Contractor Management 14 min

What is an independent contractor?

Written by Sam Ross
Sam Ross

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As you look at ways to grow your team — and your business — you may have come across the term “independent contractor.”

But what is an independent contractor? And more importantly, how can they be of use to your business?

In this article, we’ll explain what exactly a contractor does, when your company should consider using one, and what you should know about working with one.

We’ll also break down the difference between contractors and employees, and explain the risks associated with confusing the two.

So let’s dive right in.

What is the definition of an independent contractor? 

An independent contractor is someone you pay to perform a specified task or service. They could be hired for a one-off project or to perform work on an ongoing basis, but they are not employees.

For example, you might hire a contractor to design a website for your company or translate some blog content each month.

The exact scope of work (and compensation) should always be outlined in a signed agreement beforehand. Usually, this agreement will focus on the expected outcome of the collaboration, rather than on how the work itself is carried out.

Once the job is complete, the contractor will then issue you an invoice.

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

As mentioned, independent contractors are not the same as employees, even though they both perform work for your business in exchange for compensation. Employees generally work on a contract of service, whereas contractors work on a contract for services.

In most cases, independent contractors are self-employed. This generally means that they set their own hours, provide their own tools and equipment, and work with whichever clients they want. You are not the contractor’s employer: you are their client. As a result, you are not entitled to control their work conditions or force them to work exclusively for you.

On the flipside, it also means that — in most cases — they are not legally entitled to the same benefits and protections as employees. If you work with a contractor, you are usually not required to provide statutory benefits. Contractors are also responsible for handling their own taxes.

It’s vital to ensure that you are not treating your contractors in the same way as your employees (or vice versa), as this can lead to something called misclassification. This is a huge legal risk that can lead to fines and penalties for your business.

We will look more closely at misclassification later in this article.

Independent contractors:

  • Settle their own taxes.

  • Are not eligible for statutory benefits (unless explicitly stated in the labor legislation of the contractor’s country).

  • Make and manage their own social insurance contributions.

  • Are entitled to choose their own working hours and methods, work with other clients, and provide their own tools and equipment.

  • Issue invoices for payment. 

Employees:

  • Have their taxes withheld and paid by you, the employer.

  • Are entitled to receive statutory benefits (in line with their country’s labor legislation).

  • Have their social insurance contributions withheld and managed by you, the employer. In most cases, you must also make additional contributions on your employee’s behalf.

  • Work under your authority. You set the working hours and methods, dictate how the work should be carried out, and typically provide the necessary tools and equipment.

  • Are paid through payroll (usually on a monthly basis).

What are the benefits of hiring independent contractors?

When deciding whether to hire a contractor or an employee for a particular role, you should assess each specific scenario on its own merits.

In general, though, there are multiple advantages to working with independent contractors, such as:

Access to high-quality global talent

According to Francesco Cardi, Remote’s VP of Operations, we’re now entering a contractor-driven work reality. This is a natural consequence of the remote-first operations model, which removes geographic constrictions when looking for the best talent. As a result, you can now leverage some of the world’s highest-skilled individuals, many of whom are leaving their 9-to-5 jobs to pick and choose their own projects.

This is a win-win scenario for both parties. While your contractors gain more project variety and experience in their daily work, you get to fill personnel gaps quickly with qualified, talented people. 

Hiring and onboarding new employees isn’t cheap. In the US, for example, the average employer spends around 24 days and $4,000 on each new employee, while a recent study by Training Magazine revealed that in 2021 alone, US companies spent $92 billion on training and upskilling.

All of these costs can be minimized — or even avoided entirely — when you work with a competent, qualified, well-sourced independent contractor.

Greater flexibility and speed 

When you work with contractors, there is less paperwork and practically no onboarding required (or at least certainly not as extensive as with employees).

If speed is important (i.e. a certain project needs to be completed within a strict time frame), you can hire a contractor and have them working on that project almost instantly. And, since they’re experts in their field, you will see a tangible impact on your business.

If you’re happy with their work, and the relationship is mutually agreeable, you can extend the agreement. You could even convert them into an employee, saving you a long and costly recruitment search.

Minimal training

Contractors are (or should be) experts in their field. This means they need very little training to begin working and making an impact. All you need to provide is the relevant and necessary materials to work effectively — no other formal training should be required. 

For instance, if you hire a contractor to write blog articles, all you need to supply is your company’s style and brand guidelines, and links to previously written articles.

“Our clients prefer hiring contractors to reduce costs, enhance speed and scalability, and minimize risk. Contractors present a cost-effective solution, allowing businesses the flexibility to swiftly recalibrate their workforce as circumstances demand."

– Nuno Covas, COO, Mangtas, B2B remote staffing platform

Examples of independent contractors 

Independent contractors can provide almost any kind of service or product, in any almost kind of industry. Here are a few examples of how businesses can use independent contractors. 

Consulting

Many contractors leverage their expertise in a particular field or sector by offering consulting services. If you need help, guidance, or advice on managing or improving a specific process, then hiring a contractor with the relevant expertise is a simple, cost-effective way to do so.

Content creation

Another useful way to leverage independent contractors is for content creation. Many contractors offer their services as writers, editors, graphic designers, animators, video producers, and more. This is an ideal solution if you want to grow or bolster your existing in-house team for larger one-off projects or marketing campaigns.

Professional services

Many professionals — such as accountants, lawyers, and tax specialists — offer their services as contractors. This is particularly useful for smaller businesses who need help with specific tax, legal, or accounting obligations, but don’t have the budget or the requirement to hire someone in-house.

Technical solutions

If your company wants to build a technical or digital tool — such as a mobile app, website, or proprietary software — hiring a contractor (or a team of contractors, depending on the project scope) is an ideal short-term solution.

Independent contractor agreements

An independent contractor agreement specifies the terms and conditions of the relationship between you (the client) and the contractor. As a minimum, it should address:

  • The scope of work

  • Remuneration

  • The duration of the contract

  • Pay cycles (and method)

It’s important to understand that there isn’t a one-size-fits-all template for contractor agreements. They need to be compliant with your contractor’s local labor laws, and account for any other local tax and legal peculiarities. As a result, the more external talent you work with — and the more countries they’re based in — the more customized your agreements need to be.

Each agreement should also address the issue of copyright and intellectual property (IP) ownership. It’s crucial to specify who the owner of the work/deliverables produced by the contractor is. Otherwise, the authorities in the contractor’s country of residence may assign rights to the work based on the IP address of where it was produced.

Remote can help you cover all these bases. Our local, on-the-ground legal experts will vet all your contractor agreements to ensure they are fully compliant with local tax and labor laws.

Paying independent contractors

Payment is a key consideration when working with contractors. There are many different ways to calculate rates, and each contractor may have their own preferences.

The contractor also holds more of the bargaining power. With employees, you offer a salary package, and there may be some room for negotiation on the candidate’s part.

With contractors, however, always remember that you are a client. Therefore, it’s highly unlikely that the contractor will adjust their rates for you — and they probably won’t appreciate you asking.

Here are some of the most common ways that contractors calculate their pay rates:

  • Time-based: The contractor works at an hourly or daily rate.

  • Project-based: The contractor quotes a project rate based on the description of the task. For example, if you commission a 2,000-word blog article and the contractor quotes a price of $500, this is what you will pay regardless of how long it takes to write.

  • Measurement-based: The contractor charges a specific (usually very small) rate per commodity. This is a common practice when working with writers and translators, who often charge per word.

  • Retainer: The contractor charges an ongoing monthly fee for agreed-upon services. For instance, you might pay a monthly retainer of $2,000 to a lawyer for 20 hours of work each month, with the exact tasks and responsibilities agreed beforehand. Note that the contractor would still have to issue an invoice for each month.

Some contractors may ask you to pay them before the start of a project, either partially or in full (especially if you’re a new client and there is no prior relationship). In most cases, though, you settle the payment after the contract is deemed “complete.”

Paying international contractors

Paying international contractors can be a little trickier. Contractors set their rates in line with their living costs and the average market rate in their country. Depending on where your contractor is based and where your company is based, this can work positively or negatively for you.

You also have to consider how you’re going to handle payments. Different contractors in different countries may prefer different methods and tools, and if you’re paying in a different currency, there are exchange rates to factor in.

To simplify this process, you can use a dedicated aid, like Remote’s Contractor Payout Explorer. This quick, free, and easy-to-use tool allows you to see:

  • Which currencies you can pay in

  • The various withdrawal options (across Wise, Stripe, and Connect)

  • The approximate payout speed for each option

Remote also enables you to quickly, easily, and compliantly pay contractors across the globe in over 100 currencies — often with just a single click.

An individual making notes in diary at desk with laptop

How to pay independent contractors: the complete guide

Learn how to pay your independent contractors - wherever in the world they are based - with our in-depth guide.

Misclassification risk

As mentioned, misclassification is a significant legal risk that you need to be aware of when hiring contractors.

Misclassification occurs when you treat contractors like employees. For example, you may be providing them with tools and equipment, offering benefits and other perks, or dictating how work should be done. However, you are not meeting your tax and legal obligations as an employer.

If the authorities believe that you are misclassifying a contractor, they will demand that you start fulfilling these legal responsibilities. This means providing — and usually backdating — statutory benefits, tax and social security obligations, and all other associated employer costs in that country. There may also be reputational damage, either through disgruntled workers or negative press coverage.

If you are found to have misclassified contractors deliberately, then you will also receive fines, penalties, and, in some extreme cases, restrictions on your business.

How to avoid misclassification risk

In most countries, the criteria for correct worker classification is transparent. Many governments have even introduced online tools to help companies classify contractors correctly.

However, it’s still easy to accidentally misclassify people. For example, US government studies have found that as many as 30% of businesses have accidentally misclassified at least one worker, and when you factor in the additional complexities of hiring internationally, it can be difficult to stay on top of everything.

In reality, there is no one fail-safe way to avoid misclassification risk. Instead, it’s about constantly monitoring and reassessing your relationships with your contractors.

Remote’s Contractor Compliance Checklist is an excellent resource to guide you in this process, and help ensure that you don’t miss anything.

If you believe that your contractor is at risk of misclassification, then it’s advisable to convert them into an employee.

Converting contractors to employees 

It’s a good idea to review any ongoing contractor relationships at least once every six months. As well as helping you avoid misclassification risk, it’s also a good way to assess the standing of that relationship, and assess whether you want — or need — to make that person an employee.

To learn more about how to convert a contractor into an employee — and to explore some of the scenarios in which this would make sense — check out our detailed guide below.

Two people signing a document at a table.

When should you convert a contractor to an employee?

While contractor designations may be appropriate for some business relationships, companies cannot simply pay people as contractors because it’s easier. Contractors and employees fulfill different roles and have distinct legal definitions. Converting a contractor to an employee can protect the employer from penalties, provide a better experience for the employee, and make it simpler for both parties to collaborate.

Managing global contractors at scale 

With remote work fully in the mainstream, companies everywhere have instant access to some of the world’s top talent. This means that, when it comes to filling talent gaps, the possibilities are endless.

You can enjoy the convenience of working with domestic contractors, or leverage the diversity and expertise of international specialists. You can save time and money. You can approach projects and tasks with greater flexibility, and without compromising on quality.

But to reap all these benefits, you still need to pay attention to the small print. The more contractors you hire (particularly abroad), the more labor laws and tax regulations you need to comply with.

The good news is that you don’t need to be an international lawyer or HR expert to manage all of this. Our Contractor Management service does all the heavy lifting, including:

  • Ensuring compliance with local labor laws

  • Protecting your IP rights

  • Vetting contract agreements through our local, in-house experts

  • Approving or rejecting contractor invoices in a single click

  • Handling contractor payments quickly and in the right currency

Interested in hiring an independent contractor for your business? Learn more about how our solutions and expertise can help you hire, manage, and pay your contractors, no matter where they are in the world.

Onboard, manage, and pay global contractors in one click

Sign up with Remote for locally compliant contract templates at just $29 per contractor per month, with no hidden fees.

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