How to pay international contractors in Pakistan
Hiring contractors in Pakistan gives you access to the country’s large pool of highly skilled labor. But when it’s time to pay them, how can global companies keep up with the international exchange rates, payment methods, and Pakistan’s strict labor laws?
In this step-by-step guide, we lay out the steps to correctly onboard and pay freelancers in Pakistan, all while complying with the country's system of laws.
Step #1: Classify your workers in Pakistan
The Pakistani government has separate legal definitions for an independent contractor and an employee based on their working relationships with a company.
- Contractors handle temporary or one-off tasks and often work with multiple clients at once. They decide how and when they work—and usually send invoices for their services.
- Employees work exclusively for a single employer, who determines their working hours, location, and job performance.
According to the Industrial and Commercial Employment (Standing Orders) Ordinance, employers are mandated to provide workers with an employment contract that explicitly outlines the specifics of their service. This underscores the significance of accurately classifying Pakistani workers; any misclassification, regardless of intent, can result in serious repercussions such as legal proceedings, financial penalties, and detrimental effects on your company's image. You might also have to compensate misclassified workers with back payments and benefits.
To avoid confusion, here's a helpful chart outlining the main differences between contractors and employees under Pakistan's labor laws:
Contractors
Employees
High level of worker control.
Contractors enjoy more freedom in how they tackle their work and when they get it done.
More direction from the employer. Employees receive more guidance from their employer, including specific instructions on how to perform tasks and set working hours.
Tools owned. Contractors use their own equipment and tools.
Tools provided. Employees typically receive equipment and tools from the company.
Less integrated. Contractors are independent, often working remotely and using their own resources.
Highly integrated. Employees are more integrated into the employer's organization, many even working on-site.
No entitlement to employee benefits. Contractors are not entitled to company benefits or protections and handle their taxes independently.
Entitled to employee benefits. Employees are entitled to receive benefits like minimum wage, overtime pay, vacation pay, health insurance, retirement plans, and paid sick leave.
Time-bound engagement. Contractors are usually hired for certain projects or timeframes.
Indefinite engagement. Employees are hired on an indefinite basis.
Risk of loss and more liability. Contractors may shoulder more risk and liability for their work.
No risk of loss and liabilities. Employees are generally protected from work-related liabilities.
Subcontracting allowed. Contractors can delegate work to others or hire subcontractors.
No subcontracting. Employees can't delegate responsibilities without company approval and are expected to do their own work.
Step #2: Determine the best way to pay your contractors in Pakistan
After identifying your new Pakistani hire as a foreign contractor, it’s time to find a suitable payment method.
The good news is that you have many options to pay your remote workers compliantly, each designed to simplify the process of making international payments. This includes:
- Bank transfers: You can open a Pakistani bank account and use it to deposit funds directly into the contractor’s account. Alternatively, you can use your bank to send an international transfer to pay them.
- International money orders: This can be a slow and cumbersome process. You have to purchase the money order physically, and contractors must deposit it upon receipt. Moreover, money orders often come with fees and unfavorable exchange rates.
- Digital wallets or money transfer services: Consider using digital payment platforms like Wise and PayPal to pay your contractors. However, it's important to note that not all platforms are available in Pakistan (e.g., Venmo only operates within the United States). Additionally, currency exchange rate fluctuations make it challenging to predict expenses accurately.
- Global payroll services: Typically, contractors aren't included in the regular payroll, as they don't undergo the same withholdings as employees. Instead, they invoice for their services, and the payments are processed through accounts payable. However, with Rippling, you have the convenience of paying Pakistani contractors alongside the rest of your global workforce.
Step #3: Use global payroll software to process payments for Pakistani contractors
While some payment methods might not be as reliable or convenient, there's one standout solution: using global payroll software. It's the way to go for making quick and hassle-free international payments to Pakistani contractors.
With Rippling, you can pay international contractors across the world. Here’s a preview of how Rippling’s global payroll system works:
Step #4: Understand the tax considerations in Pakistan
When working with independent contractors in Pakistan, you won't have to worry about handling their income taxes. They are responsible for filing their own taxes, which makes things easier for you.
However, depending on your contractors' tax status and the nature of their work, you might need to provide them with tax forms like Form 1099 for US contractors or the appropriate local equivalent for Pakistani contractors. If you're based in the US, you'll also want your contractors to fill out an IRS Form W-8BEN, confirming their contractor status.
Effortlessly manage contractors around the world
Managing contractors is a breeze with Rippling. You can pay your international workforce in just one system, regardless of their location.
FAQs about paying international contractors in Pakistan
Does an employer need to withhold taxes when paying contractors in Pakistan?
No, foreign companies aren't required to withhold payroll taxes when paying contractors in Pakistan. Contractors are responsible for paying and filing their own taxes. However, companies can voluntarily withhold taxes on behalf of the contractors if both parties agree to it.
Does Pakistan's minimum wage apply to independent contractors?
No, minimum wage laws in Pakistan don't apply to independent contractors. These laws are specific to employees.
Do Pakistani contractors receive benefits?
No, independent contractors in Pakistan don't receive benefits in the same way as employees. Providing employee benefits to contractors can also raise the risk of misclassification in legal terms.
Can payments to contractors in Pakistan be made in a foreign currency?
Ideally, it's recommended to pay international contractors in their local currency, which in Pakistan is the Pakistani rupee (PKR). However, with a written agreement, payments can be made in another currency.
Many international payment providers, like Rippling, support contractor payments in either Pakistani rupees or your currency.
Is it possible to manually pay contractors in Pakistan?
Yes. Small business owners often resort to manual payment processing as a cost-cutting measure. However, as your business expands and you engage multiple contractors in Pakistan or internationally, this approach can become time-consuming and inefficient.
It's crucial to know the risks associated with manual payment processing:
- Compliance: Manually running payroll leaves you vulnerable to human errors and omissions, which could lead to compliance issues.
- Security: Manual payroll processing, including spreadsheets or paper records, poses significant security risks. Sensitive contractor information can be vulnerable to being lost, stolen, or misused.
- Contractor experience: Manually paying contractors can be slow and cumbersome. Contractors may have a hard time knowing when they'll be paid and what exactly they're being paid for.
The solution is simple—make payroll automatic with Rippling. By synchronizing all your business's HR data with payroll, Rippling eliminates the need for manual data entry entirely.
How do you turn a contractor into an employee in Pakistan?
Converting an independent contractor in Pakistan to an employee has several key advantages and may be the right move for your business. Here are some reasons to consider this transition:
- You envision a long-term commitment with the contractor as a valuable part of your team.
- Offering benefits to the contractor can help retain their services.
- If you discover your current arrangement isn’t compliant with local regulations in Pakistan, consider converting the contractor to an employee to ensure legal compliance.
- Converting them to an employee can provide additional safeguards for your intellectual property.
The process of converting contractors to employees in Pakistan involves several steps:
- Draft a new, legally compliant employment contract that outlines the terms and conditions of employment.
- Ensure compliance with relevant legal requirements. You could do this by either setting up a legal entity in the country or using an employer of record (EOR).
- Collect all the important documentation from the employee, including their national identity card, tax registration, and bank account details. For instance, employees in Pakistan are required to provide Form IT-3, an income tax return form, once they are employed.
- Register the employee with the appropriate local authorities to adhere to labor laws and provide essential employee benefits. Additionally, companies must register with the Federal Board of Revenue (FBR) by submitting a TRF01 taxpayer registration form or registering through the FBR website.
- Offer the legally required employee benefits. Be sure to clarify those in the employment contract.
Rippling and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any related activities or transactions.
