The gig economy today is bigger than ever. There were about
31.9 million occasional independent workers
in the United States, an increase from 15.8 million in 2020.
This
gives us a glimpse of what the future of work will look like globally.
Businesses are working to address economic volatility, geopolitical
instability, and the lasting effects of COVID-19. Organizations are
transforming their structures, processes, and people to do that
efficiently.
Independent contractors are highly valued when organizations need to expand,
scale up or need extra hands during peak or seasonal demands. The concept of
independent contractors is no longer restricted to just the same country of
operations. Thanks to technological advancements, businesses can
hire from a global talent pool, a limitless, boundaryless world of opportunities.
According to
Ceridian’s 2021 Executive Survey, 71% of executives will
hire more remote workers in the
next two years, and 63% will hire outside their country.
These trends do lead businesses to a bigger concern; how to manage and
pay international contractors compliantly in their currencies efficiently.
Before
we get into the detailed approach and process of paying independent
international contractors, let's understand what positives independent
international contractors bring to the table.
{{risk-free="/components"}}
Who is an international contractor?
An international contractor is an individual or entity hired by a company to
perform a specific job or project across national borders. Unlike traditional
employees, international contractors are not part of the company's
regular staff but function as independent or self-employed business entities.
They often work for multiple clients around the world and are responsible for
their own taxes and insurance. The agreement with a company emphasizes the
successful completion of the job rather than the methods used to achieve
it.
What are the most effective ways to pay international contractors?
It goes without saying contractor payouts should be done on time, accurately,
and hassle-free. Narrowing down the most suitable payment plan for you and the
contractors is a win-win situation. The process might become complicated With
multiple currencies and many banking regulations. However, keeping an
organized approach to the process with the right documentation will quickly
resolve international payment issues.
Let's now understand in detail the most popular payment methods and which will suit your specific needs.
1. Online Payments
Several online payment apps do not require linking personal bank
accounts but use the payee's email addresses for payments. The Payee can
also request a payment to the employer via the app. Many payment apps are
available in the market; your decision should consider transaction fees,
exchange rates, minimum amounts, and the list of countries where their
services are available.
Some examples of online payment apps are PayPal, Stripe, and Wise.
2. Cryptocurrency
Cryptocurrency is another easy and fast payment solution and is quite popular
for being safe and secure. With crypto, you save yourself the hefty exchange
rates and bank fees.
Though cryptocurrency may be a tempting option, its
volatile nature makes it difficult for people to trust it.
A few
prominent players in the market are
USD Coin, Bitcoin, Libra Coin, and Ethereum.
3. Digital Wallets to pay overseas contractors
Digital wallets are financial applications that allow you to store
funds, make transactions, and track payment histories on devices like phones
and tablets. They do not have high fees and are quite popular among employers
needing to pay international contractors. Contractors use digital wallets to
securely store money online and instantly accept or remit payments to bank
accounts without high fees.
Some highly popular digital wallets for
paying international contractors are PayPal, Google Pay, Cash App, Samsung
Pay, Apple Pay, Amazon Pay, Venmo, and more.
4. International Wire Transfers for paying international contractors
Wire transfer is another electronic money transfer mechanism from one entity
to another. The money will be sent directly to the recipient from your account
and deposited in a contractor’s local currency. They are secure, have a great
network, and have high limits. To pay international contractors, employers can
use international wires online, through payment and banking apps, by phone,
and in bank branches.
The sender could be asked to verify their
account and present some id for first-time payments. Once that’s done, you’ll
usually need to provide your recipient’s full name, your recipient’s banking
details, including bank name and account number, and details of the payment,
including the currency required. For high-value payments, one might be asked
to state the transaction's purpose and the funds' source.
Bank
international wire transfers are normally sent through the Society for
Worldwide Interbank Financial Transactions (SWIFT). SWIFT is the global
standard for paying money to other parties in another country. International
wire transfers usually take 4-5 business days.
5. International money order for paying international contractors
International money orders can be as simple as buying a paper document for the
said amount and mailing it to the contractor in another country. Once it
reaches the destination, it can be encashed. Since there is no cash involved,
it is relatively safer. It is also an excellent choice for people who do not
have a bank account.
However, this method is slow and expensive. The sender and receiver are
charged a fee, making it expensive. This makes the delivery amount less than
what you sent. The transaction limits aren't too high either.
In
most of the aforementioned modes of paying foreign independent contractors,
one should stay vigilant and cautious against scams or misleading activities.
Read More: Employee and independent contractor misclassification
What to consider before paying international contractors?
If you have planned to have a set of international temporary workers, here are a few critical considerations. These operational considerations require a thorough understanding of taxation, currency conversions, forms, timelines, payments, etc. Once you create a standardized process, paying independent international contractors becomes easy.
1. Classification
Most countries require proper contractor classification. This is critical because some roles for gig workers may be considered permanent employment in the country, leading to misclassification. Governments worldwide are introducing strict local labor laws and regulations to fight potential tax avoidance (AB5 in the U.S., IR35 in the U.K.)
2. Contract
Having a contract is a great way to stay compliant with local laws. A contract
defines the relationship between employer and contractor and how they would
function during the tenure through a Statement of Work (SOW).
The
contract should include key details such as::
- Name and title
- Payment terms
- Employment relationship
- General information about the scope of work
- Dispute resolution process
- Ownership of work and protection clauses (Based on their country’s laws)
This shall state the relationship between the parties and how that relationship works in practice through the Statement of Work (SOW). This document is a requirement in some countries, while it's strongly encouraged in others.
3. Frequency of payment
Businesses may opt for the frequency of payment at their convenience and align the payment process accordingly. Some countries have rules around payment frequency that contradict an employer’s standard practices. Therefore, being aware of such information is crucial before finalizing the payment frequency with a contractor.
Most often, the payments are either-
Monthly -
This is the most common way employers use to pay contractors in case of long
projects. This mode of payment favors both the contractor and the employer.
The contractor gets a continuous flow of income in a streamlined manner, while
the employer gets to assess his costs and manage the budget better.
Upfront - This payment frequency requires
employers to pay partial or full amounts to the contractor before the work
starts. This advance payment frequency works great in favor of the contractor
however puts the employers in an uncomfortable position in case there are
delays or issues in assignment completion.
Upon project completion - Here, the contractor gets the payment only after the satisfactory completion of work. This suits employers, but most contractors shy away due to credibility issues and payment delays. This payment mode is suitable for short-term projects. However, most often than not, both parties decide on a break up of the full payment in percentage. Some part is paid upfront (an advance) or based on any timeline agreed upon by both parties.
By milestone - Under this payment method, employers can pay
some amount upfront and then pay throughout various project phases.
4. Payment terms and conditions
Having a fair compensation structure is crucial not only for permanent
employees but also for temporary workers. Therefore, thinking through local
pay expectations, currency exchange rates, local cost of living, and foreign
taxes is essential. It is imperative also to set a deadline for paying
international contractors as this leaves no scope for disagreements in the
future.
Businesses do not incur any tax liability unless they set up an
entity in a country. However, tax and enforcement mechanisms vary with each
country.
5. Documentation
Most countries have their own forms for tax and employment purposes. This
requires businesses to understand the forms they must fill out based on an
international contractor’s country of residence. Payments shall be done
according to the right classification and should have the appropriate tax
documentation.
Another set of documentation that must be gathered
without fail is a KYC (Know Your Customer). This shall be done before
onboarding and paying foreign
independent contractors to ensure credibility and help in verification
processes.
Read More: EOR vs contractor - Make an informed choice
Challenges In paying Foreign Independent Contractors
Most often than not, the need to streamline the payment process arises from employers' challenging situations while paying independent contractors. To stay well aware early on, here is a list of challenges employers encounter.
1. Currency issues
Going global with the workforce requires paying independent contractors in their respective currencies. This requires knowledge of currency conversions, banking rules, processes, timelines, etc. Payments must be initiated in advance to avoid delays, keeping in banking partners and their processes.
2. Compliance issues
Regulations around labor laws are a serious matter for the smooth functioning of businesses once they go global. Countries have their own set of rules and regulatory requirements around employment. Various valid forms in that country must be agreed upon and duly filled to be documented and saved for verification or government scrutiny.
3. Tax Issues
We already discussed how misclassification could be a grave concern and might hamper your business's harmony. Employers should consider the employee’s tax-paying status or identification when paying their contractors. The contractor’s working status in their country must be aligned with the local laws on classifying contractors.
Summing up
Making payments is easy. But paying international contractors involves a few complexities, especially if an employer has hired contractors in different countries.
Fortunately, Gloroots can solve all your payroll-related problems. The platform simplifies global employment, allowing you to hire in 140+ countries.
Gloroots can handle all your
needs around contractor management, multi-country payouts, and
compliance-related issues. So, if you’re planning a business expansion in
another country, join hands with Gloroots to test new markets quickly and
effectively.
Reach out to our experts
now!
