Paying overseas contractors can be tricky when it comes to putting policies into place, more so if you don’t have an internal HR department or legal department that understands international labour laws. Payment structures can have ramifications on the employment status of your contractors depending on where they work.
There are different payment structures which include:
A project fee is a pre-agreed amount for a specific piece of work. This is also known as a fixed-price project fee. From the start of the project, both parties must know what the budget will be. When working on a fixed-price project, it’s important to have an ironclad contract that addresses things like milestones, progress reporting, and sanctions against any unaccomplished milestones and deadlines. A fixed-price agreement is often used for major projects like engineering design and technology development. Make sure that these (and all other) contractor agreements contain language regarding intellectual property ownership.
In a retainer arrangement, a set amount is paid on a regular basis. The retainer can be paid monthly and renegotiated at the beginning of each financial year. In the contract, you should state exactly what the retainer covers in terms of deliverables and/or time spent working for you. If you are looking to perform a variety of tasks regularly, this can be an attractive arrangement. Make sure you address what happens if you don’t provide enough work to keep your contractor busy for the hours retained. Do you lose those hours, or do they roll over to the next month? The contractor’s country of residence may make it illegal to expect him or her to roll over hours to the next month.
Time and materials
Contractors submit a timesheet and expense report to prove the time and material they consumed for the payment period on an invoice with a time sheet and expense report. For creative industries, time and materials can be costly, as it’s hard to predict how long it will take to arrive at the desired outcome. If you can closely time the effort required to produce the outcome, this could be the best payment arrangement. Time-and-material contracts also don’t have incentives to motivate contractors to work efficiently. The second problem is that time-and-material contracts do not offer incentives for contractors to work efficiently. The longer it takes to deliver the results, the more the contractor is paid.
Beware the dangers of contractor misclassification
Different countries determine employment status based on contract and payment structure. For example, you may run into a situation where a country doesn’t recognise long-term contractor agreements and instead requires companies to hire contractors as full-time employees.
In accordance with the country’s labour laws, your contractor may be considered an employee after a certain period of continuous work for the same business, such as six months. It is very important to have a thorough understanding of the local formula for classifying employees (i.e., how your payment structure, as well as the length of time, impacts your foreign contracting staff’s local classification).
Contractor misclassification is a serious issue that can result in heavy penalties.
Determine which currency to pay contractors
It is important to confirm the currency in which the contractor will be paid before you can determine how much to pay. Managing payments to independent contractors in other countries can have a huge impact on your cash flow and operating expenses since foreign exchange rates constantly change. Options include:
- Pay everyone in the same currency. This works well if your international contractors have that specific currency bank account. Otherwise, they’ll have to pay a fee to receive another currency into their account.
- Pay each individual in their local currency. This is good for contractors but then you will have to implement multiple foreign currency accounts or more feasibly you can opt to use a payment platform that is able to handle the conversions for the currencies. Foreign exchange fees are much higher. Reconciling all your accounts becomes more complicated.
- Using a hybrid method of payment. If you use an Employer of Record (EOR) contractor management platform with a digital payment tool, this will allow you to take advantage of currency fluctuations.
There you have it, the best way to pay your international contractor is basically to automate your contractor management with an EOR service.
Finding the right contractor management platform
If you would like your contractor management automated quickly and easily, creating an account with an EOR service is the way forward. With Playroll you can begin onboarding your contractors within minutes and work at ease across multiple countries, without worrying about legalities and local entities.
You’ll be able to pay your contractors in their own local currency, something that’s required in most countries. Playroll’s automated contractor management system also relieves the burden of compliance management.
The Playroll Employer of Record network provides you with peace of mind that your hiring of contractors is in compliance with local labour laws while reducing the management burden of excessive administration, filling out tax forms and correspondence.
Planning international HR and team-building is completely free
And here’s the best part: creating your account is completely free! Simply log in and start your planning, hire, land and expand your cost and tactics. There is no billing until you make your first hire.
To learn more: Use Playroll to pay, manage, and onboard, manage anywhere in the world.