Employment laws in foreign countries are often complex and are typically designed to protect the worker, not the employer, so extreme care should be taken when hiring independent contractors (aka “service contractors” or “self-employed contractors”) An independent contractor may later be deemed an employee by the host-country authorities during or after engagement, leading to substantial employer penalties and reputational damage which far exceed the cost of employment. Engaging professional assistance familiar with employment laws of the host country is essential when hiring independent contractors abroad.
Having a formal policy in place that documents the entity’s position of engaging contractors (including the applicable tests for qualification) is often good practice. Just having a policy can often work in the entity’s favor in the event of an audit by the local tax authority. Though in practice there may be inconsistencies, the policy documents the entity’s intent to follow local employment laws.
When hiring an independent contractor
A written contract in the language of the home country and reflecting specific language to document the relationship between the worker and the employer may be required, however, contracts documenting a contractor relationship do not determine the employment status.
While each country has unique laws which ultimately determine employment status, the following factors typically lead to a worker being classified as an employee rather than an independent contractor:
In many countries, the contractor should obtain an exemption of tax certificate from the local tax authority which documents the worker’s status as a contractor in their line of work.
Withholdings and Reporting
Countries vary greatly with regard to the responsibility of whether the paying agent or the independent contractor must make applicable tax payments at the time of payment or in due course of the tax return preparation process and/or monthly or quarterly filings. Thus, there may be requirements for income tax withholding at the time of payment, and year end reporting (similar to Form 1099 in the U.S.) to both the local tax authority and the independent contractor. In all cases, tracking payments to independent contractors is good practice.
Research compliance and other considerations
(federal and local laws)
Ensure that any independent contractor expenses directly charged to a federally sponsored project and the document retention practices comply with fund terms, institutional policies, and the Office of Management and Budget (OMB) Circular A-21 (http://www.whitehouse.gov/omb/circulars_a021_2004)