Employees and independent contractors represent very different ways to expand your workforce. The right choice will depend on your circumstances, so hiring contractors vs employees requires you to understand the pros and cons of each and match them to your needs.
How the law sees employees or independent contractors depends on the country you are working in, alongside other factors like the industry or job. It’s not easy to always tell the difference between hiring contractors vs employees, especially if you aren’t familiar with the market. That’s why we’ve put together this guide on hiring these worker types so you can remain compliant during your international expansion.
Employee vs Independent Contractors: The Key Differences
Employees are salaried members of your workforce. Their contracts can be full-time, part-time, indefinite, or fixed, but they are full members of your payroll and management structure, meaning they receive all the benefits and protections owed to employees in your country of operation.
On the other hand, contractors (also called freelancers or gig workers) are their own bosses. These are specialists who sign contractor work agreements with your company to perform specific tasks due to their expertise or experience. They are temporary workers and do not typically benefit from any of the rights or protections of employees.
The news is full of stories of companies being fined or facing serious penalties for incorrectly hiring contractors or not fulfilling their employer responsibilities. This includes big companies like Nike in 2023, who may have to pay millions in fines or compensation. Hiring contractors vs employees anywhere requires understanding the rules comparing these worker types.
Autonomy of Labor
Employees – Employers have much more control over employees, including their work hours, specific tasks, and how the work is ultimately performed. Despite modern trends towards remote work, employees often also work on-site and must follow company policies.
Independent Contractors – Independent contractors have greater autonomy because they are not a part of a company’s management structure. These specialists typically work off-site, set their own hours, and have the final say over how they complete tasks. Employers can specify the desired outcome of a project when hiring contractors but must give these workers reasonable flexibility.
Tax and Social Security Responsibilities
Employees – Employers usually withhold and remit income taxes and social security contributions for their employees as part of a regular payroll process. Additionally, employers will also pay toward their employees’ social security or pay additional employer taxes.
Independent Contractors – Contractors are responsible for paying all of their own income taxes, and in many countries, they have the option to contribute to their own social security funds. Employers do not withhold or contribute to these costs when paying contractors, so these savings are why many companies hire contractors whenever possible.
Worker’s Benefits and Protections
Employees – Because of their employer-augmented social security contributions, employees are automatically typically entitled to various benefits, often including health insurance, pensions, paid time off, and other insurances. They may also have better legal protections like assured overtime and anti-discrimination laws.
Independent Contractors – Contractors do not receive employee benefits and may not be covered by the same variety of labor laws and protections. Typically, they’re responsible for organizing their own insurance.
Training, Equipment, and Working Location
Employees – Employers typically provide all the training, equipment, and tools needed for employees to perform their jobs. As a result, the employer should bear the cost of these aspects of a job, which are factored into the labor burden.
Independent Contractors – Because they are specialists, independent contractors provide their own tools, equipment, and training necessary to complete the work in most cases. However, they may invoice the client for specific expenses if this is part of the work agreement.
Contract Length
Employees – The employer-employee relationship is typically expected to be long-term and can be fixed-term or indefinite. Employees often have a continuous relationship with the company and may require compensation if an employer ends their contract.
Independent Contractors – Independent contractor relationships are usually determined per project. Contractors work for a defined period, and the relationship may not be ongoing with no extra cost for termination unless specified.
Some Examples of Tests Applied to Hiring Contractors in Different Countries or States
The problem of determining a contractor’s status is compounded by the fact that different countries view this worker type differently. Some countries recognize hiring contractors as a form of independent work contract and even allow them to benefit from many of the same benefits and protections as employees. At the same time, many countries do not recognize the specific status of “independent contractor” at all, instead treating them as a business entity that provides services to other business entities.
The problem is compounded when companies hiring contractors abroad are required to abide by multiple sets of potentially conflicting regulations. This variety of opinions means that there are many ways to judge a worker’s classification, depending on where that worker operates. Below are just a few of the different tests that exist to determine whether a company is hiring independent contractors vs employees.
“Three Prong Test” Applied in Many US States
Often called the ABC test, this US state requires the following conditions to be true to be considered contracting:
An Absence of control and direction in the contractor’s work
The business of the employer being different from the services provided by the contractor
The contractor being customarily engaged in an independent trade or business
The Employment Status Test for UK Tax
Workers or companies in the UK can use an online checking tool provided by the UK Tax Office (HMRC) to determine if a worker is independent or an employee.
The test asks a series of questions about the specifics of a working relationship, including personal service requirements, control, financial risk, benefits, and contracts.
Contractor Determination in South Korea
As South Korean labor law does not recognize independent contractors as a separate type of worker, like in many other countries, it’s crucial to establish if someone is providing services as an employee or in a business-to-business relationship.
When faced with a classification dispute or investigation to determine if a worker should be rightfully considered an employee, Korean courts consider the following as evidence:
The company has decision-making power over their work
The company’s work rules and guidelines are applied to the worker
The company has control over the workers processes
The company sets the time and date of the worker’s work patterns
The company owns the equipment, location, or other assets associated with the worker’s job
The worker can’t subcontract work to a third party
The worker’s compensation is based on time, not success
The worker’s income depends exclusively or near exclusively on a single company
The worker has a long-term relationship with a single company
The worker receives social security benefits associated with employment
No single piece of evidence will determine the worker’s status. Instead, a court will make a determination on a case-by-case basis.
How to Know if Your Worker Could Be Misclassified? 12 Global Questions to Ask in Order to Avoid Contractor Misclassification and Catastrophe
Even when there are reasonably clear tests to prove worker status, mistakes can be made when hiring contractors. This can happen either consciously or unconsciously, but the penalties are severe. For example, in 2023, the US Department of Labor fined a Florida-based company and required them to provide more than 22,000 workers with backpay and damages. However, these problems can be avoided by taking proactive measures when hiring contractors or employees to ensure your workers are compliant with local and international labor regulations.
While there’s no single checklist that applies to every country or situation, below, our recruitment and compliance assurance experts have compiled a list of the key points to check and questions to ask to determine if your workers are employees or contractors.
Control Over Work
Do you exert significant control over how, when, and where the worker performs their duties? If so, it can indicate you have an employer-employee relationship. Independent contractors generally have more autonomy in the way they work.
Work Hours
Do you require your independent contractors to work set hours or adhere to a strict daily or weekly schedule? Contractors typically have flexibility in determining their work hours and how or when they complete a project.
Use of Company Equipment and Assets
Do you provide company-owned equipment, tools, or resources to contractors in order for them to complete their work? Contractors use their own tools and resources as part of their independence of action.
Exclusivity
Are your independent contractors prohibited from working for other clients, or do they have exclusive clauses in their contracts? As contractors are expected to work with multiple clients at once, restrictions may indicate a level of control typical of an employer-employee relationship.
Training and Supervision
Do you provide extensive training, supervision, performance reviews, or guidance to your independent contractors? While some may be required to ensure that a contractor’s work aligns with your needs, consistent guidance suggests a higher degree of control as contractors are expected to already be experts.
Integration into the Company
Are contractors integrated into regular workflows, meetings, or essential parts of your company routines? Because they are temporary workers providing specific services, when hiring contractors they should remain separate from your company’s regular operations.
Long-Term Relationships
Is the period of time in which you have an agreement with your contractor indefinite or ongoing? Companies typically engage contractors for specific projects or on a temporary basis. Long-term projects typically mean that you should consider hiring workers as employees on a fixed-term contract.
Equally, if you can’t end your relationship with a contractor with little to no notice or without cause, it suggests they are reliant upon your company and are, therefore, an employee.
Benefits and Perks
Do you provide benefits like health insurance, paid time off, retirement plans, or even smaller perks like gym memberships and food expenses to your independent contractors? These can be red flags as they typically come with employee status.
Payment Structure
Do you pay your contractors on a regular, fixed schedule (e.g., bi-weekly or monthly)? Regularly scheduled or consistent payments may better resemble an employee-employer payment structure.
Instead, contractors provide invoices for the specific services they render. By reviewing the contracts and invoices of your independent contractors, you can offer clear, project-based contracts that outline work and payment terms.
How You Can Benefit From the Services of Specialist Workers Worldwide While Remaining Secure
A valuable potential solution for companies looking to hire or manage independent contractors while ensuring compliance with labor regulations abroad is to work through an EOR (Employer of Record). These service providers act as employers, allowing businesses to expand their global workforce for short-term and long-term projects without the complexities and legal risks associated with international employment.
EORs like INS Global can be familiar with local labor laws, tax regulations, and compliance requirements worldwide thanks to their international networks and resources. They act as a legal employer for other companies’ staff, taking on the responsibility of payroll, tax withholding, and benefits. They can also ensure that contractors are correctly classified and receive their entitlements. This can even allow you to hire contractors long-term, giving them the benefits of employment while still maintaining a legal distance.
EORs with expertise in recruitment and contractor management can also provide a streamlined onboarding process when hiring contractors. This includes helping to handle and check documentation, work permits, and visa applications when necessary. With this support, you can focus on core activities instead of spending too much time on administrative tasks.
Finally, EORs will keep you up to date with labor laws as they evolve, ensuring you never fall behind.
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