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Deciding Between International Employees and Contractors

Time and again, businesses are tempted by the prospect of hiring contractors rather than employees. In some situations, contract employees are a business’s best bet, but it’s important to weigh all the factors before making a final decision.

Here are some of the key considerations when deciding between employees or contractors in another country.

Consider the Legal Implications

Rather than sort through the intricacies of international labor law, international business owners are sometimes inclined to hire contractors purely to save time, avoid the interview and negotiation process, and loosen their legal and tax obligations as an employer.

Before going the contractor route, it’s important to understand all of the legal issues involved in having contract workers overseas.

However, before going the contractor route, it’s important to understand all of the legal issues involved in having contract workers overseas, says Shan Nair, co-founder of Nair & Co., a global professional services consultancy based in Singapore that specializes in the U.K. and Asia. “In Europe, primarily, the contractor approach is not advisable, because you can’t get away from the ‘deemed’ employment risks,” Nair says, adding that this is especially true if the contractor fails all the normal self-employment tests such as having more than five to 10 clients and demonstrating that he or she has control over delivery of the product.

In the United States, speaking broadly, a worker should be classified as an employee if his or her employer directs and controls how the work is done. Conversely, a worker can be classified as a contractor if he or she chooses how to execute the work. There isn’t a single litmus test for who is and is not an employee, but one key factor U.S. authorities take into account is how a worker is paid. For example, is the worker paid according to the job or at regular intervals? Does the worker cover costs related to executing their job?

Because the U.S. has an at-will employment environment, businesses are sometimes tempted to use employees in the U.S. and contractors in places like the U.K. and Canada. But this can be a mistake, cautions Donald C. Dowling, Jr., an international employment attorney and partner with the New York law firm White & Case.

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“If independent contractors are such a great magic bullet for you in Canada or the U.K., then why don’t you have all nine of your people in the U.S. be independent contractors, too?” Dowling says. “If it’s fishy here, it would be fishy in England and Canada.”

Do a Trial Run

Depending on an owner’s needs, it may be best to test the international labor market by starting with the services of a contract employee. It can also be beneficial to have a trial run for individuals before hiring them on as full-time employees.

Alyssa Dver, owner and chief executive consultant of Mint Green Marketing, a strategic marketing consulting firm in Westborough, Mass., opts to keep her overheard lean by employing 15 contractors at any given time, including several who are based outside of the U.S., and tapping into a broader network of subcontractors. She gives newly hired contractors projects that aren’t client facing, such as basic research.

She says contractors work well when there is a one-off task that needs to be done, such as coding or designing a website. And she often checks in on their work through email, project and customer management software or a quick Skype session.

Let the Need Drive Employment Status

Employers should also take into account the cash flow implications of hiring contractors versus employees. With contractors, payment amounts may vary from pay period to pay period — whereas employers have the ability to set standard salaries for employees. International business owners should keep in mind foreign exchange rates in the country where their contract employees are working abroad. Regardless of whether these international payments vary or stay the same, businesses can use online foreign exchange services to send funds and convert currencies efficiently and at a low cost.

Some owners simply need a more traditional employee: a person who can manage a portfolio of often unrelated tasks during set business hours and under particular conditions and time constraints.

In 2010, Darron Burke, owner of Burke Brands, a 20-employee, Miami-based coffee growing and roasting company, decided to expand his business to Asia. To do so successfully, he needed a reliable employee on the ground — someone who could open up a location, navigate local laws and speak the language. Burke needed someone who was committed and wouldn’t bolt after Burke invested his time and knowledge into recruitment and training.

He eventually hired a South Korean businessman on as a partner and says it turned out to be a great decision for his company. To date, Burke’s partner has helped him hire an additional six employees in Seoul, and business is booming: Next year, he expects to double this year’s estimated revenue of $10 million to $15 million.

For Burke, bringing on full-time help was the right choice. But the pros and cons of using contract employees are different for every business. By gaining a firm understanding of their needs, business owners can minimize the risks and maximize the benefits of expanding their workforce abroad.

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