As you expand your company globally, hiring independent contractors in Uruguay is an attractive option. However, before starting the process, you must get familiar with local laws and worker classification requirements, as Uruguay takes misclassification very seriously.
Bear in mind that Uruguayan courts are likely to rule in favor of misclassified workers—which can mean penalties and fines for the employer. In February 2022, the 20th Labor Court of Montevideo ruled that Uber misclassified its workers as independent contractors, and there was an existing employment relationship as defined by the International Labor Organization.
Worried about classifying and paying Uruguayan contractors compliantly? Read on for our step-by-step guide on hiring and paying independent contractors, according to Uruguay's employment laws.
Step #1: Classify your workers in Uruguay
It's important to note that the Uruguayan government has different standards for contractors and full-time employees. In Uruguay, independent contractors can:
- Set their own schedules
- Work with their own software and tools
- Work for other clients
Misclassifying contractors in Uruguay may result in fines and penalties from The Dirección General del Trabajo (DGT), the government agency responsible for enforcing labor laws.
While not required by law, a written contract is a great option for documenting the terms of your relationship with a contractor. This can help clear up any questions regarding classification in the future.
To help you decide how to classify your workers, consider the following differences between employees and contractors:
High level of work autonomy. Contractors must receive autonomy over where, when, and how they complete their work.
More direction from the employer. Employees are generally subject to more control from their employer and must follow specific instructions to complete their work.
Equipment and tools are provided by the worker.
Equipment and tools are typically owned by the company.
Less integrated. It is common for contractors to operate independently, perform their duties remotely, and use their own equipment.
Highly integrated. Employees are usually more involved in the employer's organization, often working in an office.
No entitlement to benefits. Contractors are not entitled to the same benefits and protections as employees. They also manage and pay their own taxes.
Entitled to employee benefits. Employees are entitled to benefits and protections, such as minimum wage, vacation pay, overtime pay, health insurance, severance pay, and paid sick leave.
Time-bound engagement. Contractors are typically engaged for a specific period of time.
Indefinite arrangement. Employees are generally hired for an indefinite time period per their employment contract.
Higher risk of loss. Contractors may assume more risk and liability for the work they perform depending on their business model.
No risk of loss. Employees are generally protected from liability for work-related issues under their company.
Subcontracting. Contractors can delegate work to be performed by another person or company.
No subcontracting. Employees are expected to do their own work and can only delegate tasks with approval.
Step #2: Determine the best way to pay your contractors in Uruguay
Establish a written service agreement that covers all critical aspects, such as payment amount, method, currency, and schedule, if you plan to hire a Uruguayan contractor. This way, you can ensure that both parties are on the same page and avoid any misunderstandings or discrepancies in the future.
Global companies have more options than ever to pay their contractors in Uruguay:
- Bank transfer. You can quickly transfer funds to a Uruguayan account from your US bank account or open a local account in Spanish, which may take longer if you don’t have a legal entity in the country.
- Digital payment platforms. Paypal and Wise are well-known payment options when making digital payments in Uruguay. Remember that paying in Uruguayan Pesos (UYU) may impact the exchange rate, and there may be fees and coverage to consider.
- International money orders. Western Union now offers online services to send money to Uruguay. However, it often requires in-person pickup, has high fees, and is subject to exchange rates.
- Global payroll services. Typically, contractors invoice for their services through accounts payable at many companies. But with a global payroll system like Rippling, you can pay Uruguayan employees and contractors, wherever they are, in a single pay run.
Step #3: Use global payroll software to process payments for Uruguayan contractors
There are several ways to pay independent contractors in Uruguay, but many require manual processing, which can slow down your company's global hiring. To efficiently manage a global team, you need an automated payroll system in your corner.
With Rippling, you can pay contractors across the world quickly and compliantly. Here’s a preview:
Step #4: Ensure your Uruguayan contractor has the right tax information
Employers aren't obligated to withhold and pay income taxes for contractors in Uruguay. Contractors must file their own taxes with the Dirección General Impositiva (DGI), the Uruguayan tax authority.
Employers can choose to withhold taxes, including income tax, public health insurance, social security, and other deductions, for contractors under the PAYE system.
Offload your paperwork and process tax payments automatically with Rippling.
Frequently asked questions about running payroll for contractors in Uruguay
Do you need to withhold taxes when paying contractors in Uruguay?
No, companies don't have to withhold payroll taxes when paying independent contractors. Contractors are responsible for their own taxes.
However, employers can offer to withhold taxes under the PAYE system if they choose to, including income tax, public health insurance, social security, and other deductions.
Do Uruguayan contractors get benefits?
No, independent contractors in Uruguay do not receive benefits, including paid public holidays, maternity leave, severance pay, and sick leave.
Providing benefits to independent contractors can create confusion around their classification, risking potential legal consequences.
Can you pay contractors in Uruguay in your home currency?
It’s usually best to pay international contractors in their local currency (Uruguayan pesos for contractors in Uruguay). However, many international contractors prefer to be paid in currencies like USD, so be sure to establish a written agreement explicitly stating the chosen currency.
Can you manually pay contractors in Uruguay?
Businesses may manually run payroll or use cash as payment to save on fees, but this method is time-consuming and error-prone, especially as your business grows.
Manually processing payments also comes with some risks:
- Security. Processing payroll manually using spreadsheets or paper records can pose security risks, as sensitive employee information may be lost, stolen, or misused.
- Compliance. This approach can result in errors such as incorrect payment records and overlooked invoices.
Make payroll automatic by using Rippling. Rippling syncs all your business's HR data with payroll, eliminating manual inputs. Employees and contractors get paid on time in a single pay run.
How do you turn a contractor into an employee in Uruguay?
When offering a full-time position to an independent contractor who excels in their role, it’s crucial to reclassify them in compliance with Uruguay's strict labor laws under the Constitution and the International Labor Organization.
The employment contract should specify employee benefits like sick leave, paid time off, maternity and paternity leave, Aguinaldo (or 13th-month salary), notice periods, probation periods, and public holidays.
You can easily manage contractors with Rippling and transition them to full-time employees with legally compliant paperwork, benefits administration, and more. Stay compliant from onboarding to offboarding with Rippling.
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.