How to Manage Contractors: An Ultimate Guide to Risk-Free Contractor Management

Just like remote work is becoming commonplace, managing contractor workforce is getting more and more complex. Freelancers, contractors, on-call workers – so many types of temporary employment are now part of the so-called gig economy. 

With contingent and alternative work arrangements, it is hard to correctly classify and track workers on their career paths. Only in the US, according to the latest official data, there are 11.9 million independent contractors (7.4% of total employment). Besides, there are 6.9 million people (4.3% of workers) working as contingent workforce.

In today’s guide, we share our best practices on how to hire contractors and manage them efficiently. Additionally, we show how contractor management tools become a game-changer in optimizing contractor-related processes.

But before going straight to contractor workforce management, let’s discuss one question. Why is it important to tell the difference between contractors and full-time employees?

Contractor compliance issues can be costly

Business owners should be aware of misclassification risks, as legal cases on contractor compliance happen now and then.

For example, in 2015, Uber came under fire in misclassification lawsuits. Drivers, hired by the company as independent contractors, claimed they did the job of full-time employees and demanded respective benefits.

Confusion increased when courts in different states ruled either in favor or against Uber. In some cases, the company agreed to pay compensation. For instance, in North Carolina, it reached a $1.3 million settlement agreement to pay to about 5,200 drivers.

Around the same time, driver groups filed similar actions against FedEx Ground, Amazon Flex, Dynamex Operation West, and others. For FedEx, the case started in 2005 and ended in 2016 with a $240 million settlement to pay drivers in 20 states.

As you can see, it’s better for business owners to know how to ensure contractor compliance and hire workforce under the right type of contract.

So, to start with, let’s brush up the basics.

Difference between full-time employees and contractors

Full-time employees, contract employees, and independent contractors are essentially different. The chart below sets out the main distinctions.

Comparative chart: full-time employees, contract employees, and independent contractors

In addition, here is a clue helping differentiate contractors from full-time employees. In some US states, employers use the ABC test to identify whether they can classify a worker as a contractor. According to the test, a person qualifies as an independent contractor when they meet three criteria:

1. The worker is free from control and direction of how they work, both under the contract and in practice.
2. The worker performs such a job that is not the hiring company's major business. 
3. The worker operates their own independent trade, occupation, or business that is distinct from the hiring company's business.

Contractors must be differentiated from permanent employees because it is all about how companies and individuals pay their taxes.

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How contractors pay their taxes

The rule of thumb is that independent contractors pay the self-employment tax.

Paying taxes as a global contractor can be even more complex. Potentially, such a person may have income sources from multiple countries. It may require from them to:

• Pay self-employment taxes in the country of tax residence (where the contractor lives for six months + one day).
• Understand foreign income and tax treaties. Some countries have agreements to avoid double taxation, while others do not.
• Pay other local taxes as required by the home country rules, for example, social security contributions.

How companies hiring contractors report on taxes

Terms may differ for different countries. For example, in the US, the company using contractor services must report independent contractor payments on Form 1099-NEC, Nonemployee Compensation. On the contrary, employee earnings may be subject to FICA (social security and Medicare tax) and income tax withholding and reported on Form W-2, Wage and Tax Statement.

Penalties for contractor misclassification

Misclassification of workers as contractors can result in huge fines. Contractor laws are country-specific, which is crucial when hiring global contractors. For example:

• In the US, depending on the intent, state, and scale of the violation, fines may range from $100 to $15,000 per violation (in addition to the backpay that the employee is entitled to).
• In Spain, hiring the so-called 'falso autónomo' envisages a fine of up to 10,000 euro and even a prison sentence.
• In Germany, employers must retroactively pay social security payouts. Additionally, they can be penalized and even held criminally liable if misclassification was intentional.
• In Australia, the so-called ‘sham contracting’ is penalized by fines of up to AU$93,900 for businesses with fewer than 15 employees.

Note: this is not legal advice, to determine responsibilities in your particular case, get your local legal services.

Benefits of working with contractors

Working with contractors can be rewarding for companies with plenty of advantages, such as:

1. Cost savings: hiring global contractors, companies can reach specialists from countries with a cheaper workforce.
2. Access to a more diverse global talent pool: by hiring foreign contractors, companies reach specialized skillsets that might not be available in the local market.
3. Reduced overhead costs: since contractors work remotely with their own equipment, software, and workspace, companies don’t invest in extra office space or equipment.
4. Faster recruitment: it is easier to hire and onboard independent contractors than FTEs, as there is no tricky documentation handling, probation period, etc.
5. Easier scalability and flexibility: contractors are a ready-to-use workforce. This allows companies to scale up quickly when they are tight on the schedule.
6. Advantages of scattered time zones: working with foreign contractors in different time zones, teams can work round the clock.
7. Fewer commitments: contractors deal with taxes and insurance themselves. This can reduce some of the risks associated with full-time hires.

Challenges of contractor workforce management

Of course, there are some difficulties in managing contractors (especially on a global scale). Some of the critical challenges include:

1. Misclassification risks when an independent contractor is classified as an employee. This could lead to tax, legal, and financial penalties.
2. Global contractor compliance issues because of different labor laws, tax requirements, and benefits which can be complex from one region to another. 
3. Intellectual property protection must be enforced. Although the results of the contractor's work belong to the company who hired them, it requires clear agreements to protect IP, for example, by signing non-disclosure agreements (NDAs).
4. Managing multiple contractors alongside full-time employees is a headache for HR managers and team leads. If you hire several independent contractors, keeping track of different contracts, payment schedules, deadlines, and timelines can be cumbersome.
5. Coordination hardships may occur due to time zone differences, disjointed teams, and different tools that each contractor uses, which on average slows down progress.
6. Consistency can be an additional challenge, especially when companies do not dedicate enough time to familiarize freelancers with standards and expectations.
7. Cultural differences may rise as an additional challenge when people with different communication styles, work ethics, or expectations stop understanding each other.
8. Reliability and availability is different from that of permanent employees. There’s a risk that a contractor may not be available when you need them. They may not have the same sense of urgency as you or may have night time when you need to troubleshoot an issue asap.
9. ‍Disputes over payments, invoicing, or the scope of work may arise if the contract isn’t defined clearly. Contractors chasing invoices or a company chasing contractors to have the job done – either of those may lead to delays, legal issues, or damage to the relationship.

How to manage contractors right

Working with contractors and full-time employees simultaneously, you need efficient contractor management strategies to streamline workflows. We’ve gone that way, too, when hiring foreign contractors for one of our clients. And we’ve worked out an actionable plan on managing contractors, considering risks and challenges.

This is what you need to do step by step.

Step 1. Define your goals and the type of contractor you need.

First of all, have the benchmarks against which you will be evaluating the success of your project:

• Outline the project or role you need the contractor for.
• Define the scope of work, timeline, and key deliverables.
• Choose whether you need a freelancer, a contractor from an agency, or else.

Step 2. Draft a comprehensive contract.

Outline your expected terms of work. Your contract may include deadlines, payment rates, etc. Legal advice may be costly. However, if the job involves intellectual property rights or global contractor compliance, this is highly recommended.

Step 3. Screen and interview candidates.

Just like with full-time hires, you run the same recruitment process, evaluating contractors’ skills, portfolio, and more. To hire independent contractors, register on freelancer websites such as Upwork, Fiverr. For longer-term and bigger projects, specialized recruiting platforms will be of great help.

Step 4. Negotiate payment and work terms.

Before signing a contract, make sure you are on the same page about the rates and payment schedule. Some contractors charge per hour, while others work on a flat-rate basis for the entire project. Additionally, define the communication – how often you communicate and how you solve urgent issues.

Step 5. Handle contractor compliance and legal issues properly. 

Double-check that the contractor’s status is properly classified according to legal requirements (e.g., independent contractor vs. employee). Pay attention where the contractor lives and provide your agreement and/or contract legal copy to the contractor. Keep all tax-related paperwork in order, like W-9 forms or 1099s.

Step 6. Onboard your contractors.

Just like with full-time employees, contractors may need access to your teams, research data, and other stuff. This can be key to the successful completion of their assignment. Therefore, get ready with a checklist to onboard the contractor. Introduce them to the tools you will be using – project management tools, payroll software, knowledge bases, and the like.

Step 7. Monitor progress and evaluate performance.

Although contractors are autonomous workers, it is a nice idea to cross-check if they are doing well with the task. Ask additionally if they need more training or information on the project. Use time-tracking tools and schedulers where possible to track their work hours.

Step 8. Work on feedback.

Evaluate the final work and provide feedback. For example, you can leave a shoutout on the relevant freelancer platforms. If you want to re-engage the contractor for future projects, it is crucial to understand what motivates them. Contractors differ from full-time employees in terms of salaries, benefits, and even how they advance in their careers.

Managing contractor workforce is efficient with Juggl

From the start, Juggl was created to simplify global hiring and manage contract employees, observing global contractor compliance. The platform streamlines managing contractor workforce whenever they are.

The contractor management software allows you to leverage contractors and full-time employees alike in one interface.

Here are some features that make the whole process a breeze:

1. Contractor payroll to track contractor salaries at per hours, per project, and other rates you define.
2. Contractor profile management to quickly access contract details, personal data, pay rates, signed policies, and other compliance documents.
3. Contract management to handle contractor-related documents, upgrade a person from an employee to a contractor and vice versa. 
4. Time-tracking tools, natively integrated into the platform, to track contractor’s schedules or earnings based on productivity/hours worked.
5. Custom alerts and reminders for important dates: due payment dates, approaching termination or extension of contracts, etc.
6. An integration with DocuSign to enable the possibility to sign e-documents.
7. Integration with payment processing platforms, such as PayPal, Wise, Payoneer, etc. or banks for quick and streamlined payments.
8. A native BambooHR integration to hire and onboard contractors quickly in one tool.
9. A self-service portal for contractors where they verify their work hours and pay rates to ensure that the invoices they receive are fair.

See how Juggl can help you manage contractors

Contractor management outsourcing – for or against?

Managing contractors without expertise may leave you at a loss. Remember contractors are not a cheap workforce or somebody you are not obliged to anything. Working with contractors requires even more work discipline.

The Juggl team has a proven track record of managing global workforce and minimizing red-tape. The customer story shows how the contractor management software and EOR services helped the tech company to:

• Pay contractors the right amount at the right time
• Handle independent contractors and contract employees alongside full-time employees
• Keep track of policies, legal documentation, and contract agreements
• Manage benefits for salaried and contract employees.

If you are interested in these features or want to learn more about how we could help you manage contractors, contact us.

Frequently Asked Questions:

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1. What is a contractor?

A contractor is somebody who is paid by another company to work on a certain project for a defined amount of money over a period of time. We are used to talking about contractors as self-employed individuals.

As a rule, a contract worker is subject to self-employment tax. Also, contractors handle their health insurance and other social security benefits by themselves.

Contrary to permanent staff, contract workers are not entitled to company-provided benefits, such as paid time-off or sick leaves. On the flipside, they enjoy greater independence in how they work and with whom.

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2. What is the difference between contract employees and independent contractors?

Although the terms refer to contractors in general and may have some similar work arrangements, contract employees and independent contractors are not the same thing.

Contract employees typically establish a longer-term relationship with a company under some form of contract. They deliver their services for a fixed period of time without enjoying the responsibilities and benefits of full-time employees. Unlike with freelancers, contractors may be tied by commitments with only one of their clients during the contract duration.

Examples of contract employees can be software developers, UX/UI designers, media consultants, attorneys, HR consultants and recruiters, financial auditors, etc.

Unlike contract employees, independent contractors, also known as freelancers, deliver their services on a per-job basis. Freelancers are the most flexible and can work with multiple clients at once.

Traditionally, we think of freelancers as remote workers, such as designers or journalists. However, the examples of independent contractors may also include those who deliver in-person services on the premises: plumbers, electric technicians, painters, wedding photographers, etc.

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3. What is a global contractor?

A global contractor, also called an international contractor or foreign independent contractor, is somebody who works for a business while residing in a country other than where the business is based.

To hire international contractors, employers must navigate complicated tax rules. For example, they need to understand where and how contractors should be taxed, and whether there are any tax treaties between your country and that of the contractor’s residence.