Direct Contractor vs FTE through an EOR
Global remote work has opened up two new models of engagement - be aware of the pros and cons of both before making the choice that’s right for you
Register for OpportunitiesDirect Contractor
- You enter into a contract in your individual capacity with the company directly
- Kaamwork facilitates contract creation and payments but essentially, you are directly contracted by the company
- As such, there is no entity employing you
Fulltime Employee
- A Company appoints an Employer of Record (EOR) to hire you locally on their behalf
- The Company decides your salary, benefits, leaves, reporting, title, appraisals, and promotions while Kaamwork executes these decisions through its tech platform - simply put, Kaamwork is the HR Admin Partner to your Company
- Legally and on paper, you the employee of the EOR (Kaamwork), but for all intensive purposes, you are an FTE with the Company
Key Considerations
Taxes
- You do save on taxes in the contractor model. Period.
- The savings are material and tempting - should you then eyes-closed jump on the offer? Short answer is NO and listed below are some considerations for you including sense of belonging, benefits, and employment protections
Contractor | Employee | |
|---|---|---|
Salary or CTC (INR) | ₨ 35,00,000 | ₨ 35,00,000 |
Deductions (50% as Contractor, standard like HRA, etc. as Employee) | ₨ 17,50,000 | ₨ 95,700 |
Taxable Income | ₨ 17,50,000 | ₨ 34,04,300 |
Taxes | ₨ 3,51,000 | ₨ 8,67,142 |
Net Take Home | ₨ 13,99,000 | ₨ 25,87,158 |
Effective Income Tax % | 10.03 % | 24.78 % |
Sense of Belonging
Even if the Company issues these to you as a direct contractor, these are legally not binding since you would have a contractor agreement in place - this could be an important consideration if in the future you want to apply to full-time roles at more traditional companies who would want proof of previous full-time employment along with regular salary slips
As an employee, you are considered for title promotions and periodic appraisals, and therefore have an equal opportunity as the rest of the company to grow in your career. Contractors seldom have these opportunities
Your LinkedIn, Resume, and even Payslips will mention the Company Name directly as an employee. Legal restrictions in the contractor model might prohibit these
Benefits
As an employee, you are entitled to public holidays and PTOs of upto 3-4 weeks (varies by company) - if your contract does not provision for these, you have already wiped out the tax savings with a 4 week or effectively one month of 'extra' salary
As an employee, you get medical insurance for your entire family. As contractors, you are on your own to purchase retail insurance which might be costly and also restrictive in terms of coverage.
Gratuity and many such other benefits are typically missing in most contract arrangements - Gratuity alone for example can be upto 20% of your annual salary for continued employment (minimum 5 years per law but most companies have lower thresholds to reward retention)
Protections
As a contractor, a Company can terminate you instantly whereas most employment contracts would have a minimum term of one month notice (in some cases, upto 3 months) - not having such a provision and losing out on even one month out of a year due to abrupt termination for any reason again wipes out the tax savings mentioned above in the contractor model.
Any Company would always prioritize its own employees over contractors in cash-crunch situations (very common at start-ups), so do ensure you are protected on this front in your contract. In the employee model, there is a Security Deposit companies have to pay to ensure buffer for timely payroll
While filing under 44ADA, you are now classified as an independent professional and not a salaried employee - the ramifications extend to your credit history when seeking bank loans for a house or car - a salaried employee earning ₹35 Lakhs has a much better credit profile than an independent professional earning the same amount
Typical contractor agreements will ask you to indemnify (be liable to pay) the Company in case they receive claims including those for your own engagement's misclassification. Such claims are common, particularly in states like California which have stringent employment laws. Ensure to read these carefully to know what you're signing up for
