You need specialized talent fast. Maybe it’s a developer to build that feature your customers keep requesting, or a marketing consultant who understands the German market you’re trying to crack. Hiring full-time feels like overkill, but you need someone good, and you need them now.
Enter independent contractors. They’re perfect when you need expert help without the long-term commitment. Testing a new market? Bring in a local contractor who knows the terrain. Building a one-off project? Find someone with exactly the skills you need, pay them well, and part ways when it’s done. No lengthy hiring process, no severance packages, just great work delivered on your timeline.
However, it can get a little tricky when the line between independent contractor and employee blurs, and getting it wrong can cost you. We’re talking fines, back taxes, and legal headaches that make you wonder why you didn’t just hire someone full-time in the first place.
This guide breaks down when hiring independent contractors make sense, when they don’t, and how to work with them without accidentally creating an employment relationship you didn’t intend. The flexibility of contractors is too valuable to skip—you just need to know how to do it right.
What is an independent contractor?
A domestic or global independent contractor, also often called a contract employee, is someone who runs their own show but does work for your company. Think of them as business owners who happen to have you as a client—they handle their own taxes, set their own hours, and decide how to get the job done.
This isn’t an employment relationship—it’s more like hiring a plumber or a web designer. You need something specific done, they have the skills to do it, and when the project’s over, you both move on. No ongoing obligations, no benefits packages, just a straightforward business transaction.
Companies love hiring independent contractors when they need someone with ninja-level skills for a specific project. Maybe you need a blockchain expert for three months, or a local market researcher in Tokyo for a product launch. Instead of hiring full-time (and figuring out Japanese employment law), you bring in a contractor who already knows their stuff. They hit the ground running, deliver what you need, and send you an invoice. Clean and simple.
How do independent contractors differ from employees?
There are key differences between independent contractors and employees that employers and HR teams should know. We detail some of these differences below.
An independent contractor:
- Works for one or more clients
- Determines how, where, and when to perform their work
- Receives pay according to a contract agreement with each client
- Does not receive benefits from their clients
- Pays and files their taxes
- Uses their own work equipment
- Is responsible for their career development and training
- Has a temporary relationship with their clients that ends when work is complete
An employee:
- Works for one employer
- Follows the employer’s rules for how and when to perform the work
- Receives a salary or hourly wage
- Is entitled to statutory benefits from their employer
- Relies on the employer to withhold and file taxes
- Uses company-owned work equipment
- Receives career development opportunities that help them grow professionally
- Invests in a continuing relationship with their employer
Wondering if your contractors are correctly classified? Check out our free contractor risk assessment checklist:
Pros and cons of hiring independent contractors
The following are some advantages and disadvantages of hiring independent contractors.
Pros of hiring independent contractors
Saves businesses money
Employers pay several expenses for full-time employees, such as salaries and bonuses, payroll taxes, statutory and supplemental benefits, work equipment, training, and paid time off.
On the other hand, contractors are responsible for their own taxes, benefits, work equipment, time off, and training. They also receive payment according to their contract agreement, which is typically less than an employee’s salary since they don’t work full-time hours.
As a result, businesses can save 20-30% by hiring independent contractors over full-time employees.
Helps businesses stay competitive
Working with remote independent contractors helps companies stay competitive globally and quickly broaden their talent pool without entity establishment. By engaging international contractors, organizations can find the right talent for the job, regardless of location.
Because companies don’t need a foreign entity to hire an international contractor, it’s often easier to engage contractors than full-time employees in other countries. As a result, companies can test new markets quickly while investing the money they would use for entity establishment into other areas of their business.
Increases flexibility
Contract labor gives employers more flexibility to meet their short-term needs. Employers engage independent contractors for specific projects and offboard them when the work is complete. Contractors can also be quickly re-engaged if they’re available.
Once the independent contractor’s project or term is complete, the commitment between the contractor and company ends. The employer does not have to take additional legal steps when terminating a contractor, as they typically do when terminating an employee, such as providing notice periods, severance, or unemployment payments.
This onboarding and offboarding flexibility is especially valuable in foreign markets, as many countries have complex legal requirements for terminating employees.
Improves efficiency
Employers engaging independent contractors seek specific skills to address their unique business needs. Independent contractors already bring specialized skills and experience to a project without the need for additional training. As a result, the onboarding process is fairly simple and quick, and it requires less administrative time and effort.
Additionally, independent contractors can jump into a project immediately and typically complete the work faster because they have one targeted focus, unlike employees who may have a broader range of tasks, roles, and responsibilities to fulfill.
Reduces entitlement liability
Employers must provide statutory benefits to employees, including annual leave, overtime pay, workers’ compensation, protection from employment discrimination or wrongful termination, and more. Companies that fail to offer the required benefits face legal and financial penalties.
On the other hand, employers do not owe correctly classified contractors the same entitlements as full-time employees. Instead, contractors are responsible for their own benefits, which eliminates potential legal and financial penalties employers may face if they don’t offer employees statutory benefits according to local and national employment law.
Cons of hiring independent contractors
Despite the advantages, engaging independent contractors also presents the following challenges:
Companies have less control over contractors
Independent contractors have more work autonomy than employees and can decide how best to accomplish tasks, with what tools, and in what timeframe. An employer risks misclassification if they interfere too much in their independent contractor’s work.
Also, because an independent contractor’s work is temporary and they may also work with more than one client, they might not have the same passion and investment in the company’s long-term goals that an employee might demonstrate.
Employers who want significant oversight and control of their talent’s work schedule or methods must correctly classify them as employees.
Contractors come and go
Most employers use independent contractors as needed for specific or short-term projects. Once the project is complete, independent contractors take on additional assignments or move on to work with other clients. This constant coming and going of independent contractors can be inconvenient or disruptive to a company’s workflow and culture.
Independent contractors also bring levels of uncertainty and inconsistent availability because they work for multiple clients and may not be available for the company’s next project.
Companies that want to invest in the same talent for ongoing projects would benefit from hiring employees instead of contractors.
Increases liability for work-related injuries
In most countries, employers must provide workers’ compensation insurance for employees who become injured on the job. Under workers’ compensation insurance, employees typically waive their right to sue their employers in exchange for the benefits they receive for their injuries.
However, most employer workforce compensation does not cover independent contractors, and contractors do not usually purchase their own workers’ compensation insurance. As a result, contractors can sue their clients for damages related to injuries suffered on the job.
Loss of copyright ownership
Employers typically own the copyright for any intellectual property their employees create, which ensures sensitive information stays safe and doesn’t get into competitors’ hands.
Conversely, because contractors are not employed by their client’s company and act as their own company, they own the copyright for the intellectual property they create on the job.
The employer is only considered the owner of any work their contractors complete if the contractor agreement explicitly indicates a copyright ownership transfer.
Risk of worker misclassification
Every country draws the line differently between “contractor” and “employee.” What flies in the U.S. might be completely illegal in Germany. And getting it wrong isn’t just a minor paperwork issue—it’s a fundamental misunderstanding that can unravel your entire hiring strategy.
Independent contractor misclassification happens when someone who legally qualifies as an employee gets labeled as a contractor instead. Maybe it wasn’t intentional—you genuinely thought that developer working 40 hours a week for the past year was a contractor. But intentions don’t matter much when the tax authorities come knocking.
When misclassification happens, here’s what you’re looking at:
- Unpaid taxes. You’ll need to pay all those employment taxes you should’ve been paying—national, state, local, the works. Plus interest.
- Back benefits. That contractor who should’ve been an employee? They’re entitled to all the benefits your employees get—health insurance, vacation days, sick leave—retroactively.
- Legal fines. Beyond the back payments, there are penalties. Some countries take this seriously enough to pursue criminal charges for intentional misclassification.
- Reputational damage. Word travels fast when a company gets caught treating employees as contractors.
The solution isn’t to avoid contractors altogether—it’s to understand the rules wherever you’re hiring. Each country has specific tests for what makes someone a contractor versus an employee. Get familiar with them, or work with someone who already is. Because the flexibility of working with contractors is worth preserving—you just need to do it by the book.
Read more in our complete guide to employee misclassification.
Skip the classification minefield with an Employer of Record (EOR)
Engaging contractors is a flexible and cost-effective solution for testing new international markets and meeting immediate needs. However, companies seeking to invest in long-term goals while avoiding misclassification risks would benefit from engaging employees instead.
Still, keeping up with evolving employment laws around the world requires time and expertise that your HR team might not have. That’s where an employer of record (EOR) can help.
An EOR correctly classifies your workforce
An EOR partner provides in-country insight and works on your behalf to hire international talent, create compliant employment contracts, correctly classify your workforce, and ensure full compliance with evolving labor laws.
An EOR converts contractors to employees
If you already have a contingent workforce, the right EOR can help you quickly convert your contractors into full-time employees. An EOR onboards your talent as employees on your behalf using their global network of entities, speeding up and simplifying the conversion process.
An EOR also handles HR responsibilities such as payroll, benefits planning and administration, and ongoing support—all while you maintain day-to-day control of your team.
Avoid the risks of engaging contractors and work with an EOR to seamlessly and compliantly hire full-time talent around the globe or convert existing contractors into employees.
Learn more: What Is an Employer of Record (EOR)?
Start building your compliant global workforce
Love the flexibility of contractors, but tired of worrying about classification rules? Pebl makes it simple. Our EOR services help you hire full-time talent in 185+ countries—no misclassification risk, no compliance guesswork, just great people doing great work.
Already working with contractors who feel more like employees? We can convert them to full-time status the right way. Need to hire someone new in Singapore or Stockholm? We’ll handle the employment contract, payroll, benefits—all of it—while you focus on managing your team.
The best part is you get all the commitment and loyalty of full-time employees without becoming an international employment law expert overnight.
Ready to build your global team the right way? Let’s talk about who you want to hire.
This information does not, and is not intended to, constitute legal or tax advice and is for general informational purposes only. The intent of this document is solely to provide general and preliminary information for private use. Do not rely on it as an alternative to legal, financial, taxation, or accountancy advice from an appropriately qualified professional. The content in this guide is provided “as is,” and no representations are made that the content is error-free.
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Topic:
Contractors
