Switching Contractors to PEO

If you’re a startup or a foreign SME planning international market expansion, there’s a high chance that you’re considering hiring international contractors in order to either test these new markets before planning a full-blown expansion or to execute a one-time project. While this makes a lot of sense, it is imperative for you to understand the implications of hiring contractors in a foreign country as well as the challenges and complications that may arise by doing so from a compliance standpoint. Going the PEO (Professional Employment Organization) route can be a much safer and more effective bet than hiring international contractors – we’ll get to that a bit later.

Understanding how contractors are classified in their home countries is a good starting point. Just because a company has decided to hire a contractor as opposed to an employee does not necessarily mean that the contractor’s home country also follows the same definition while determining employment status. It is the responsibility of the hiring company to understand the labor rules and regulations in the foreign country to which it is planning to expand its business and ensure relevant compliances are taken care of.

Countries around the world have their own unique classifications for contractors but there are some general guidelines that can be followed in case a company would like to hire an international contractor:

  • The contracted individual is allowed to work for several companies at the same time
  • The contracted individual can control their own working status or schedule
  • The contracted individual can only work for a single company for a short period of time before moving to a different company

According to the above-mentioned criteria, if a contractor happens to work for any one company for an extended period of time, they would be classified as an employee and would automatically qualify for all the employee benefits that the company offers to other full-timers such as salary, benefit programs, gratuity, etc.

There are some distinct complications that may arise while hiring international contractors such as:

  • Employment Traps: This is a very common problem across the world wherein new hires deliberately misuse the above-mentioned guidelines despite being fully aware of their country’s employment rules. They would agree to come on board as a contractor and file a complaint with their government after a few months of working with evidence that they were hired as full-time or a part-time employee. In most cases, the foreign governments would side with the employee and the company would be liable to pay benefits, overtime, benefits, sick leaves, etc.
  • Misclassification: These are cases where a company has unknowingly misclassified an employee as a contractor by virtue of having a different interpretation of the employee’s status compared to that of the government of that country. This seemingly innocent mistake can have considerable financial repercussions because it can result in serious financial penalties such as back tax withholding on wages, employee benefits, overtime payments, vacation, sick leave, severance pay, etc.
  • Non-compliant Employment Contracts: It is extremely critical for foreign companies to create country-specific employment contracts as opposed to using a general template across different geographies. This is because each contract should be fully compliant with the labor and taxation laws of the country in which the new hire is based in order to avoid lawsuits arising out of legal loopholes that the company may be unaware of. Labor courts can rule in favor of the contractor and make the company liable to pay withholdings and benefits if the employment contracts are not prepared correctly and in line with local laws. 

Against this backdrop, it is in the interest of foreign companies to move international contractors to a PEO model. This would essentially involve reclassifying the existing contractors and converting them into employees who would be on the PEO’s payroll but work full time for the foreign company. Some companies may be hesitant to undergo this reclassification due to the increased costs but these costs aren’t as impactful to the bottom line in the larger scheme of things. This transition ensures stability for both the employer and employee by converting contractors into employees which is a more permanent and long-term solution. Even from the contractor’s standpoint, being converted into an employee would entail benefits such as paid time off, sick leave, pension, maternity/paternity leave, termination rights, health insurance, etc. Most importantly, the PEO route is advantageous because it offers the following distinct benefits to foreign companies versus hiring international contractors.

  • It ensures 100% compliance with the local labor and taxation laws while hiring employees on behalf of the foreign company and helps avoid the risk of misclassification 
  • It helps the foreign company hire a world-class dedicated team capable of achieving its business expansion goals in a new geography
  • Foreign companies do not need to waste time and resources in understanding the labor laws of different countries in detail before drawing up 100% compliant employment contracts. The PEO agency would take over this task completely and protect the company against employment traps as well as the risks associated with non-compliant employment contracts
  • The PEO agency would completely manage all the administrative tasks on behalf of the foreign company such as payroll, time and attendance, benefits and taxes, etc. so that the company can instead focus its attention on core business activities and growth

For foreign startups and SMEs planning business expansion to India, Remunance offers a one-stop solution for all their PEO needs. Remunance is regarded as one of the most reputed Indian PEOs who has the expertise to help foreign companies move their international contractors working in India onto a PEO model. Unlike a regular PEO, Remunance not only takes care of cost-effective services for HR, payroll, insurance, benefits, and risk management, it goes one step further to provide extended services like leave management, recruiting, employee training, and office infrastructure, and HR support. It essentially takes over all administrative activities so that clients can focus their attention on core business activities instead of worrying about rules, regulations, and compliances!