What is Independent Contracting?
There are two main ways a business can structure working arrangements with people: They can employ them (either full-time or part-time) or they can hire them as independent contractors. As their different names suggest, these two classifications are not equal.
Independent contracting is ideal for people who want more freedom in how they work and will likely work with multiple clients. That freedom, however, comes with loss of the protections afforded to workers classified as employees.
Freelancing, as a work arrangement, is usually done through an independent contracting mode of work. The individual provides services to another organisation (the client) on a contract basis.
In this arrangement, the independent contractor is not an employee of the company. They work autonomously and have control over how they perform their work, including when, where, and how they complete their tasks, and are not required to follow routines typically required of the company’s employees.
Independent contracting is very common and offers both clients and contractors flexibility in terms of project-based work and access to specialised skills without the commitment and overhead associated with traditional employment relationships.
How are independent contracting agreements created?
The relationship between the independent contractor and the client is formalised through a written agreement that outlines the scope of work, deliverables, payment expectations, and other terms and conditions.
These contractual agreements typically state and define what is a purely commercial relationship. There is no mention of benefits, such as health insurance, retirement plans, or paid time off (PTO) because the individual isn’t an employee of the company.
Independent contractors often work with multiple clients simultaneously or on a project-by-project basis, giving them complete control of when and how they work and allowing them to diversify their income sources. However, their work arrangements should generally not be long-term or permanent, and contracts may be terminated once the specified work is completed. As a result, independent contractors are not guaranteed any kind of job security and are responsible for securing continued agreements and partnerships with new clients on their own.
How are independent contractors paid and taxed?
Independent contracting agreements stipulate when and how the contractor will be paid by their clients. Contractors set their own hourly or service-based rates that are then agreed to by the client. Payments can be made to contractors through a number of different systems agreed to by both parties.
It is up to the contractor to send invoices for payments due and to ensure their clients pay those invoices on time and in full.
Because they are not, by definition, employed, independent contractors are also responsible for paying their own taxes, including income taxes, social contribution taxes for programs like national healthcare and social security, and typically receive compensation from their clients without tax withholdings.
Who is responsible for providing supplies and equipment to an independent contractor?
Independent contractors typically incur their own business expenses, such as equipment, tools, and office space, and are not reimbursed by their clients. However, some contract agreements may include stipulations outlining special cases where the client should reimburse the contractor for certain expenses or services.
Can a business legally employ independent contractors?
The short answer is ‘yes’ – as long as the worker is a genuine contractor who is not working full-time for an unlimited amount of time. However, it's important to note that the classification of workers as independent contractors or employees is a subject of legal scrutiny. Every country has specific criteria and checklists for what constitutes full-time employment and what does not. This may be a case of the contractor registering specific government agencies or tax authorities, as in Denmark. Misclassification can lead to legal and financial consequences.
For specifics on what differentiates independent contractors from gainfully employed workers in a particular country, check out our country guides.
Labour laws and regulations regarding employment vary by country and region, and authorities often assess the nature of the work relationship to determine whether a worker should be classified as an employee and therefore extend government-mandated employee protections. Misclassifying employees as independent contractors to avoid legal or tax obligations can result in penalties and liabilities for employers.
Employ your workers legally with Boundless
Whether you plan to employ remote full-time workers, hire temporary independent contractors, or work with a mix of both, Boundless can help ensure you remain compliant with global employment laws and regulations.
Get in touch with one of our experts to learn more about your options.