Compliantly Engage Contractors in India

Any business hiring in India should understand the important legal distinction between who classifies as an independent contractor, and who can be hired as an employee. Fines or penalties may be issued to businesses who are hiring contractors under what qualifies as legal employment in India. It is important to work with a partner like Worksuite to establish a legal hiring framework that falls under compliance. Common factors weighed include:

• What degree of control and supervision does the company have over the worker?
• Who provides equipment, work space, amenities, internet, etc.?
• Does the company provide benefits such as pension, insurance, or vacation pay?
• What is the nature of the relationship, and how long is the period of work?
• Who has the authority to terminate cooperation?

In India, there is a distinction between a contract of service and a contract for service. An independent contractor in India works under a contract for service, which must explicitly lack any degree of control or supervision from the employer. Be careful to not confuse this term with ‘contract of service’ which is essentially an employment contract.

A contract of service implies a relationship of boss and employee, which establishes a hierarchical degree of power and authority. Note that this type of contract excludes those employed as manager or administrative roles.

A contract for services implies an agreement where one party simply provides for another, using their own resources, skill and knowledge to deliver the service. Consultants, freelancers and agencies fall under this category.

The most important step of structuring a contractor relationship in India is to document the working relationship properly, as to not establish an employee relationship. The risks of reclassification (from contractor to employee) will lead to legal and financial disputes that may harm business.

The key considerations to make when differentiating an Employee vs. an Independent Contractor:

• A contract for service should establish no control or supervision from the employer. It is important to not confuse this term with ‘contract of service’ which is essentially the opposite type of contract.
• India labor laws greatly weigh the degree of authority over a worker to be the key indicator of Employee vs. Independent Contractor. The contract should not establish how the work is performed, when it is performed, or any day-to-day management requirements.
• Employers may list qualifications or skills required by the contractor, or conduct regular quality control inspections without being classified as an employer.
• Benefits provided to permanent employees should not be provided to independent contractors or consultants, as this could be construed as employment.
• The termination clause should allow termination without cause, in order to prevent any stipulations or requirements that might show a degree of control, and thus employment.
• Independent contractors should be paid via invoices or directly. Payment with a recurring salary may indicate that the relationship is one for employment.

Payment to independent contractors is extremely flexible and can simply be determined by both parties within the contract. When working with independent contractors, freelancers or agencies, you’ll need to have an established process for paying them correctly and on time within the contract for service. The most common payment methods include:

• Direct deposits: Direct deposit in India is popular, safe and convenient. The downsides may include transfer fees or exchange rates depending on the financial institution.
• Paper check: While not the safest or most convenient method of payment, less developed regions of India may only offer this option
  
• Money orders: Money orders are similar to paper checks in that they are a good option in less developed regions, and they give you and the contractor a strong paper trail for recordkeeping and taxes.
• Virtual wallets: Global providers of digital wallets may provide a direct way to pay contractors, which they can then move themselves to their bank accounts or debit cards. Keep in mind that not all residents of India may have access to the same payment gateways, so it’s important to establish the payment relationship beforehand.

Independent contractors are responsible for paying income tax if their annual total net income exceeds INR 2.5 lakh. Any income earned from foreign employing entities will be taxed like local income, but there. India’s government offers an easy online e-Filing portal to make the process easy, quick and secure for independent contractors to file tax forms. Independent contractors, freelancers, and consultants are primarily concerned with two tax filings:

• Income Tax Return
  A contractor is required to file an income tax return (ITR)  for every financial year as outlined by the Income Tax Act. The e-Filing portal has a convenient calculator to help contractors file automatically.
• Goods & Services Tax
  Contractors are liable to pay GST if their annual income exceeds INR 20 lakh. Service-based contractors may charge up to 18% GST from clients, to be deposited with the government. Contractors can claim any additional taxation automatically after filing on the online portal. However, they must ensure that their invoices are GST-compliant, so that the invoices are able to be claimed on tax filings.

We can simplify hiring full-time workers in India by acting as the Employer of Record (EOR) on your behalf, handling everything from contracts, onboarding, documentation, payroll, benefits, and workforce management. Reduce your time-to-hire by 90%, slash your overheads, and remain fully compliant.

• Quickly find, hire, and onboard talent in India without setting up your entity
• Prevent expensive legal, contractual, or tax mistakes in India
• Manage contracts, payroll, and global tax forms all in one Worksuite