Compliantly Engage Contractors in Bangladesh

Any business hiring in Bangladesh should understand the differences between independent contractors and employees. Fines or penalties may be issued to businesses that are hiring independent contractors under the guise of employment. 

Understanding the differences between employees and independent contractors is critical to compliantly engaging workers in Bangladesh. It is important to work with a partner like Worksuite to ensure you can navigate the ambiguities and uncertainties of Bangladesh’s employment landscape.

Bangladeshi labor law does not distinguish between employees and independent contractors, although there is a distinction between employees and ‘workers’. According to the Bangladesh Labor Act 2006, a worker is defined as:

“Any person including an apprentice employed in any establishment or industry, either directly or through a contractor, [by whatever name he is called,] to do any skilled, unskilled, manual, technical, trade promotional or clerical work for hire or reward, whether the terms of employment are expressed or implied, but does not include a person employed mainly in a managerial, administrative [or supervisory] capacity.”

In practice, an employee (which includes the sub-category of “worker”) undertakes work in exchange for a salary, while an independent contractor is hired and paid for achieving a specific end result as stipulated in their contract. 

Legal provisions concerning employment and hiring freelance contractors are rather vague, which might serve as a deterrent. It is therefore important to leverage an employment service partner like Worksuite when hiring in Bangladesh to compliantly navigate the ambiguities and uncertainties of Bangladesh’s employment landscape.

Who is an independent contractor?

Labor law in Bangladesh is relatively underdeveloped compared to developed countries. Distinguishing between an employee and an independent contractor can be difficult to determine in underdeveloped labor markets, and therefore a range of factors may be risk factors for incorrect hiring methods. Individuals are generally considered to be independent contractors if they:

• Are subject to relatively little control by the hiring company, which means they are free to decide when, where, and how they complete their tasks.
• Do not have fixed hours of work that are determined by the hiring company.
• Can choose the location from which they work.
• Provide their own equipment, rather than receive it from the hiring company.
• Can be (or are expected to be) dismissed once the contracted work is complete. 
• Are not integrated into the hiring company’s organizational structure.
• Are paid for a specific project or task rather than on a recurring basis.
• Can refuse to perform a task (unless that task is part of their contract).
• Are not entitled to a minimum amount of work or a minimum amount of pay.
• Are not listed on the hiring company’s normal payroll

There are two main categories under which independent contractors operate in Bangladesh: 

• Freelance: This is the most common category for independent contractors in Bangladesh, especially amongst the younger and digitally literate population. Freelancers must file and pay their own taxes. Freelancers must register for a Taxpayer’s Identification Number (TIN) from the NRB, which can be done through the e-TIN portal. Freelancers working in software development and IT will not need to pay taxes until after 30 June 2024.
• Limited company: Independent contractors can also set up a limited company. The most common types in Bangladesh are Private Limited Company (LLC) and Public Limited Company (PLC), although One Person Company (OPC) can also be established. Each of these structures entails different tax implications, and most sectors allow 100% foreign ownership of companies. New companies must register with the Registrar of Joint Stock Companies and Firms (RJSC) to obtain a trade license, TIN, VAT certificate, and other mandatory documentation. 

There are two main types of contracting models for working with independent contractors in Bangladesh.

A. Direct engagement of the contractor as self-employed or registered via their own company. Under this model, the hiring company engages directly with the independent contractor – either as an individual sole trader or as a limited company (see above) – and establishes a direct contract for the provision of services. The hiring company then pays the independent contractor directly, in accordance with the contract.

B. Third party. These companies come in two forms and both are specially designed to vet and engage freelancers compliantly as either contract employees or independent contractors on your behalf.

1. Temp agency: Here, the hiring company engages with a staffing agency, which in turn supplies one of its own independent contractors to deliver the contracted services. The hiring company pays the staffing agency directly, in accordance with the terms of the contract. The contract is, therefore, between the hiring company and the staffing agency, while the agency pays the independent contractor through a separate contractual arrangement.
2. Umbrella company (“contracting agency”): Independent contractors can also work through an umbrella company. This turns a ‘self-employed’ individual into a legal ‘employee’ of the umbrella company itself. The contractual relationship is between the umbrella company and the client, with the umbrella company running payroll and administration for the independent contractor. The umbrella company invoices the client directly, while paying the contractor via PAYE as a standard employee. Umbrella companies levy a fee on the contractor to cover their costs.
3. Hiring partner: The hiring company can also work with a hiring partner who helps them vet potential independent contractors, set up contracts, ensure the contractor is properly classified, onboard, manage contractors and make payments to them. 

Companies hiring independent contractors in Bangladesh should avoid making payments directly through their payroll system. Beyond these guidelines, there are no specific legal requirements related to paying contractors in Bangladesh. The contract should stipulate the preferred payment method agreed upon by both parties.

Bangladesh has a progressive tax rate, and the tax year runs from 1 July to 30 June. Employees who are residents pay income tax ranging from 10% (for earnings up to BDT 400,000) to 30% (for earnings above BDT 3,000,000), while non-residents pay a flat tax rate of 30%. All employees earning over BDT 250,000 (men) or BDT 300,000 (women and over-65s) still need to file tax returns with the National Revenue Board (NRB). Additionally, employers must submit statements of tax deductions to the NBR each month. 

Independent contractors both file and pay their own taxes and are subject to the same progressive tax rates as employees. Tax returns can be filed online with the NRB’s E-Filing service. Until 30 June 2024, individuals earning income from software development, information technology enabled services (ITES), or the Nationwide Telecommunications Transmission Network (NTTN) are tax exempt, although they still need to file tax returns. 

There is no social security in Bangladesh, although companies may be required to contribute 5% of their profits to the Workers Profit Participation Fund, depending on the size of the company.