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Performing international contracts

August 10, 2015

Increasing activity in international markets and increasing use of outsourced or contract labor are two of the current trends in business. So what happens when these two trends converge?

Many corporations want to expand into new markets, but they want to conduct thorough tests before they commit to major expense. Indeed, in some cases the nature of their business or the potential volume make it unlikely they will ever formally register a local company. At the same time, they need feet on the ground and sending staff on occasional visits may not be enough to build local credibility. So what are the options?

For some, the preferred route may be to appoint a local agent or distributor / reseller. However, this is often risky because many countries have onerous laws protecting the interests of these local representatives. Such appointments can be difficult and expensive to terminate. Therefore an increasingly popular approach is to hire local staff as independent contractors. For corporations based in the countries like the US and the UK, this seems a logical extension to the types of local arrangements they often follow. And indeed, in countries with liberal labor laws, it may be a fine approach. But unfortunately there are not many countries as liberal as the US and the UK.

I write about this partly because it is an interesting topic, but also because I encounter a growing number of situations where companies win an international contract and then need to hire local staff for its fulfilment. Therefore anyone involved in international contracting needs to be aware of the potential challenges associated with contract performance.

Many will be aware already of the issues associated with sending your own staff from an overseas location. Potentially they will be working illegally (no work permit) and in addition may fall foul of local tax authorities at both a personal and corporate level (for the company, it could be deemed that they have created ‘permanent establishment’). So hiring independent contractors seems an attractive option. They are arm’s length; they are personally responsible for reporting income and paying tax. It seems simple. But it is not; and getting it wrong can be costly in terms of compensation, penalties and taxes levied.

There are several things you must consider in this situation. While specific rules vary across jurisdictions, the basic principles tend to be similar. The tests applied to determine whether this is really a contractor or a de-facto employee include whether or not they market services to others; the duration of their appointment; whether they determine their own work schedule and workload management; whether their independence is evident to external parties; whether they receive benefits from the principal, such as vacation entitlement or health cover; whether they carry business risk and in particular the potential for profit and loss.

If you need to know more on this subject, law firm K&L Gates has produced an invaluable guide.

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