How to Find and Pay Contractors in India: A Guide for US Employers

India is a top destination for US employers looking to hire abroad, especially when it comes to hiring in tech and customer support. Learn best practices for hiring and paying contractors there.

Rachel Mindell
Rachel Mindell
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If you're looking to hire contractors in another country, India is an excellent option. Shared language, political alliances, and cultural affinities between India and the US have inspired many American companies to employ talent in India, and India remains a top destination. In fact, since 2020, the demand for contract work, especially in IT, has grown significantly in India and is predicted to continue doing so.

Whether you're looking to hire software developers or customer support team members, now's the time to set your business apart: attract the best independent contractors using the following suggestions. You'll get familiar with key terminology and learn how to find and pay contractors in India.

Photo of birds flying over the water near Jal Mahal, Jaipur

Understanding employee and independent contractor designations👷🏽‍♀️

In India, there are multiple categories for workers and employees. The term “worker,” according to the Factories Act of 1948, refers specifically to a person working in manufacturing, either directly or with an agency.

Employees of any kind can be referred to as “employees,” regardless of whether they are a workman or not (see below), and regardless of their role type (i.e., permanent or temporary). All independent contractors can be referred to as employees, and some can also be referred to as workers.

According to the Industrial Disputes Act, employees (including contractors) in India are distinguished in the following way: workmen vs. non-workmen. A workman is defined as “any person (including an apprentice) employed in any industry to do any manual, unskilled, skilled, technical, operational, clerical or supervisory work for hire or reward.”

The Industrial Employment (Standing Orders) Central Rules of 1946 state that workmen may be employed in any of the following types of roles: permanent, temporary, apprentice, probationer, or badlis (a substitute).

Who is considered an independent contractor in India?

Contract employment in India is regulated by The Contract Labor (Regulation and Abolition) Act 1970 . An independent contractor is a workman and person employed to “produce a given result for the establishment” (beyond merely supplying manufactured goods) by providing labor or subcontracting labor. A contract worker (also called a contract laborer, contractual laborer, contractual worker, or agency worker) is a workman engaged in contract labor, employed either by an independent contractor or indirectly by an establishment or company employing more than 20 workers on a contractual basis.

Contractors and contract workers in India often have more projects going than traditional employees and may also work for more than one employer. Independent contractors in this country can also include temporary, fixed-term, gig, and platform workers:

Temporary and fixed-term workers. All labor statutes are applicable to non-permanent employees, including temporary workers and those on a fixed-term contract.

Gig and platform workers. Gig and platform workers are a designation of laborer newly recognized by The Code on Social Security, 2020. Gig workers perform roles that fall outside of a “traditional employer-employee relationship”—their work is often hourly or part-time, and temporary. Gig workers can include freelancers, and even part-time professors. Platform workers generally work for organizations providing services through an online platform directly to consumers—drivers that work for a company like Uber are a good example.

Contractors and contract laborers are not eligible for benefits mandated by law for full time employees.

Nighttime view of Durgam Cheruvu, Telangana, near Hyderabad

How to hire talented contractors in India: 3 important steps 🌟

Finding a great foreign contractor (or many) in a new country requires the same best practices you’d employ to hire talent anywhere. Focus on compliance and a clear job description in your search for international talent to enhance your business.

Indian employment law is determined by the Indian Constitution and the Concurrent List (Seventh Schedule). The Contract Labor (Regulation and Abolition) Act (CLRA) prohibits the use of contract labor for activities which are “perennial in nature” and usually completed by workmen with employee status at the business. If a business wishes to hire more than 20 independent contractors, they must obtain a so-called “principal-employer” registration certificate followed by a license.

Though not yet in effect, the CLRA was subsumed by the Occupational Health, Safety and Working Conditions Code 2020 (OSH Code). Once enacted, every independent contractor employing 50 or more contract laborers (as opposed to 20) will need to obtain a license. Further, the principal-employer registration will be replaced with a common registration for every establishment employing at least 10 workers.

The OSH code also (1) introduces higher penalties for non-compliance with contract labor laws, especially regarding employee misclassification, (2) differentiates contract labor from workman status, and (3) introduces regulations regarding an establishment's “core activity,” which limits the ways contractors and contract labor can be engaged. Find full details here.

Income tax, tax policy, and tax liability

For India, as with hired contractors in any foreign country, you'll want to be mindful of taxes due, withholding the correct tax amounts, and transmitting them to the proper tax authorities.

US employers should require all independent contractors from India to complete an IRS W-8 BEN tax form, which collects Nonresident Alien (NRA) taxpayer information.

With the exception of those on a fixed, long-term contract, a contractor is considered self-employed and must pay tax. Self-employment taxes can be deducted from independent contractor pay up front, in a system called TDS (Tax Deducted at Source), a system for tax withholding. As part of its pandemic relief program for taxes, the Indian government reduced TDS in 2020 from 10% to 7.5% of contractor income.

Self-employed individuals are also required to file income taxes each year by July 31. Failure to submit these taxes may result in a fine of INR 10,000. For contract employees, per the Income Tax Act of 1961, tax liability depends on taxable income level (for total income) and age.

Minimum Wage

Minimum wages vary across India as a result of the Minimum Wages Act of 1948 which allows local governments to set wage rates. Once implemented, the Code on Wages of 2019 will establish a standard minimum wage for all employees including foreign contractors, set by the Indian government based on factors such as employee living standards and geographic region. Learn more about minimum wage payment here.

Working conditions

Indian law aims to protect employees and workers through legislation on employee safety, child labor, harassment, discrimination, and privacy. You can explore these topics in detail by reading this guide to employment law in India.

Termination

Per the Industrial Disputes Act of 1947, terminations related to misconduct by workmen, no written notice or notice period is required but so-called natural justice is — this means the concerned employee (including independent contractors) must be made aware of allegations and given the opportunity to defend themselves before an unbiased committee. If an employer fails to provide necessary cause, this termination will be deemed invalid.

Employers with more than 100 workmen are required to obtain prior permission from the appropriate government before dismissal. Termination of non-workmen is subject only to terms of any employee contract or agreement.

2. Post a clear job description 📋

Your search for the perfect independent contractor depends on a well-crafted job description that explains what you’re looking for in an ideal candidate. Make sure to include the following in your job posting for an Indian contractor:

  • A summary of the role and how it fits into your company
  • The requirements, responsibilities, and skills necessary for the job
  • The length of the contract (e.g., six months, one year)
  • Scope of work (e.g., 10 software bug fixes per month, 15 hours per week, etc.)
  • A statement that the position will have independent contractor status instead of full-time or part-time status
  • Request for a portfolio of past work

Once you’ve created a job description, be sure to share  it on your website and social media, with your networks, on relevant job sites for professionals in India, and even with a staffing company or recruiting firm.

Popular, free job posting sites for India include KillerLaunch, Indeed, Freshersworld.com, PlacementIndia, ClickIndia, and WorkIndia.

3. Prepare a contract or agreement ✍🏽

A written employment contract or agreement is generally not required in India in order to establish an employer-employee relationship. Exceptions to this include specific contract requirements in Karnataka and Delhi, and some local statutes that pertain to business.

Although you may not have to, creating a written agreement or contract for hiring international contractors in India is highly advisable. This document should include, at the very least, project details or scope of work, timeline plus start and end dates, fees and payment structure, and termination.

Be aware that India’s labor laws supersede provisions included in employment contracts and agreements—be sure to check all policies and clauses your company uses against the law. It should also be noted that, by the Indian Contract Act of 1872, all agreements are not considered contracts but all contracts are considered agreements. This article clarifies the difference.

If you choose to create an independent contractor agreement (or ICA), there are a number of provisions you should consider, since they are the most often negotiated. These include intellectual property rights, terms of service, payment, representations and warranties, confidentiality, and liabilities. See this article for details on each of these provisions.

If you make a contract, be aware: while it is common for employers in India to include restrictive covenants like non-compete, and non-solicitation, Section 27 of the Indian Contract Act makes these provisions technically unenforceable.

Creating an agreement or contract when hiring contractors for your business is highly advisable. Not only are these documents useful in potential disputes, but they also provide clarity for all parties, especially regarding payment.

Photo of vehicles on a road in New Delhi

Payment for independent contractors 💲

You may choose to pay independent contractors in India using US dollars or India’s currency, the Indian rupee (INR). As of February 2022, the exchange rate of US dollars to Indian rupee is 75.09. This exchange rate is close to the highest it's ever been—the exchange rate peaked at 76.67 in 2020. Staying mindful of the exchange rate will help you make the smartest decisions regarding contractor payments, whether you use a service to help or manually issue international payments from your company bank account.

You may choose to pay an international contractor upfront (in India, contractors can be paid up to 33% of their total fee right away) or issue payment to contractors who send invoices after their work or a term of service is completed. In either case, how you send money to the foreign contractors that support your global team (and whether you use a service to do so) should be determined by the convenience, security, and fee structure a payment service includes.

You'll want to make it easy and fast for independent contractors to receive payments with minimal deductions and payment fees. Using a digital payment service can make paying contractors easier for your business but exchange rate markups, for example, can eat into contractor payments. Here are a few options to consider for making payments to independent contractors in India:

Bank transfers using SWIFT 🏛

Many companies use SWIFT (The Society for Worldwide Interbank Financial Telecommunications), a network of global financial institutions, to transfer international funds to contractors. SWIFT is a safe, convenient option for transferring payment directly to an independent contractor's bank account.

Unfortunately, with SWIFT, payments are routed through multiple banks before they reach the independent contractor’s bank, and transfer fees are charged each time. Even if the same institutions are used for every bank transfer to pay a contractor, the total cost for transferring funds may vary each time. This can be a hassle for both your company and your contractors.

Money transfer companies 💳

Money transfer companies including Remitly, Xoom (owned by PayPal), Ria, Istarem, OFX, Transfast, and Wise (formerly Transferwise) can be a convenient way to pay wages and send money because of their online accessibility and mass payment tool options. These services may also mark up exchange rates.

There are some downsides to using these services for digital payments, however. These companies may require that payees use company-issued debit cards to access their payments, which can entail withdrawal fees. Furthermore, a money transfer company may charge percent-based transfer fees or they may charge exchange rate markups.

Traditional money transfer services 🏦

Companies like MoneyGram and Western Union offer international wire transfer services for paying overseas contractors, both online and using physical locations. Often these companies will have a more favorable markup on currency rates for payments to another country than traditional banks do; however, percent-based fees or markup fees are still often charged for wire transfer and currency exchange rates.

Money orders 💸

To send a money order, issued by the Indian Postal Service, an employer pays the fee due to the foreign contractor, plus a small markup. This money order is delivered to the independent contractor in cash at their address within a few days, after which a receipt is returned to the employer. Although money orders are helpful for foreign contractors in remote areas, they require a bit more time and offer less security than other options.

For more best practices on how to issue payments to independent contractors in another country, check out this list of do's and don'ts to ensure the best experience for everyone.

Photo of exterior of Hawa Mahal palace, Jaipur

For more successful partnerships with independent contractors 🤝

The process of hiring contractors, especially in other countries, can be complex. You'll want to avoid common pitfalls like misclassifying contractors (or foreign employees), disregarding labor laws, or mishandling international payroll.

Pilot can help. We specialize in user friendly remote payroll, benefits, and compliance for US-based companies hiring globally. We can help ensure that you're staying up-to-date and compliant with contractor regulations in India. Contractors love us, too, as we do not mark up exchange rates, so your team members can get paid more. Our team of HR and legal experts is happy to be your best support team as you navigate questions and build your international team.


Interested in learning more about Pilot? Schedule a demo with one of our experts.


⚖️ Legal Disclaimer: The information contained in this site is provided for informational purposes only, and should not be construed as legal advice on any subject matter.


Cover photo of the Taj Mahal, Agra, by Sylwia Bartyzel on Unsplash

Photo of Jal Mahal, Jaipur, by Aditya Siva on Unsplash

Photo of Durgam Cheruvu, Telangana, near Hyderabad by Rishabh Modi on Unsplash

Photo of vehicles on a road in New Delhi by Laurentiu Morariu on Unsplash

Photo of Hawa Mahal palace, Jaipur, by Aditya Kumar on Unsplash

Rachel Mindell
Rachel Mindell
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