As your company grows, you may start hiring globally to meet your goals. Working with independent contractors can be a valuable resource to your company, but it requires knowledge of various laws to ensure that all contractor relationships are fair and legal.
Hiring independent contractors in India
Independent contractors can offer specialized skills for completing projects, but you need to understand the classification to keep the arrangement compliant.
Independent contractors vs. employees
The defining difference between independent contractors and employees is the presence of an employer-employee relationship. Independent contracting does not include this dynamic. The “prima facie test” is a control test that the Supreme Court of India uses to determine if such relationship exists. Governing authorities may also refer to the integration test to classify workers. This test aims to determine if an individual is fully integrated into a workplace and the employer’s care or remains independent of this care, as an independent contractor should. Independent contractor relationships that last more than 240 days may also suggest employee status.
Generally, the factors that set an independent contractor apart include:
- Using personal equipment rather than employer-provided equipment
- Freedom in work location, schedule, processes, and approach to project completion
- Work without direction or supervision
Penalties for misclassification
If governing authorities identify a misclassified independent contractor, your company can face a range of penalties. Possible consequences may include:
- Financial penalties, such as fines or sanctions
- Nonfinancial penalties, such as imprisonment
- Reputational damage
How to hire independent contractors in India
The contractor hiring process should involve 3 key steps.
1. Carefully conduct interviews.
When hiring employees, the interviewer may include questions about character to assess how the candidate may contribute to company culture. When hiring independent contractors, you should avoid questions like these, as they may point to full integration in the workplace. Interviews should emphasize skills and experience that can contribute to project completion. Think of contractor interviews as business transactions.
It’s also useful to clearly define your hiring goals in the job advertisement. Make it clear that you’re looking for an independent contractor, describe the project, and outline any skills required.
2. Create a service agreement.
Companies should create a contract for service for arrangements with independent contractors. This service agreement will lay out any terms of the professional relationship and ensure clarity between both parties. Terms to include are:
- Pay rate and arrangements
- Project description
- Contract duration
- Termination requirements
3. Know how to work with independent contractors.
Any type of in-depth training may imply that you — as the company — are telling the contractor how to do their job, which may lead to misclassification, as this indicates an employee-employer relationship. Keep any training and introductions brief. These may include introducing key players and explaining the workflow for the specific project.
An important step in engaging the services of independent contractors is understanding how to work with them. Independent contractors should not receive the level of control or supervision that employees do; they are generally free to perform the work according to their own schedule and methods.
How to pay independent contractors in India
The distinction between independent contractor pay and employee pay is the payment model. Employees receive salaries, which may be based on annual earnings or an hourly wage calculation. Independent contractors receive a fee for service. Typically, contractors will receive these fees as a lump sum upon project completion, but other terms may be included in the contract for service.
Additionally, the company may be responsible for withholding taxes on service fees paid to contractors — depending on the nature of the services the independent contractor is rendering in India. Companies may prefer to shift this burden to the independent contractors to report and pay taxes, but nonetheless, may face liability for failing to withhold.
Terminating independent contractors
Your contract for service should define the reasons for termination and any payment owed in the event of termination. There are no labor laws regarding minimum requirements for terminating independent contractors.
Turn to G-P when hiring independent contractors in India.
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Contact us to learn more.