the remaining 10% is paid by you.

As with taxes, contractors are required to arrange and cover their own contributions. In many cases, contractors, as self-employed individuals, are required to make both employee and employer contributions, although some governments set special self-employed rates.

Note that while you aren’t required to offer benefits to contractors, a growing number of companies are doing so. Many contractors now expect certain benefits, such as paid time off and health insurance, as standard. However, it’s essential to remain compliant when offering benefits to contractors and ensure you avoid a misclassification risk.

Learn more about offering benefits to contractors in our dedicated guide.

Compensation insurance

Most countries have some form of workers’ compensation program that insures employees who become injured or ill at work (this shouldn’t be confused with disability insurance, which covers non-work-related injuries or illnesses). Compensation insurance typically provides insured individuals with access to healthcare and cash benefits, although this can vary in different regions.

Independent contractors are typically not eligible for this insurance, which can be a source of concern for some workers who engage in higher-risk work.

Tools, equipment, and resources

Most companies require their employees to use company equipment (such as laptops and phones) for work, usually under an employee equipment agreement. This regulates what your employees can and can’t do with your company’s devices, such as connecting to unsafe public Wi-Fi connections or using them for personal purposes.

With contractors, things are more complex. While some companies require contractors to use company equipment (usually for security purposes), this can create a significant misclassification risk.

Allowing contractors to use their own equipment is safer from a legal standpoint but poses other threats, such as security and data protection. Also, some countries might assign intellectual property (IP) ownership of the produced work to the device owner.

If your contractor is going to use their own equipment, we recommend that they sign an agreement that regulates security, privacy, and IP standards.

Learn how Remote protects your IP rights with Remote IP Guard.

Tax paperwork

As mentioned, you must withhold and settle taxes on your employees’ behalf. This involves managing and submitting a whole host of tax forms.

While contractors settle their own tax affairs, there are still occasions when you may need to fill out and submit certain forms.

If you work with a US-based contractor, for instance, you’ll need to submit a Form 1099 to the Internal Revenue Service (IRS), even if your company isn’t based in the US. Conversely, if you’re a US-based business and hire contractors abroad, you might have to submit a 1042-S form to the IRS on their behalf.

As the overseas contractor is working for a US-based business, it might seem that this contractor is earning US income, which would require the filing of a 1042-S form. But that isn’t always the case.

Many global contractors earn their income by providing personal services. According to IRS guidelines, the location from which these services are provided determines the source of their income.

So, if a foreign contractor works for a US-based company from a country outside the US, their income isn’t considered to originate from the US. In this case, the US company isn’t required to withhold or report taxes as long as the contractor conducts all of their work outside of the US.

Whether you’re working with contractors, employees, or both, it’s crucial to understand what your tax reporting obligations are for everyone. Remote’s in-house, local tax experts can tell you exactly what needs to be submitted and when, no matter where in the world your people are based.

Training and onboarding

Contractors are hired for the skills they already have. Their onboarding often focuses on project specifics, system access, and introductions.

In contrast, employees usually receive a more comprehensive onboarding that covers company culture, policies, and procedures. Remote employee onboarding may also include training on collaboration tools.

Not only that, but companies also tend to invest in longer-term training for employees to support their professional growth within the company.

What is the difference between a local and an international employee?

A local employee is someone you hire in your own country (i.e., the country where your business is registered and based). Usually, hiring a local employee is relatively straightforward from a tax and legal perspective.

However, if you decide to employ someone in a different country, you need to follow the employment and tax laws of that person’s country. Understanding these laws, complying with them, and managing all your other obligations requires local, on-the-ground expertise.

On the flip side, there are multiple benefits to hiring international employees, such as:

• Increasing the diversity of your workforce

• Covering new markets

• Generating local knowledge and establishing networks

It also allows you to broaden your recruitment pool and gain access to some of the world’s top talent. Instead of restricting your candidate search to your city or region, you can find and onboard the right person for the role anywhere in the world.

To legally hire someone in a different country, you must either own a legal entity there or use an employer of record (EOR) service — like the one provided by Remote.

What is the difference between a local and an international contractor?

For international contractors, the situation is slightly different. As mentioned, contractors are self-employed individuals, so you don’t need to own a legal entity or use an EOR to work with one.

However, when working with international contractors, it’s crucial to understand the worker status laws in their country, as they can vary significantly across the globe. For example, in some countries, ongoing contractor arrangements are automatically converted into employment arrangements after a set period of time (i.e., six months). If you’re unaware of laws like this, you can create serious compliance issues for yourself down the road.

That’s why, if you’re hiring international contractors, it’s advisable to work with an experienced contractor management provider, such as Remote. In addition to making sure you stay within the lines, our platform enables you to automate invoice payments in multiple currencies and create locally tailored agreements for your contractors.

What are the different types of international contractors?

There are several different types of international contractors. They’re defined as follows:

Independent contractors

International independent contractors perform tasks for you in the same way that a domestic contractor would, but they’re based in another country. A localized agreement directly governs the engagement with the contractor.

Subcontractors

Subcontractors typically partner with an umbrella company, which acts as a go-between and manages local compliance requirements for a fee. This option is generally more expensive than hiring an independent contractor.

Agency contractors

Agency contractors are employed through an agency and move from one contract to another while maintaining stable employment. Agency contractors usually get paid when they’re between contracts, so the agency is incentivized to find their contractors work. 

The agency helps maintain the quality of work, but it also puts a sizable markup on every billable hour or fixed-price project. This is generally the most expensive way to hire international contractors.

Should I hire a contractor or an employee?

So, with all of the above in mind, which one should you hire?

Ultimately, the choice of whether to hire a contractor or an employee depends on your organization’s requirements and resources and the nature of the role you need to fill.

If, for example, you want to regulate your workers’ operating hours, require them to use company equipment, and need their exclusive engagement, an employment contract might be the best choice.

However, if you are looking for a short-term fix, the amount of work required doesn’t justify a full-time employee, or you just want to set up a more casual arrangement, then a contractor agreement may be a good fit.

Hiring international employees

If you are able to hire an international employee, it’s worth considering the pros and cons of doing so as an alternative to hiring contractors.

Pros of hiring international employees

• You can hire the best talent available regardless of where they are located

• The investment you make in training is kept in the company

• You maintain greater control over your IP

• You can offer international assignments to your team

• Any risk of potential misclassification is removed

• Innovation is enhanced due to new perspectives and skills

Cons of hiring international employees

• Building a globally consistent culture can be challenging when your team is distributed.

• You must supply office equipment, office space, and employee amenities in multiple locations.

• In some countries, you may be required to provide training and professional development beyond your usual policies.

• You must source local HR, legal, and tax expertise everywhere you hire.

• Employment contracts must comply with local laws.

How do I hire an international employee?

Hiring international employees can be fairly straightforward if you have a legal entity in the country where the worker lives. If you don’t have (or don’t want to set up) your own entity, or if your business isn’t ready to scale in that country, the easiest and most cost-effective option is to work with an EOR provider, like Remote.

An EOR handles all the local legal requirements so that you can hire employees compliantly. An EOR also removes the need for you to source in-country lawyers, accountants, payroll providers, and HR professionals. Your EOR provider acts as your local HR and legal department on the ground in your hire’s country and provides them with their pay and benefits.

Employer of Record & PEO —

29 min

Guide to hiring international employees

Learn how easy it can be to hire someone from another country, with tips on navigating HR compliance, managing payroll, and providing visas.

Hiring international contractors

If you’re scaling and growing a company, contractors are an excellent option, as they allow you to move quickly and flexibly. There are a few challenges, though.

Pros of international contractors

• You can supplement your team with highly skilled workers who are “work-ready.”

• Contractors provide good local knowledge if you’re trying to break into a new area.

• Contractors usually have large professional networks that can be a good source of referrals for additional skilled workers.

• Contractors are self-sufficient with limited need for onboarding or training.

• Contractors supply their own office space and equipment.

• Contractors work independently.

• A contractor model is cost-effective for short-term engagements.

• You don’t have to guarantee steady work, especially if you’re in startup mode.

Cons of international contractors

• Your contractor’s attention may be divided across several clients.

• You have little say in or control over how they do the job.

• Misclassification errors can occur if contractor status changes, even if you don’t realize it’s happened.

• Complying with local employment laws and taxation requirements can be a cumbersome exercise.

• Contracts must be localized for each country.

• If you need to convert a contractor to an employee, you must establish an owned entity in the country or find an EOR to hire on your behalf.

• Your IP and invention rights may not be as well protected as they would be with employees.

• You may have too many vendors to manage, especially if you use contractors in multiple countries.

• You could lose talent if they expect future employment and you can’t offer it.

How do I hire an international contractor?

Hiring international contractors is also fairly straightforward, as long as you understand the legal and tax implications in both your and your contractor’s countries.

If you don’t have time to become fluent in these implications, don’t worry: Remote makes the hiring and onboarding process simple.

Our contractor management solution lets you:

• Create locally compliant contracts

• Make payments in local currencies in just a few clicks

• Manage all your contractor invoices in one easy-to-use platform

Our convenient service is designed to help you manage all your international contractors while laying the groundwork to scale in the future.

Contractor Management —

19 min

Hiring independent contractors: pros, cons and the ideal process

Is hiring independent contractors the right decision for your business? Learn the best practices and traps to avoid with new contractors.

Can I convert a contractor into an employee?

It’s entirely possible — and, in some cases, required — to convert your contractor into an employee. For instance, you may:

• Be potentially misclassifying your contractor

• Want to give the contractor a greater role in your company

• Want more IP protection

• Want the contractor to work exclusively for you

In some cases, your contractor may even approach you and ask to become an employee. To learn how to convert your contractor into an employee and determine when it’s a good idea to do so, check out our dedicated guide. 

Contractor vs employee FAQs

How do you pay taxes as an independent contractor?

As an independent contractor, you're responsible for managing your own taxes. You need to make estimated tax payments to the IRS throughout the year to avoid penalties.

Use IRS Form 1040-ES to calculate what you owe in self-employment taxes and income tax. A tax software or tax professional like Remote can help make the process easier.

What percentage of taxes do I pay as an independent contractor?

Your tax percentage depends on your overall income and tax bracket. Unlike an employee, a contractor is responsible for paying the full amount of Social Security and Medicare taxes — 15.3%.

Additionally, there are federal and potentially state income taxes. The good news is that contractors can usually deduct eligible business expenses to reduce their taxable income.

Can you change a worker’s status at some point?

Changing a worker's classification is possible, but it’s legally complex and carries risks. The IRS and other agencies may investigate, so any change must be due to a genuine shift in the working relationship, not a desire to reduce taxes or ignore regulations.

If you're considering a change in worker status, we recommend consulting with an employment lawyer for guidance.

Hiring international contractors and employees with Remote

Whether you’re looking to hire employees, contractors, or both, Remote can help.

Our global HR services allow you to hire across the world and provide a best-in-class experience for all your people. Specifically, our in-house, on-the-ground experts take care of all the heavy legal, tax, and payroll lifting in every country you hire in, allowing you to focus on growing your business.

To learn more and discuss your global hiring options in more detail, book a free demo with one of our friendly specialists today.